Morrisons is considering acquiring a substantial number of stores from Costcutter, which would transform the supermarket chain's presence in the smaller store market in one fell swoop.
The UK's fourth-biggest grocer is in talks with the financial services and shipping company Bibby Line Group, owner of the Costcutter chain of independent convenience stores.
Bradford-based Morrisons launched its first convenience stores under the M Local banner in June last year, and it currently has just five. But it is late to enter the market for smaller shops, which is dominated by Tesco, Sainsbury's, the Co-operative Group, Marks & Spencer and independent operators.
Morrisons recently vowed to have 70 convenience stores, which are sized up to 3,000 square feet, by early 2014. But its chief executive, Dalton Philips, is believed to be considering acquisitions to put a turbo-charger under its growth plans.
The grocer's talks with Costcutter are believed to have been ongoing since the end of last year. A source said: "The Morrisons and Costcutter deal is still alive." Morrisons declined to comment, while Bibby Line and Costcutter did not respond to requests for comment over the weekend.
The talks with Costcutter come at a testing time for Mr Philips, who last month unveiled the first fall in underlying quarterly sales at Morrisons for seven years.
Founded in 1986, Costcutter – whose managing director is Nick Ivel – has about 1,500 convenience stores in the UK and Republic of Ireland that are primarily run by franchisees.
One of the options on the table is for Morrisons to acquire Costcutter's 157 company-owned stores. Another option could see Costcutter franchisees sell out to Morrisons, or strike a deal to benefit from the supermarket chain's buying power. Bibby Line Group could also play a role in helping Morrisons to establish a nationwide supply chain for convenience stores, which require a different product offer and smaller delivery vehicles to bigger supermarkets.
Alongside these talks with Morrisons, Costcutter is weighing up its options over the buying partnership it has with Nisa Today's that is due to expire in 2014. The Bibby Line-owned chain may sign a new contract with Nisa Today's, the convenience store business, or find an alternative distribution partner.