Tesco is in a lot better place than it was three years ago, when it was still reeling from the full-on assault of Aldi and Lidl. Since then CEO Dave Lewis has dug in and returned the grocer to modest growth. Yet the discounters continue to expand.
Indeed, it’s now rumoured that Lewis is considering creating Tesco’s very own discount chain, in a sign that the Germans still have him rattled.
The rumoured launch would no doubt be a risky venture.
For a chain that already has a finger in pretty much every pie there is a danger of self-cannibalising, taking business away from its main stores, as customers seek out its cheaper option.
Tesco already has over 6,000 stores nationwide, including its Express convenience stores. With the takeover of wholesaler Booker given the green light, Tesco could once again fall victim to overstretch.
Afterall, Tesco’s revival since its 2014-15 record loss has been built not on triumphant expansion, but on online sales, cost discipline and scaling down unprofitable segments.
Then there’s the question of how to brand these new discount stores so that they stand out from the rest of Tesco’s shops.
It's unlikely the market needs a Tesco Value version of Lidl, and if Tesco doesn't get it right, there is a substantial risk of undermining its current stores.
Where they stocked the same products, there would be inevitable questions over why a customer should pay more in a Tesco supermarket, when they can get the same at the discount branch.
But on the other hand...
Looking at the big picture, of course, it is not hard to see the allure of the discounter sector.
Aldi and Lidl already dominate a significant portion of the market, representing nearly 13% of the UK grocery market, and this is set to rise.
A 2017 report released by the Institute of Grocery Distribution (IGD) predicts that the discount sector will grow by 49% between now and 2022 - the second fastest behind online. Based on these figures, the IGD envisages that £1 in every £7 spent will be in a discount store.
While that’s clearly attractive, the irony is that switching to a discounter model has proven in the past to be an expensive option. Sainsbury’s, for instance, had to pull the plug on its joint venture with the Danish chain Netto in 2016, over the scale of investment needed to match the rapid market growth of Aldi and Lidl.
Opening a new discount chain is complex as well as expensive. The ability to scale cheapness is built into Aldi and Lidl’s business model.
What makes Lewis think he can beat the seasoned Germans at their own game? The truth is, if it was easy to adapt to the discount model, everyone would be doing so.
Is there any truth to the rumours? Or is Tesco merely assessing its options, browsing the shelves of the discount market? At this point it's hard to tell, but if it can actually pull it off it deserves to reap the rewards.
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