Tesco is reportedly interested in launching a new discount banner in the UK to combat Aldi and Lidl’s growth. As reported by the Times Newspaper, Tesco has asked key own-label suppliers to sign non-disclosure agreements, and the new format is expected to list around 3,000 SKUs to compete against Aldi and Lidl. Tesco is likely to launch two test stores in existing real estate. This news follows Tesco’s announcement of plans in February to test and launch new formats once the merger with wholesaler and distributor Booker is completed.
UK grocers have been there, done that
The history of retail competition in the UK market helps us to draw one clear lesson: Trying to do discount retailing against Aldi and Lidl is fighting the wrong battle with the wrong tools. The price wars in 2009-2012 were extremely costly for the Big Four, both in terms of money and shoppers. Even the grocers that acted early to take a position to fend off the discounter threat were unsuccessful: Asda launched Asda Essentials discount banner in 2006, modelled on Leader Price in France. The operation ended in 2007, within only 10 months of trading. Tesco expanded its Discount Brands private label range by a third in 2008 with an aim to become “Britain’s biggest discounter”. Despite heavy pricing investments, Tesco’s sales and profit got hit as shoppers did not compromise on quality, and the grocer suffered slowdown in sales and traffic.
Tesco's "Britain's Biggest Discounter" campaign in 2008. (photo: Daily Mail)
As the Big Four lost market share to their German rivals year-on-year, they acknowledged the need for a shift in strategy: Supply chain efficiency and logistics maintain discounter pricing, and it is something that supermarket operators cannot achieve through lowering prices or launching economy private label ranges. Instead, the grocers focused on differentiation and new value propositions, moving from defensive to offensive strategy. Thus range resets, premium private label expansion, and store refurbishments shaped the last five years of the UK grocery. Tesco has been one of the first retailers learn for its mistakes in taking on the discounters, and assigned Dave Lewis in 2014 as CEO to turn the business around by focusing on its points of differentiation to win as competition intensified.
The very last attempt among the Big Four to do “discount” was Sainsbury’s Netto relaunch in 2014. After opening 16 stores, the retailer decided it was only a distraction from their core operation, and would be impossible to reach the scale of Aldi and Lidl to make it a profitable business. The test run was called off in 2016.
With this market background, the question remains: Would Tesco really consider going head-to-head with Aldi and Lidl by launching a dedicated discount banner? To answer this question, we raise counter questions. Simply asking ‘what if?’. It is worth noting that this is merely a retail exercise, rather than speculation on Tesco’s format plans. However, these questions may help to understand the shift in Tesco’s approach, while recognising the existing, and new, challenges.
1) Hybrid format
Supeco in Romania (Photo: Carrefour)
Following the Booker deal, Tesco began testing Chef Central, the shop-in-shop in Tesco Extra stores that sells catering-size packs of dry food. What if…
- … Tesco considers a hybrid approach with B2C sales alongside with B2B sales
- … Based on the success of these shop-in-shop experiment, Tesco rolls out standalone stores
- ….Tesco gets inspiration for its new format from successful examples abroad such as Supeco*, Carrefour’s hybrid super-cash format in Europe
- …This format later expands into online, expanding Booker’s reach
2) Big Box imitator
Kaufland in Poland (photo: BIA24)
Tesco seeks to revive its big box operation, continuously investing in store refurbishments, resizing and leasing idle space to other retailers. What if…
- …Tesco considers launching a new big box banner with a very strong EDLP offer, serving full basket missions with branded products
- … The new banner mostly expands in suburban locations and Tier 2 cities of the UK, rather than targeting London
- …The new banner takes inspiration from the likes of Colruyt and Kaufland** in Europe, big box operators that imitate the operational efficiency and pricing of discounters, but are not conventional discounters
Based on not only Tesco’s own history with discount competition, but also the Big Four grocers' total experience on what works and what does not, these scenarios may shed a light on Tesco’s new considerations. UK’s market leader will seek to merge Booker’s capabilities, both in store and online, with Tesco’s own strengths. New format innovation will be in line with Tesco's new strategic goals, rather than deviating from its core business.
Kantar Consulting POV
- Tesco’s focus on core grocery business will continue in the next 12-18 months as business turnaround targets are still to be met in the coming years. The grocer is also expected to prove synergies after the Booker merger. Lessons learned from the Big Four’s price wars against discounters show that Tesco looks to leverage its own strength points for fighting on the offence, rather than taking a defence position in price wars.
- Tesco has announced its plans to launch new formats in the UK, leveraging Booker’s wholesale operations and new digital capabilities. This may result in a hybrid stores similar to Carrefour’s supercash format Supeco, or a strong EDLP player similar to Kaufland in Central Europe, rather than a conventional discount banner that would compete directly against Aldi and Lidl.
- For a deeper analysis of disruptive new formats across Europe, click here to read our report on grocery formats to watch out for.
* Supeco is a supercash format with low-to-medium pricing. It offers a wide variety of bulk-purchase products, and private label is very limited, if any. Supeco was launched in Spain following the success of Atacadão hypercash concept in Brazil. Carrefour later expanded the format to Romania and Italy.
**Colruyt and Kaufland are big box operators that match EDLP pricing strategy with EDLC operational efficiency. The stores are basic in design with pallet displays, and the private label share is around 20%. Colruyt operates in Belgium and France, while Kaufland predominantly operates in Central Europe.