Opinion: Can Tesco crack the discount code?

‘Jack the LAD’ was how Shore Capital’s Clive Black brilliantly coined the prospective venture – in reference to the Jack’s brand, named after founder Jack Cohen, that Tesco is attempting to copyright to tackle the limited assortment discounters, Aldi and Lidl.

Were the reported move to come to fruition though, it would not carry the connotations of brash arrogance that Black’s moniker might suggest.

Having been through the proverbial ringer in recent years, Tesco is a humbler operation these days and would enter the discount arena with eyes wide open.

The supermarket Goliath abandoned its last attempt to crack the discount code back in the 1980s when it launched the Victor Value fascia, through fear that it could harm the perception of the wider brand.

Sceptics voiced similar fears when whispers first started circulating in February that Tesco was mulling another stab at discount grocery retailing.

But things are very different this time around.

Tesco already has a tried and tested range of entry-level products that it could transplant directly into the new format – its Farm brands now feature in more than 70% of customer baskets, a statistic that adds weight to their quality credentials.

And the prices of those lines have remained within 2% of the discounters during that period, according to analysts at Bernstein, which rates Tesco’s shares an ‘outperform’, with a target price of 290p.

Such was the success of the ranges launched across fresh produce, poultry and meat that Tesco has rolled out a wave of new brands including Eastman’s deli meats, Hearty Food Co ready meals and Ms Molly’s ice cream and cakes.

Making sense

Rather than taking away from the core Tesco values, stocking such brands in smaller-format discount stores could actually act as a signpost to the grocer’s larger shops. You can almost see the ‘shop more of our Stockwell & Co range at your nearest Tesco Extra store’ signage appearing at the shelf edge already.

Naysayers have also voiced concerns about whether a mainstream grocer such as Tesco could run a business using a discount model. Its big four rival Sainsbury’s knows about the associated challenges all too well after launching a partnership to bring Netto back to the UK – a tie-up it ended in 2016 after just two years.

But it would be wrong to directly compare the two ventures. Tesco is already said to be earmarking 50 to 60 stores for the initial roll-out, far more than the 16 Netto shops Sainsbury’s managed to establish.

“Copying the hard discounters would put Tesco one step behind. Developing a new retail format… seems much more likely and in line with the Tesco culture”

Bruno Monteyne, Bernstein 

What’s more, Tesco now has the enormous buying power and scale required to support the potential move, having acquired wholesaler Booker in January and revealed details of a proposed buying alliance with French grocery giant Carrefour earlier this month.

In allowing Tesco to source in larger volumes at lower unit prices, both combinations would prove pivotal to the success or failure of the possible new cut-price format.

Crucially, Tesco also has points of difference it could bring to the party, such as Booker’s bigger pack sizes and in-store services such as click-and-collect, which would differentiate it from Aldi and Lidl.

Indeed, as Bernstein’s Bruno Monteyne suggests, Tesco almost certainly wouldn’t be producing a ‘copycat’ discount format, but “thinking how they can combine their existing ranges and locations to offer something that is amazing value for money, and can serve as a competitive outlet to discounters”.

He adds: “Copying the hard discounters would put Tesco one step behind. Developing a new retail format that is equally great value for money and good quality, but that is differentiated from the hard discounters, seems much more likely and in line with the Tesco culture.”

That culture has always been one of innovation – something that perhaps got a little lost in the latter days of Philip Clarke’s reign and Dave Lewis’s early fire-fighting exploits.

Now that Tesco is firmly on the front foot again, you cannot blame Lewis and Co for assessing the make-up of the modern grocery market and aiming to tackle it head-on.

The shift to online and the rise of the discounters have been the two most seismic changes that have rattled the big four over the past decade or so. Tesco is conquering the former, boasting around 50% of the online grocery market in the UK, but should be lauded for exploring ways to step up its fightback against the latter.

A gamble

Shore Capital’s Black, however, harbours a degree of caution about the potential move into standalone discount-style stores.

Although the broker retains its ‘buy’ stance at this juncture, Black notes that the strategy wouldn’t tally with Tesco’s “major programme of simplification” under Lewis, which has involved the offloading of non-core businesses, the streamlining of ranges and changes to store staffing structures.

Admittedly, the amount of time, cash and energy required to establish, hone and expand a new format could create a distraction at a time when Tesco has the wheels turning at pace once again.

Yet the fact remains that, if Tesco is looking to implement the new format within Metro or Express stores that aren’t responding to Lewis’s methods, as some have suggested, the grocer has nothing to lose and everything to gain by leveraging existing strengths to try something different. 

Nevertheless, any attempt to play the discounters at their own game would still represent a gamble.

But given Lewis’s impressive record to date, investors would be wise to back him to the hilt, whatever it is he is plotting.