Low prices, no frills: can Tesco’s se­cret plan de­feat Aldi and Lidl?

All eyes will be on the launch of the su­per­mar­ket’s much-an­tic­i­pated dis­count chain, Jack’s, this week for clues as to whether the UK’s big­gest gro­cer can op­er­ate as well as its sharp Ger­man ri­vals at the cheap­est end of the mar­ket. By Zoe Wood

The Observer - - Business -

The Tesco founder, Jack Co­hen, was an en­ter­pris­ing mar­ket trader who brought modern su­per­mar­ket re­tail­ing to post­war Bri­tain. Nearly a cen­tury later, Co­hen, nick­named “Slasher Jack” be­cause he liked to “pile it high and sell it cheap”, is mak­ing a high street come­back.

On Wed­nes­day, Tesco will un­veil Jack’s, a dis­count chain named af­ter its no-non­sense founder who fa­mously gave top lieu­tenants tiepins en­graved “YCDBSOYA” – an ab­bre­vi­a­tion of “you can’t do busi­ness sit­ting on your arse”.

The closely watched ven­ture is one of the most sig­nif­i­cant moves by a main­stream UK su­per­mar­ket chain in re­cent years, and points to Tesco mov­ing on from the 2014 ac­count­ing cri­sis that brought it to its knees.

The un­likely venue for the big re­veal is the sleepy mar­ket town of Chat­teris in Cam­bridgeshire. The £22m store has been an empty shell since 2014, a vic­tim of the sud­den halt­ing of the ma­chine that had un­der­pinned its growth in the 20 years lead­ing up to the ac­count­ing scan­dal.

As it fi­nally opens, Chat­teris will act as a win­dow to Tesco’s fu­ture un­der its chief ex­ec­u­tive, Dave Lewis. Bol­stered by this year’s £3.7bn takeover of the cash-and-carry chain Booker, Lewis is try­ing to re­build profit mar­gins at what was once one of Bri­tain’s most prof­itable com­pa­nies. The project has been shielded in se­crecy, with visi­tors to a mock store at Tesco head of­fice in Wel­wyn Gar­den City asked to sign con­fi­den­tial­ity agree­ments.

As staff worked late fill­ing the shelves of the Chat­teris store last week, it was clear the spar­tan lay­out had been de­signed to ap­peal to shop­pers used to the no-frills ex­pe­ri­ence of an Aldi or Lidl. Whereas Aldi has a reg­u­lar “Su­per 6” deal, the signs in Jack’s ad­ver­tise a “fresh five” of­fer. An­other hoard­ing prom­ises ‘‘ev­ery drop of milk is Bri­tish” – again, a nod to the Ger­man chains, which have heav­ily mar­keted their Bri­tish sourc­ing cre­den­tials.

“The rea­son why dis­coun­ters suc­ceed is not just be­cause they are cheap,” says Bryan Roberts, an an­a­lyst at TCC Global. “The food is high qual­ity and it’s sim­ple to shop. You don’t have to choose be­tween 15 types of ketchup; you choose be­tween two.”

Tesco is dip­ping its toe in the fast-grow­ing dis­count mar­ket at a time of huge up­heaval in the UK’s £117bn gro­cery mar­ket. The com­pe­ti­tion watch­dog is ag­o­nis­ing over the pro­posed £12bn merger be­tween Sains­bury’s and Asda, which would cre­ate a re­tailer more pow­er­ful than Tesco. A tie-up be­tween the UK’s sec­on­dand third-largest su­per­mar­ket chains would pre­vi­ously have been un­think­able but for the rise of Aldi and Lidl, whose sales are grow­ing at 10% a year. Their low prices have forced down those of the ma­jor chains and eaten away at prof­its.

The scale of shop­per de­fec­tions means that £7bn less is be­ing spent an­nu­ally with the “big four” su­per­mar­kets – Tesco, Asda, Sains­bury’s and Mor­risons – than a decade ago. To re­tal­i­ate, Tesco has re­placed its cheap­est own-la­bel prod­ucts with

the generic “farm” brands and er­satz ranges such as Bay Fish­mon­gers, Ms Molly’s and Butcher’s Choice.

But some se­nior in­dus­try ex­ec­u­tives won­der why, given the ex­tra buy­ing power cre­ated by the takeover of Booker, which boosts group sales to £60bn, Tesco needs a dis­count brand.

“Are they ef­fec­tively raising the white flag?” asks one for­mer su­per­mar­ket boss. “Why can’t Tesco com­pete with Aldi and Lidl? Will Tesco now be a more ex­pen­sive al­ter­na­tive, al­beit with a big­ger range?

“Su­per­mar­kets have al­ways been dis­coun­ters since they were brought here from the US af­ter the war. The self-ser­vice model was all about lower costs and cheaper prices. Why can’t Tesco be a dis­counter rather than launch­ing Jack’s? It just gives Aldi and Lidl af­fir­ma­tion and le­git­i­macy.”

Time has not stood still in Chat­teris and in the in­ter­ven­ing years an Aldi store, one of nearly 800 in the UK, has opened and built a clien­tele. Tellingly, it emerged when Tesco de­cided to moth­ball the store that lo­cals had ex­pressed a pref­er­ence for an Asda or a Mor­risons in the first place.

In the 90s and 00s, the big su­per­mar­ket chains en­gaged in a “space race”, com­pet­ing to open the most su­per­mar­kets. Un­der Terry Leahy that race was won em­phat­i­cally by Tesco as it shape-shifted into tiny con­ve­nience stores and the huge de­part­mentstore-style Ex­tras. Leahy’s legacy is an un­par­al­leled 2,659 UK stores, but these days some of them – par­tic­u­larly within the 172-strong Metro chain of small su­per­mar­kets – are feel­ing their age on ail­ing high streets where the dis­coun­ters are their new neigh­bours.

The Shore Cap­i­tal an­a­lyst Clive Black says the Jack’s for­mat could give 100 Tesco stores a fresh lease of life. Jack’s could also be de­ployed in eastern Europe, where Tesco is also un­der at­tack from dis­coun­ters. “This is about a group of prob­lem UK stores: whether it turns out to be some­thing more ma­te­rial, time will tell,” he says.

It’s not the first time that a main­stream su­per­mar­ket has tried to be a dis­counter as well. Sains­bury’s coopened stores with the Dan­ish chain Netto in 2014 only to shut them two years later af­ter strug­gling to make a profit. Asda briefly ex­per­i­mented with the Asda Es­sen­tials chain of small out­lets.

An­a­lysts say Jack’s will only suc­ceed if it is run at an arm’s length from the moth­er­ship. “Be­ing a dis­counter is about turn­ing ef­fi­ciency into scale and the low­est pos­si­ble prices and high­est pos­si­ble qual­ity for shop­pers,” says Roberts. “You can’t play at be­ing a dis­counter. If you try and do it along­side the main brand and there’s over­lap, shop­pers will no­tice.”

Getty

ABOVE Tesco’s founder, Jack Co­hen, and his wife, Sarah Fox, in 1968.

BE­LOW Tesco’s cur­rent boss, Dave Lewis.

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