Credit: C41n/Wikipedia

Tesco needs to do more than ditching promotions

The supermarket is 'rationalising' its discounts as the supermarket price war bites.

by Adam Gale
Last Updated: 16 Feb 2016

Bargain hunters will be disappointed to learn that Tesco is scaling back on promotions. Apparently, the grocer has realised that all those 2-4-1 offers aren’t helping its battered bottom line one bit, and instead wants to focus on keeping prices cheap across the board.    

According to the Times, this ‘rationalisation’ is designed to attract shoppers back from Aldi and Lidl, where the pricing system is simpler (i.e. this is how much it costs, take it or leave it). Of course, Aldi and Lidl are also cheaper as well as simpler, and it is this that is really at the heart of Tesco’s current woes.

The Big Four supermarkets have taken a machete to their margins in an effort to hold onto market share in the face of the onslaught from the low-cost Germans, thus far to little avail. Ditching a few of those ‘buy seven Babybels, get an eighth free’ offers seems to represent a tacit admission that a basket of shopping there will indeed be more expensive than it would be from Lidl.

That could turn out to be a smart move. Fighting Aldi and Lidl on price alone is a recipe for disaster, because the German stores are fundamentally designed to be cheaper. Accepting that its comparative advantage lies elsewhere could enable it to increase margins at the expense of market share that it will probably lose eventually anyway.   

Ditching loss-leading promotions (the bargains being dropped were apparently identified by Tesco’s analytics business Dunnhumby as being for those products that didn’t ‘need it’), will thus probably help the bottom line. Especially so, when you consider that most of the cost of promotions is borne by – of course – the suppliers, who concede cheaper prices in exchange for the promotion.

It’s not without risk, though. For a start, there’s only so far suppliers can be squeezed without undermining the firm’s efforts to show customers it cares about its supply chain. Besides, while shoppers already have an idea where’s generally cheaper and where’s more expensive, at least with plentiful discounts there’s the (usually erroneous) sense that they can beat the system if they pick carefully.

Ultimately, if Tesco is indeed accepting that it’s ‘USP’ isn’t price (or night shopping, or range), it will need to figure out what it is as a matter of some urgency, otherwise no amount of tinkering with its pricing strategy will help it. 

Find this article useful?

Get more great articles like this in your inbox every lunchtime