Tesco moves the retail wars to a different front
YOU know you are doing something right when one of your main competitors tries to copy your business model and muscle in on your patch. Oscar Wilde may have been right when he famously said that imitation is the sincerest form of flattery, but in the case of Tesco trying to emulate the German discounters Aldi and Lidl with its own low-cost retail offering, it’s tempting to say that imitation may be the clearest sign of desperation.
In case you missed it, Tesco recently announced that it was launching a network of low-cost and no-frills stores to compete with Aldi and Lidl in the UK.
If successful, the company may roll out a similar offering in other markets, including Ireland. Called Jack’s — a nod to Tesco’s founder Jack Cohen — the first store opened in Chatteris, Cambridgeshire, two weeks ago to a mixture of great fanfare and curious disbelief.
According to the company, each store will carry just 2,600 products compared to more than 25,000 in a typical Tesco store.
Like its German rivals, Jack’s will also offer so-called Wigig (when it’s gone, it’s gone) overstock promotions. Think angle-grinders, wetsuits and fishing rods.
More importantly, Jack’s will embrace the same discount model successfully developed by both Aldi and Lidl which, between them, have carved out 13.1pc of the grocery market in the UK and 23.4pc in Ireland.
With Tesco now looking to park its considerable tank on the perfectly-manicured Germanic lawns of its rivals, it’s quite possible that in the boardroom of Aldi Sud in Mulheim in Germany, senior management are currently physically quaking in their boots as they contemplate the prospect of retail annihilation.
It’s also possible that in the Neckarsulm, the picturesque town in northern Baden-Wurttemberg where Lidl has its HQ, board members may even have thought about hara kiri as they weigh up a possible negative outcome to the imminent battle that lies ahead. Somehow, I doubt it. To their credit, both Lidl and Aldi have proved to be worthy pioneers of the discount retail model and their no-frills approach and quest to drive prices down has won them admiration in all the markets in which they operate.
Yes, they don’t have fancy stores, no costly loyalty clubs and no cash-back offers that appear to be a common currency among their competitors. And while the overall customer experience may not be as slick as some of their competitors, at a time when many purchasing decisions are rooted in value for money and quality, their prices do all the talking.
In other words, they created and own the discount end of the market and after years of tweaking and getting better at it, they are not going to hand over their dominance any time soon.
Why Tesco has now chosen to take them on at their own game has baffled many retail analysts. With sales of €57bn in its last financial year, Tesco is the largest retailer in the UK by a country mile. The most recent Kantar Worldpanel figures give it a market share of 27.4pc, way ahead of Sainsburys on 15.4pc and Asda on 15.3pc. In Ireland, Tesco is also the largest grocery retailer with market share of 22.1pc, ahead of SuperValu on 21.7pc.
Like Aldi and Lidl, Tesco is clearly doing something right. With a substantial footprint of large and small stores the length and breadth of the UK and Ireland, it also owns a treasure trove of customer data which makes it the envy of other retailers. It has already proved that its own in-store discounting strategies work and often match those of many of its rivals. And, following its €4.14bn acquisition of wholesaler Booker in 2017, it has also built up unrivalled scale and leverage with suppliers.
Is the latest move into the discount end of the market an admission of failure? Has Tesco thrown in the towel in the discount wars and opted to open it up on a different front with a smaller and untested retail offering?
Arguably, the biggest grenade Tesco could have chucked into the discount market is Tesco itself, something which appears to have been lost in all the talk about regaining market share.
Analysts also say that playing them at their own game is doomed to fail. Instead, it should focus on developing the turf it owns, they say.
Unfortunately the business graveyard is full of tombstones remembering those companies that made the ill-fated decision to copy others only to fail miserably. In the retail world, the biggest of them all — Walmart — tried to take the fight to the Germans on their own home turf in 1997 only to be trounced at every turn, forcing it to withdraw with a bloodied nose in 2006.
Or what about British Airway’s hair-brained attempt to take on Ryanair and EasyJet with it’s low-cost alternative Go Fly? That went well, didn’t it?
Maybe Tesco has learned something from these case-studies, or maybe not. But when it comes to launching new businesses in uncharted waters, just because you can doesn’t always mean you should.