A tough legacy is in store
AT ONE time it was so simple: if you were a bit posh, you did your weekly shop at Waitrose or Sainsbury; if you wanted a huge range at cheap prices you went to Tesco, and if you were hard-up you slunk into a discounter, hoping the neighbours didn’t notice.
In the old order, Tesco was the undisputed leader, the colossus of British grocery retail. Now, having neglected the UK heartland in favour of international expansion, it is the biggest casualty of a market that has been turned on its head.
It must add to the agony at Tesco Towers that a draconian dividend cut comes in the same week as discounter Lidl unveiled a substantial rise in sales, a major expansion plan and a £20m advertising campaign.
Lidl and fellow German discounter Aldi have capitalised on the economic downturn with aplomb, at the expense not only of Tesco but also of traditional rivals Sainsbury and Morrisons.
The model of limited ranges and ultra-low prices shows every sign of moving from the margins of grocery retail into the mainstream. Traditional market-positioning has been turned upside-down: the discounters boast about their quality, while Waitrose flaunts low prices.
I first became aware of the advance of the discounters into the Hyacinth Bucket bracket when some slightly snooty acquaintances began buying their Prosecco sparkling wine from Aldi (£5.39 a bottle). Claims we are all Lidl- class now have a ring of truth.
According to Kantar WorldPanel figures, more than half of households – 53pc – visited Aldi or Lidl over the past three months.
Ronny Gottschlich, chief executive of Lidl in the UK, says almost a quarter of his customers are from the higher socio-economic groups A and B. And while the economic downturn has provided a spur to Aldi and Lidl, Tesco cannot assume people will dump the discounters as the recovery gains pace. The financial crisis and aftermath have been different from previous recessions, in ways that play into the hands of the low-cost chains.
Although unemployment has remained relatively low, average real incomes have suffered and are forecast to continue falling in real terms for some time. Coupled with higher mortgage bills when interest rates rise, household budgets will continue to be squeezed and austerity shopping is likely to become an entrenched habit rather than a temporary expedient.
The discounters have changed the game, probably permanently. Although they appear to have burst upon the scene, both Aldi and Lidl have in fact been in this country since the 1990s.
They cannot keep up their present pace of growth indefinitely, but as privately-owned companies they are able to take a long-term view. They can also make any difficult decisions they may need away from the glare of the stock market, which has punished Tesco shares so savagely.
Richard Broadbent, the Tesco chairman, opted for Unilever man Dave Lewis to replace Phil Clarke because he didn’t want to hire another retailer steeped in the corporate culture, but a marketeer who could look at the company from a fresh perspective.
Despite the huge kitchen-sinking exercise ahead of his arrival on Monday, having cut short his summer break, the task in front of Lewis is immense. He cannot compete with the discounters on price, so will have to come up with another proposition that captures the imagination of customers.
In the 13 years of Sir Terry Leahy’s reign as chief executive, lasting until 2010, Tesco led a retail revolution with innovations such as the Clubcard, the ‘Finest’ range, the Metro local convenience stores and the sale of financial services.
There is an air of crisis about yesterday’s announcement, but the company is still a formidable force. Profits, even after the warning, are expected at £2.4bn.
Tesco has 20m customers a week, more than 3,300 stores and 38m loyalty card holders, all of which are great assets. Yet without a clear and compelling reason for customers to shop there, the empire will crumble.
Under Leahy, Tesco re-invented Britain’s grocery landscape. Under Lewis, it must reinvent itself.
Feeling def lated
THE latest figures from the eurozone are fuelling fears of deflation and that the single currency bloc may descend into a Japanese-style lost decade of stagnation.
Prices rose just 0.3pc in August and in Italy deflation is a reality already, with prices falling for the first time since 1959.
Germany, since the Weimar Republic, has been obsessed with keeping inflation under control.
Deflation, which makes the burden of debts heavier and encourages companies and individuals to defer spending decisions, is equally if not more vicious.
Perhaps these numbers, along with the recent weakness of the German economy will dilute their opposition to European Central Bank chief Mario Draghi embarking on a programme of QE moneyprinting to alleviate the threat.