As Tesco reportedly works with advisers to develop a new discount grocery chain, Andy Brian, head of retail at Gordons law firm, considers whether the UK’s biggest supermarket can make a success of this shift into new territory.
When reports surfaced last month that Tesco was exploring the possibility of launching a new discount grocery chain, it was understandable, if not expected.
Like the rest of the ‘big four’ UK supermarkets, Tesco has looked at the recent success of Aldi and Lidl with interest as the German discounters grew from a combined market share of 6% in December 2012 to 12% by the end of 2017.
The new chain, according to The Guardian, would offer around 3,000 SKUs, significantly less than the 25,000 different products often available in a Tesco Extra, seeking to take advantage of its huge buying power to compete on price, rather than choice.
Tried And Tested
Of course this isn’t the first time a major supermarket has entered the discount market and indeed Tesco has tried and failed with a similar project before.
Those of a certain age will remember Victor Value, which had 217 stores when it was sold to Tesco in 1968 for £1.75million. The brand soon disappeared but was revived for a short while in the 1980s.
More recently, Sainsbury’s abandoned its joint venture with Netto – which was described afterwards by Sainsbury’s chief executive Mike Coupe as a ‘trial venture’ – because they could not scale up quickly enough to compete with the rapidly expanding German discounters.
This was only six years after Netto had first tried to crack the UK market by selling 200 outlets to Asda.
However, none of these past experiences are necessarily reason for Tesco – or any other major supermarket for that matter – to try and enter the discount grocery space again.
Presenting The Challenges
There is no doubt it will be a challenge if Tesco does opt to develop a new discount grocery chain – not least because of the strength and recent growth of established competitors.
With continued expansion from Aldi, Lidl, Iceland and even B&M, which confirmed its own intention to roll out a “discount convenience grocery brand” following the acquisition of Heron Foods last year, Tesco will need to scale up quickly if it is to have a chance of competing.
As Sainsbury’s found with the Netto venture, this comes at considerable cost.
Tesco must also consider the risk of cannibalising its own customer base, especially taking into account its established own label value range. How will the new brand sit price wise against this value range in Tesco’s Extra, Superstore, Metro and Express stores? And how will customers react?
Every Little Helps
On paper, the idea makes sense. Tesco has a strong team in place with valuable experience of the grocery sector, huge retail knowledge and of course the added wholesale power provided by the recent acquisition of Booker.
Next the Tesco team – and their advisers - must find the right strategy to ensure success in the discount market. If this venture is to be successful, Tesco must find a way to attract customers from the likes of Aldi, Lidl and Iceland, rather than converting existing Tesco customers into discount shoppers through brand association.
Many observers will be very interested to see if they can pull it off.
© 2018 European Supermarket Magazine – your source for the latest retail news. Article by Andy Brian. Click subscribe to sign up to ESM: The European Supermarket Magazine.
