British supermarkets don’t have a great track record when it comes to running discount chains in parallel with their mainstream stores. But that’s not stopping Tesco from launching Jack’s – its final answer to the persistent threat posed by Aldi and Lidl.
Aldi and Lidl have been trading in the UK since the nineties so why now? Well, shopping habits have evolved dramatically over the past decade. The 2008 financial crisis forced many consumers to re-evaluate their household budgets. Frugality went from being shamed to celebrated, and the notion of ‘smart shopping’ took off. What many didn’t realize at the time was that this would be structural, not cyclical, change. Some industry observers thought the discounters were simply enjoying their time in the sun, but the discounters recognized an opportunity to meet shoppers halfway, deviating from their lean operating model by broadening their ranges, investing in quality and the instore experience, and moving into better locations. As a result, Aldi and Lidl have become more credible, well-rounded competitors.
The launch of Jack’s is an admission that the likes of Aldi and Lidl have fundamentally changed the way we shop and there’s no sign of them abating. Tesco couldn’t pay the discounters a higher compliment.
Over the years, Tesco has attempted to stem the discounters’ growth through endless price cuts. They’ve reduced the number of promotions in a bid for more honest, consistent pricing, taking a leaf from the discounters’ book. They’ve launched their own discount brands and even created dedicated pound zones instore. The reality is that none of this has stopped shoppers from defecting to the budget supermarkets. Aldi and Lidl’s combined market share has grown by 80% over the past five years. Tesco has exhausted all their tactics – launching Jack’s is very much a last resort.
Will it work?
Let’s be clear – the odds are against them. But I’d argue that it’s better than standing still. Tesco needs 3 things to make this work:
- Scale – you can’t run a successful discount chain with a handful of stores. If this is going to work, Jack’s will need to go big quickly.
- Discount differentiation – ahead of launch, the biggest question for me was ‘What can Jack’s do that Aldi and Lidl can’t’? If Tesco wants to be a discounter, then they need to start acting like one. The model is based on simplicity and ruthless efficiency. So, Tesco must ensure that they distinguish themselves from the very well-established competition *but* without adding cost into the business model. Tesco has always had muscle but they’ve further strengthened their buying power recently, having acquired Booker and teamed up with Carrefour for joint purchasing. Tesco will differentiate by undercutting Aldi and Lidl on price. It really is as simple as that.
- Distinct offer – some self-cannibalisation is inevitable, so it’s vital that Jack’s distances itself as much as possible from Tesco’s mainstream stores. To do this, and of course to keep costs down, Tesco’s own brands will feature heavily and all the traditional components of a full-service supermarket (loyalty scheme, online offering, counter service, etc) will be stripped back.
So, what’s next? At best, Tesco will have won back some of its more price-conscious shoppers. At worst, Jack’s becomes another costly distraction. Either way, Aldi and Lidl aren’t going anywhere. This is about co-existing with the discounters, not stamping them out.
For more, check out my interviews on the Today programme (15 min in) or BBC Breakfast below: