Photo: Aldi
Can Tesco beat Aldi and Lidl at their own game?
Concern over increased competition from grocery discounters like Aldi and Lidl seems to be a big factor pushing Tesco to open its own low-price concept.
Tesco plans to open a discount chain, possibly to be called Jack’s, as soon as September, according to The Guardian. There may be as many as 60 stores in six different U.K. cities. In some cases, Tesco appears to be closing existing stores that will reopen as Jack’s locations, as well as opening stores in properties it has owned for some time but not utilized. And with the recent acquisition of Booker, the UK’s largest wholesaler, there has been speculation that the new concept may have elements resembling Costco.
Tesco currently operates four formats in Britain — a big box superstore, a smaller version of the superstore called the compact format, a metro store with product catering to urban shoppers and an express convenience store.
Despite having added new formats over the years to meet new shopper need and habits, the last time Tesco attempted a discount concept was back in the 1980s, according to The Guardian, when the company launched a chain called Victor Value, which closed after four years.
While Tesco has been successful with its other various concepts in the U.K. in recent years, the company has also hit some roadblocks.
A decade ago Tesco launched its U.S. convenience store concept, Fresh & Easy, to high expectations. But in 2013 Tesco sold off the floundering chain. Two years later, the new owners, Yucaipa Companies, closed Fresh & Easy’s doors for good.
Tesco faces other big competitive challenges, as well. In April, its two major traditional grocery competitors, Sainsbury’s and Asda, agreed to a merger that would result in a supermarket chain larger than Tesco.
- New Tesco discount chain could launch as early as September – The Guardian
- Store format: shapes to match shopping patterns – Tesco
- What’s the American equivalent of Tesco? – Reddit
- Sainsbury and Walmart’s ASDA to create grocery powerhouse – RetailWire
- Tesco’s Fresh & Easy reassessed – RetailWire
- Fresh & Easy calls it quits – RetailWire
Discussion Questions
DISCUSSION QUESTIONS: Is launching a discount concept that takes on Aldi and Lidl the right move for Tesco? Do you think we will see grocery chains in the U.S. do something similar to compete with the German chains?
Poll
BrainTrust
Shelley E. Kohan
Associate Professor, Fashion Institute of Technology
Andrew Blatherwick
Chairman Emeritus, Relex Solutions
Tesco appears to be caught between its traditional competitors (who are merging to achieve economies of scale) and the deeply entrenched “value” grocers like Lidl and Aldi. And the “hypermarket” factor can’t be ignored, either. Given Tesco’s size, there is nothing wrong with testing a new discount concept — but there’s no guarantee of success in an increasingly crowded space.
I’m not sure Tesco has much to gain in opening stores to compete at the bottom. Rather, why not set up a “value aisle” in current stores and test with lower-end private brands? They’ll learn more about current shopper preferences at way less of a cost to the overall business model. Additionally, research to understand why shoppers are selecting alternative stores is certainly needed.
I agree, Anne – great idea!
This is a sensible idea, but they have tried it. They’ve also been aggressive on the development of entry price products and brands. The problem is that in the mainstream stores customers trend to be tempted by all of the other products, including the premium Finest line. They then get a shock when they checkout at the register. In turn, that drives perceptions of poor value for money!
Retailers do well when they meet the wants and needs of consumers. To do so while still making money is the key. I don’t know that discount aligns with the Tesco identity and with the ways they have already provided lower pricing. The race to the bottom is a nasty business, and given the ingredients, expiry dates and special handling that consumers hope their food gets, it strikes me that value deserves explanation as an alternative to another discount move.
The grocery store sector is rich with competition, mergers and many distribution points optimized with economies of scale. For Tesco, they have a great brand and should focus on product differentiation, in-store experience and mastering grocery home delivery (or click and collect). Trying a new (or revisited) discount format may end them up in the same place as before. If however, Jack’s can morph itself into a warehouse club format, they may show some promise with highly-edited content sold in bulk.
Discount grocery is a risky business, even for leaders like Aldi and Lidl — just ask Lidl how they are doing in the U.S. right now. It seems Tesco is eying the high volumes they see competitors at the bottom achieving and want to get their share of that market. They’re wise to create a new brand for this and not risk the Tesco image they currently enjoy. However, it’s not clear how many brands the U.K. market will support at the bottom. I suspect Tesco is showing signs of fear of the merged Asda-Sainsbury’s entity at the high end of the market and this is how they intend to mitigate that risk (by exposing themselves to a new risk?). It will be interesting to see if they can succeed — the key will be for them to create a format and shopping experience that is different than Aldi and Lidl and not just a copy with low-cost food items that fail to differentiate.
I presume that the Jack’s name for this new concept comes from Jack Cohen, the founder of Tesco and a revolutionary in food retail in the U.K. The big difference is that Jack really understood his philosophy of “Pile it high and watch it fly,” something that had not been seen before and had an immediate impact. Today, Tesco is a long way from a limited range discount retailer and the whole cost structure discipline and operation is very different from the way they operate today.
People think that having a smaller range with no frills is an easy concept — it is not. The level of control has to be very sharp. I am sure that Tesco could cross-fund a discount operation and make it work on the surface, but if this starts to cannibalize its current store sales and takes away the focus from their core business, it is a slippery slope. Will they build a completely new organization or ride on the back of Tesco? If the latter, they endanger the brand. If the former, they are unlikely to be able to control the cost structure. Booker was not a low-cost operator so they cannot use that as a model — they supplied a wholesale operation to smaller stores and foodservice.
The bottom line is that they have a very steep learning curve with a lot to lose.
Retailers need to stick to their core competencies and not proliferate formats to address any and all possible competition. What Tesco might lose to hard discounters is minimal when compared to the cost of launching, operating and folding a sub-chain of stores whose value proposition is completely counter to one’s own. If the new launch works, customers will figure out it is Tesco soon enough and demand the same pricing. If it doesn’t, it will just be a very expensive experiment gone wrong. In retailing, as in life, you shouldn’t try to be all things to all people.
Potentially, yes this is a winner for Tesco. Sure, it will cannibalize some of its core store sales, but that’s better than having them taken by Aldi and Lidl.
In terms of execution, to make this work, Tesco must ensure the offer is one dimensional and focused on low prices. It must aim to beat the deep discounters on pricing terms.
The point about being one dimensional is important. While Tesco’s mainstream stores have many low-priced value items, consumers tend to trade up on some lines, which means a total basket can be perceived as expensive. A price-focused format should avoid this.
Location is also key. While Tesco is fairly saturated in terms of stores, there are some select locations that could accommodate this type of store.
It’s better to meet your competition head on, get smacked around, and learn from it then turn your back and wait for the inevitable. Tesco has an uphill battle but with shopper loyalty at an all-time low if a grocer provides a high-value product the shoppers will come.
In the US we’ve already seen grocers dramatically lower their prices to compete. Unfortunately for Aldi and Lidl, they lost the element of surprise when they launched in the US and the grocers we’re ready to compete before they even opened their doors.
By changing the brand to something new, Tesco is able to start from scratch in the market – with limited impact to it’s Tesco brand. Smart way to experiment with discount grocery. I’m sure with so many years in business, Tesco knows the customer demographics quite well already – they’re looking to grow their market. Right move — hard to tell, but with the constant market changes, move they must.
US chains have different customer behaviors that lead to very different actions. Instead of US chains shifting, it’s been Aldi and Lidl that have worked to conform to the US customer patterns. That doesn’t mean US chains haven’t done anything, but the actions are not similar, and more defensive posturing so that Aldi and Lidl aren’t able to encroach on their markets.