The mundane world of food retailing in the UK market was rocked by a recent rumour about the future strategy of Tesco earlier this week (early February 2018).

This came about in the business press when they informed their readers that Tesco was about to launch a new range of discount stores to directly challenge the ever-growing threat of the two major food discounters in the UK market: Aldi and Lidl.

The backdrop to this development in interesting. The Kantor World Panel survey of market shares and sales figures for the quarter ending January 2018 showed that Tesco improved slightly to achieve a market share of 28 per cent. Aldi and Lidl respectively returned market shares of 6.9 per cent and 5 per cent. The sales of the latter retailers rose by 16.2 per cent and 16.3 per cent respectively.

When the figures of Aldi and Lidl are combined it is clear that they have overtaken Morrison’s (one of the “Big Four” retailers) and edged it into fifth place. Aldi on its own overtook the Coop in 2017 in terms of market share.

The impact of the deep and long-lasting recession has led to the inexorable rise of the discounters. Shoppers, faced with a never-ending decline in real incomes initially tried out the value propositions of the discounters. Many were surprised by what they saw and experienced and continued to direct some of their shopping in these stores.

The other major trend is that the concept of the “big weekly shop” has declined. Instead people are shopping more frequently during the week, using two or three different food retailers and shopping more locally.

In the context of this background perhaps it is not surprising that Tesco may react by establishing a separate discount brand format to address the threat of Aldi and Lidl.

At present £1 out of every £8 spent by shoppers on food retailing goes to Aldi and Lidl. Estimates suggests that the discount sector is likely to grow by 49 per cent between 2018 and 2022 and that £1 out of every £7 will go that that area.

In another connected event Tesco got approval from the competition authorities to merge with Booker – a major distributor, wholesaler and retail operation towards the back-end of 2017.

What are we to make of this move – if it eventually happens? It appears that something is afoot as some of Tesco’s own brand suppliers have been asked to sign a noon-disclosure contract before they can contribute to the new venture.

Firstly this concept has been tried before. Sainsbury’s entered into a venture with the Danish discounter Netto, a few years ago to launch a discount format in some of its existing stores. Ultimately it failed. Sainsbury’s divested out of it because it under-estimated the level of investment required and the inability to gain a quick critical mass of such stores.

Tesco arguably are in a stronger position. They have over 6,000 stores across all of its formats including “One Stop” and “Express” outlets. If the Booker merger goes ahead it will also have access to a range of other stores and outlets. Some of the latter could be re-badged under a new discount fascia.

This rumoured move has implications in a number of different areas.

For instance does the food grocery market in the UK need a Tesco Light version to compete with already well entrenched discounters such as Aldi and Lidl? The trends as noted earlier, suggest that the demand for discount retailers in this field is growing. Arguably this is a strong indicator that opportunities exist for another entrant.

Will Tesco not damage its current brand image and equity? While it is certainly not regarded as a discount retailer, competing instead on issues such as reasonable prices at good quality levels. It has invested heavily in its own brand part of the business. This is most notable in the case of its Farm Labels. Moves in this area included the design of packaging which appeared to suggest that these were premium food products from genuine farms with appropriate “folksy” names, redolent of the pleasant English countryside. This was not the case in reality. Tesco was accused of creating the names of the farms and also in the case of its Willow Chicken range using repackaged meat that was already being supplied to Lidl.

If it were to come out with another fascia, using a different brand name would it not be in danger of confusing its shoppers and sending “mixed signals”.

Some commentators have highlighted the danger of cannibalisation. In other words it simply divert people from its One Stop and Express formats to the new stores. The net effect would be felt in little or no increase in overall sales coupled with a significant degree if investment that would be needed to provide it with a footprint in the market.

Other observers have noted that a new corporate philosophy and culture would be needed in order to succeed in the discount space. They point to the experience of the big airlines who attempted to take on the likes of low-cost operators such as Ryanair and EasyJet. BA struggled because it did not understand the economics and culture of working in the low-cost, low-price segments.

From what information that I can gather on the topic it would appear as though Tesco would be engaging in a “copycat” strategy. It proposes to stock these new outlets with around 3,000 items (similar to a typical Aldi or Lidl store). This contrasts with around 30,000 to 40,000 items in a typical Tesco supermarket format.

You might seriously question what this new proposed value proposition would offer shoppers that is not currently provided by the likes of Aldi or Lidl? It would stock brands that are not well known – again similar to the core strategy of Aldi and Lidl.

In the case of the two discounters, they would appear to be going away from the hard discount model, where they only stock cheap and relatively unknown items to a softer version of discounting. This is evidenced in items such as whiskeys, chocolates and even Champagne.

There is no doubt that it has the financial resources and available retail space in the form of outlets to attempt such an ambitious project. This is critical to success, if the experience of Sainsbury’s and its ill-fated venture into the discount space is to be believed.

In my view Tesco would have to identify some point of differentiation from Aldi and Lidl in order to make any sort of viable impact. It is difficult to see where this might be likely to occur.

It is possible that it could attempt to provide a limited range of product categories that would be priced even lower than Aldi and Lidl.

However it would appear to me that Tesco does not have the existing capabilities to do this from the point of view of corporate culture and the cost disciplines that would be necessary to effect such a strategy.

What do you think?