Tesco has always been a market disruptor. When it was founded by Jack Cohen in 1914, it picked a fight with the long-established market leader Sainsbury’s – and won. Through a series of ambitious acquisitions, culminating in victory against Sainsbury’s in the 1994 takeover of “William Low” and its 57 stores in Dundee, Tesco established itself as the UK’s leading supermarket chain. It now boasts nearly 6 times as many stores as Sainsbury’s worldwide, and almost double its UK grocery market share. But its success is under threat. With Lidl and Aldi on a rapid ascent, could Tesco’s new discount store “Jack’s” be the answer?
Tesco has never shied away from doing something new. In 1997 they embarked on a joint venture with the RBS to set up Tesco Personal Finance (now known as Tesco Bank). In 2000 the official Tesco website was launched. In 2004 they broke into the broadband market, joining the price war with their £2.50 a month unlimited broadband deal. In 2006 they announced the launch of “Fresh and Easy” store chain in the US.
Despite this bold expansion, not all of these ventures have been successful. In September 2013, Tesco lost £150 million the sale of 150 of their US “Fresh and Easy” stores to Yucaipa Companies. Just two years later they were forced to sell their broadband business to TalkTalk, as well as their Blinkbox video service.
Tesco wasn’t the only supermarket making their mark on Britain’s high streets. Both Lidl and Aldi managed to grow their sales by 16.8% compared to the previous year in the three months to December 2017, crowning them as Britain’s fastest growing supermarkets. Having launched in Britain in 1990 and 1994 respectively, the growth of these young companies has been a direct threat to the dominance of Tesco. According to Ashley Anzie at the Kantar Worldpanel, an international consumer panel researcher, their combined grocery market share is estimated to total 15% by 2020.
So, why have the two stores been so successful?
Since the 2008 financial crisis, real wages have declined. Real consumer spending per head still remains lower than 2008 levels. Inflation has slowly been rearing its head above the Bank of England’s 2.0% target. It is therefore little wonder that shoppers have been turning to cheaper alternatives for their grocery shopping.
Given the growth prospects of Aldi and Lidl, the current discount stalwarts, it is certainly possible that Tesco will benefit from this boom if they play their cards right. However, increasing diversity has not been entirely successful in the past. Smaller, more specialised companies have been able to provide services far more efficiently at a much lower cost.
Other companies that have tried the discount approach in the past have not been successful either. British Airways failed to take on EasyJet’s cheap flights, and the pairing up of Sainsbury’s and Netto lasted just two years.
Still, Tesco Bank has been a resounding success, holding 5.6 million customer accounts and £9.2 billion of customer deposits. So, what will it take for Jack’s to see similar success?
The most important lesson for Tesco to learn from its past ventures is the value of commitment. If this venture is to succeed, Tesco must go well beyond the 30 stores which are to be opened in Autumn. There must be sufficient capital investment into this new chain of stores and Tesco must stay in the market despite almost inevitable initial losses. The conversion of existing Tesco stores to “Jack’s” in less affluent areas could be a possible approach, resulting in increased profits for the conglomerate without cannibalising their core business.
Tesco is a discount store, and for all their successes in other fields, it’s the core business that counts. If Jack’s is to succeed, they must stick firmly to Jack Cohen’s original motto: “pile it high and sell it cheap”.