Tesco 'Discounter' Rumours Lead To More Questions Than Answers: Analysis

By Steve Wynne-Jones
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Tesco 'Discounter' Rumours Lead To More Questions Than Answers: Analysis

Just when you thought that the rumour mill had started to slow down a little ...!

The UK retail sector has been all aflutter in the past 24 hours, following reports in The Sunday Times that market leader Tesco is working with Boston Consulting Group on a new brand that would 'match or beat the German discounters' on price.

According to the newspaper, Tesco has even asked a number of its private-label suppliers to sign non-disclosure agreements before contributing to the as-yet-unconfirmed project.

The proposed stores would offer a more limited range than a typical Tesco outlet.

Tesco has yet to make a statement on the rumours, but that hasn't stopped some of the UK's top analysts from deconstructing just what such a move could mean, with many pointing to previous failed ventures by mainstream grocers to embrace the discount format, such as Sainsbury's recent efforts to revive the Netto banner.


Track Record

"If it is true that Tesco its exploring the grocery discount segment, then the business, as a mainstream supermarket player, is not doing so against the backdrop of successful prior peer attempts," Clive Black of Shore Capital said in a briefing note.

As Black explained, the concept of the limited-assortment discounter "is not a complex one. In fact, it is very simple. However, the concentration and consolidation of Aldi and Lidl in the UK reflect the imposition of a quite defined business model, from root to branch. Whether such a division, therefore, could be meaningfully created within a business like Tesco UK remains to be seen."

Black also suggested that such a move could backfire against Tesco, should it offer similar products to its mainstream stores, albeit at a cheaper price.

"If Tesco sold identical product in a LAD fascia to that which is available in its stores, then there could be a consumer challenge and a loss of gross margin to its business, should there be shopper shift to the discount site," he said.


"Aldi and Lidl, in particular, have prospered because they delivered private-label products that, for many years, were lower in price and better in quality, in the main, than those offered by the major supermarkets. So, if Tesco went the same way and offered a new private label that was cheaper and better in quality than its mainstream offer [...] what would that do for its footfall and gross margin?"

Segmenting The Market

Elsewhere, Bruno Monteyne of Bernstein Research said that it would "make sense" for Tesco to develop a discount banner, as it would enable it to "segment the market" in a similar manner to what Loblaw has done in Canada.

"Initially, [a] new banner will likely utilise existing Tesco and Booker excess space," Monteyne said in a note. "On our recent conference call, Charles Wilson pointed out that Booker sells at prices below the discounters, meaning: Booker has credible ranges, and so does Tesco.

"We would expect the banner to initially be made up from converting excess space in less affluent areas: Metros, One Stops and supermarkets. This helps Tesco to deal with its excess space problem," he added.


Noting that the strategy would be unlikely to mark a return to the "'bad old days of heavy capex spend and space expansion", Monteyne suggested that the strategy would "take oxygen away" from the discounters.

"At the moment, growth from the discounters comes almost exclusively from adding space, as their volumes are stable in the mature stores," he said. "Tesco filling discounter white space with its own discount banner will make it harder for the discounters to continue to find white space to grow into."

In addition, commenting in The Guardian newspaper, Bryan Roberts at TCC Global suggested that the move sounded "credible", however, Tesco may struggle to reconfigure its management structure to a discounter mindset.

“There were rumours that Tesco was planning something like this two or three years ago, and while Tesco undoubtedly has the buying buying power and expertise to make it work, recent history suggests these moves tend to fail in the UK," Roberts commented. "Discounters work in a fundamentally different way, and it can be hard to change the store management’s philosophy."


Learn From The Past

Should Tesco choose to go down this road, it will certainly seek to learn from the mistakes of the past.

As well as Sainsbury's revival of Netto – an initiative that lasted less than two years – each of the Big Four has toyed with the discount market, with limited success.

Under Sir Terry Leahy, Tesco toyed with the idea of entering the discount segment, while, in the 1990s, Asda temporarily converted many of its underperforming stores to an LAD model called Dale's.

Morrisons, too, sought to take on the discounters at their own game, launching a 'price match' scheme in 2014, which then chief executive Dalton Philips described as a "neutralising" factor.

“We are not and we will not become a discounter. Match & More is about neutralising on price, so that the rest of our offer will really shine through,” Philips said in October of that year.

Within five months, Philips was ousted as Morrisons CEO, the 'Match & More' scheme was scrapped, and the Bradford-based retailer began its slow march back to profitability under current CEO David Potts.

Tesco would be wise not to ignore its rivals' missteps, should it be serious about launching a discount offering.

© 2018 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: The European Supermarket Magazine.

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