Tesco undercuts Lidl, Aldi

Bloomberg

Tesco Plc is fighting back against German discounters Lidl and Aldi with a new line of stores that are wooing budget-conscious shoppers with a patriotic pitch.
Tesco unveiled its first Jack’s store — named after the UK supermarket chain’s founder, Jack Cohen — in a small town 80 miles north of London. Private-label products, featuring a red Jack’s logo and sometimes adorned with British flags, make up more than half the total range.
“The intention is for us to be cheapest in town,” Chief Executive Officer Dave Lewis said at the event in Chatteris, England.
It’s the first of 10 to 15 openings planned over the next year offering low prices such as 2.89 pounds ($3.81) for a liter of olive oil. Shoppers can scan their items as they take them off the shelves with a smartphone app and then pay at the end. Tesco is investing 20 million pounds to 25 million pounds on the format.
With the new chain, Tesco has to walk a fine line, challenging the discounters while avoiding cannibalisation of its main store brand with lower prices. The UK’s largest retailer has struggled to compete in recent years as cheaper supermarket chains such as Lidl and Aldi have clawed away market share.
UK flags emblazoned on Jack’s products including milk, cereals and potato chips advertise their Britishness, reflecting a push by grocers to emphasize local provenance as shoppers want to see them do more about sustainability.
Tesco said eight out of every 10 products in Jack’s will be produced in Britain. The flag-waving also lets Tesco contrast its UK roots with the German ownership of Lidl and Aldi, at a time when Brexit has heightened some Britons’ awareness of nationality.
Five of the new Jack’s stores will be at locations Tesco has that are vacant or it’s repurposing. Tesco has also had to contend with consolidation in the market, opting to acquire wholesaler Booker earlier this year just before J Sainsbury Plc agreed to purchase Walmart Inc.’s Asda. The moves appear to be paying off, with Tesco posting its 10th consecutive quarter of growth in June, as it cut prices to ward off rivals.
Exiting Turbulence?
The growth comes after a turbulent period for Tesco. The supermarket chain struggled to compete with changing market headwinds and just two months after Lewis took over in 2014 an accounting scandal wiped $2.8 billion off its market value.
Just as Amazon.com Inc.’s expansion into grocery adds to competition, Tesco is starting Jack’s out as a traditional brick-and-mortar operation with no online shopping.
The German discounters continue to make inroads, with Aldi’s share of UK grocery sales rising to 7.6 percent in the 12 weeks through September 9 from 7 percent a year earlier, according to Kantar Worldpanel. Lidl rose to 5.5 percent from 5.3 percent in that period, while Tesco slipped by half a percentage point, to 27.4 percent.
Alasdair McKinnon, investment manager at Tesco shareholder Scottish Investment Trust, said that the discount format is an interesting idea because it uses excess space and may allow Tesco to
compete better.
“It will be easier for them to judge whether it works or not,” McKinnon said in a phone interview. “If a standalone discount store isn’t making money in cash, I would imagine they would shut it.”