The Co-operative Group and United Co-operatives are poised to merge in a deal that would create the UK's fifth-largest grocery retailer by market share.

The UK's two largest co-operative societies revealed this week they were in talks about coming together to create a business with annual sales of £10.5bn.

The combined society would hold a 4.5% share of the grocery market through 2,300 food stores - ahead of Somerfield and Waitrose with 4% and 3.6% shares respectively, according to ACNielsen data [12 w/e 2 December 2006].

Neither co-op was willing to be interviewed about the deal but in a joint statement they said: "The boards of the Co-operative Group and United Co-operatives have agreed to discuss the possibility of a merger between their two societies."

In the past United chief executive Peter Marks made no secret of the fact he favours creation of a single society. But while the prospect of a tie-up was welcomed by other co-operative societies, several disputed the suggestion it meant the creation of a single society across the UK was now inevitable.

"In the case of the Co-op Group and United, their geographic fit is excellent and therefore the proposed merger is logical," said John Fitzgerald, chief executive of Midlands Co-operative, the UK's third-largest society.

"While Midlands has no intention of merging with the Co-operative Group, we would continue to advocate local mergers, where appropriate, in order to build on existing strengths."

Tony Gudgeon, chief executive of Chelmsford Star Co-op, added: "While this new group would dominate the Co-operative retail market, it is not seen as an inevitable force for one national society.

"Regional and local co-operative societies can still thrive but it will require them to embrace clear national strategies."

However, ACNielsen analyst Mike Watkins insisted: "This could be the catalyst to create one society."