A new discounter for the UK market

A new discounter for the UK market

Pro Ganguly Blog, FMCG

Rumour is rife that Tesco is about to launch a stand-alone chain of discount shops, likely to be named “Jack’s”, after one of its founders, Jack Cohen. So why are Tesco doing this? What’s in it for them, their customers, competitors and suppliers?

Why?

Between Aldi and Lidl, they now command a combined 13% market share of the UK grocery sector – this is worth billions of pounds in sales for them at the expense of sales declines at the big 4 supermarkets (Tesco, Asda, Sainsburys and Morrisons). In fact, Aldi and Lidl’s share has increased by a staggering 80% in the last five years and they have overtaken more traditional supermarkets to become the 5th and 7th largest supermarkets in the UK. They’ve done this through significantly improving their fresh food offer – something which they were unable to compete upon with the big 4 a few years ago. The discounters have also significantly invested in the quality of their predominantly own label ranges, with Aldi recently being voted as the best supermarket to buy wine from. Anyone that shops at these discounters will have seen similar quality improvements in other categories such as ready meals, dairy, meat and fresh produce, whilst keeping their prices lower than the bigger players. The big 4 simply cannot afford to ignore the growth and popularity of the hard discounters as well as those on the high street like B&M, Poundland and Wilko, who have all in recent years stepped up their focus on selling groceries.

Why now?

This isn’t Tesco’s first foray in to tackling the threat of the discounters. Stretching as far back as 2010, Tesco had a discounter strategy. They developed various “discounter brands” to fight the threat from Aldi and Lidl. All food categories were set targets to have a minimum number of discounter products in their range. However, these brands just drove deflation and also caused confusion amongst customers. The packaging of these brands were designed to look better than Tesco’s lowest tier which was “Tesco Value”. The aim was that customers would switch from the lowest priced value range to the discounter range but instead, in most cases, customers started switching from higher priced standard tier ranges and in some cases, even from the top tier Tesco Finest range. This drove significant deflation and LFL sales declines as customers traded down to lower priced products. Certainly not a sustainable longer term solution.

Matching the discounters on price would cost the Big 4 supermarkets millions of pounds in revenue so that too isn’t a viable solution. Their high/low pricing strategy and the depth and breadth of ranges in comparison to the discounters EDLP (Every day low pricing) pricing strategy on a fairly limited range also restricts the Big 4’s ability to match the discounters on their standard ranges. So it’s time to tackle the threat in a different way.

If you can’t beat them, join them!

And that’s exactly what Tesco would be doing with the launch of a stand-alone discount chain. Linking this new chain with the core Tesco brand would be damaging to Tesco’s reputation (and balance sheet!). They would have to sell products at prices that are significantly lower than in the core Tesco estate which would then lead to accusations of profiteering and negative perceptions of Tesco’s brand and pricing. The best way therefore would be to completely detach this new discounter chain from having any links with the core Tesco estate. However, the new chain, despite being a start up will have the backing of Tesco’s buying power and scale and, with the acquisition of Booker and the recently announced strategic tie up with Carrefour, would put it on par with the buying power of Aldi and Lidl. Tesco could achieve in a fairly short period of time, what’s taken Aldi and Lidl several years and claw back some of the market share than Aldi and Lidl have gained.

What’s in it for customers and suppliers?

For customers, the launch of a new discount chain can only be good news. More competition would drive food prices down and help with already tight purse strings and also increase the choice of shops available for them to shop in. For suppliers, this will no doubt bring them opportunities to supply additional volume, although they should expect some tough conversations on costs.

How will competitors react?

Initially, Tesco are planning on opening up to 60 of the discounter stores. Given the small scale compared to the 1,400+ combined store estate of Aldi and Lidl (and a constantly growing store estate), any impact on the established discounters is likely to be negligible. For any localised threats, there is no doubt that Aldi and Lidl would react strongly with increased local marketing and pricing which could make Jack’s early days difficult. However, an abundance of empty shops on the high street could easily mean that after the initial launch, Tesco could speed up the expansion of the discounter format fairly quickly to turn it in to a credible threat for the hard discounters and dependent on success, could even consider rolling it out to their other markets in Europe, just as Poundland have done with their Dealz fascia. The other supermarkets and the grocery sector as a whole will be watching developments closely.

The UK grocery market continues to evolve and we will all be watching Jack’s with interest. Time to say – “Hit the road Jack…..”