Why Tesco can't compete with Aldi and Lidl

Amidst the noise and smoke of Tesco's escalating crisis over its £250m profit overstatement, boss Dave Lewis should be careful not to lose sight of the underlying issue - how to compete.

by Alastair Dryburgh
Last Updated: 21 Apr 2015

With a £250m profit overstatement to deal with and eight senior execs suspended at the last count, the commentariat has not been slow to offer advice on how Tesco’s board might respond. Not much of it has had anything to do with the fundamental problem facing Britain’s largest supermarket.
Maybe nobody has seen it, or nobody wants to confront it, but…
If Tesco wants to return to health, it needs to give up the idea that it can win by being the cheapest.
Tesco is losing out to 'hard discounter' retailers like Aldi and Lidl. Many have urged it to cut prices further in order to compete, but this would be a suicidal move. Aldi have stated publicly their intention to remain at least 15% cheaper than Tesco and they are well placed to do so: their whole business is designed to be lower-cost.
The hard discounters stock only around 2,000 lines against Tesco's 40,000. 90% of those lines are own brands. The package sizes are designed to make optimum use of the shelves, and the goods are delivered in shelf-ready packaging. You can't compete on price with someone who has systematically designed their business to be cheaper than you - it would be like British Airways deciding to compete on price with Ryanair.
Until Tesco and its new boss ‘Drastic’ Dave Lewis comes up with a convincing story of how it will compete other than on price, most of the advice being offered at best misses the point or is even positively dangerous.
Some suggest that it should sell off parts of the business. That would at least give the impression of something being done. It would generate some nice fees for banks and lawyers. But until you know what the future Tesco looks like and how it’s going to compete, how do you know which bits you want to keep and which it might be possible to dispose of?
Still worse are the voices urging it to raise money from shareholders to reduce prices. As a shareholder I would be uncomfortable enough taking up a rights issue until I could see a plan, but if I were asked to fund a price war that Tesco could only lose? Forget it.
What's happening here is a classic case of what psychologists call 'substitution'. When faced with a problem that seems too hard to tackle, we simply substitute an easier one. But there is no corporate finance solution, no clever marketing tactic or discount strategy to apply here.
What's needed is a fundamental change to the business model. For all the heat and stress it is creating, this current crisis actually presents Lewis with the perfect opportunity to make such a change - if he can grasp it. Nokia couldn't. Kodak couldn't. Can Tesco?

Alastair Dryburgh is chief contrarian at Akenhurst Consultants. Subscribe to his free newsletter at www.akenhurst.com.

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