Tesco- Every Lidl doesn’t help

It was no big surprise last week when Tesco ousted its boss, Philip Clarke, as the leading retailer continued to lose ground to the German discounters. The man tasked with reversing the trend is Dave Lewis, ex Unilever, a brand man who has some very tough strategic decisions to make.

To understand the scale, 75m shopping trips are taken every week to a Tesco store around the world. But their recent troubles have seen 1m customer visits less per week.

The latest figures from Kantar Worldpanel show that Tesco’s share of the €9bn Irish retail market had fallen to 26.1%, down from 28.8% two years ago. In the UK, Tesco’s share is now 28.9%, the lowest figure since 2004.

It is ironic that Tesco’s success, built on the basis of pile it high, sell it cheap, is being destroyed by a similar model from Aldi and Lidl today.

Shopper behavior

According to retail analyst and lecturer at Dublin Institute of Technology, Damian O’Reilly, what we are witnessing is a shift in consumer behavior.

“The recession has changed consumers and the weekly shop seems to be over. The desire to shop around for bargains came about because of the recession. But even though the economy is improving, many shoppers have kept the habit.”

He added: “We are also seeing the emergence of the “repertoire shopper”, who is buying staples such as pasta and beans in Aldi and Lidl, while choosing butchers and fishmongers at the other end of the market.”

“Aldi and Lidl have become fashionable and are perceived to offer better value through local and high quality and it’s not just about price.” according to O’Reilly.

He says Clarke reacted to Lidl and Aldi. “They were always going to do their own thing. Tesco forgot they were twice the size of their competitors. Therefore, as the dominant player, Clarke should have used his power and led the market.”

Some analysts believe that Clarke inherited a troubled business that had not seen enough investment in the UK and also featured misguided overseas expansion. When he finally exited the US after six years of losses, it cost £1.2bn.

Tesco was caught in the middle of this polarised market that favours the top-ends such as M&S and private butchers, while at the other end you have the discounters. Clarke’s downfall appears to have been his failure to give Tesco a distinct identity as either a high-quality grocer or a low-price one.

O’Reilly argues that Clarke didn’t develop Tesco Express to compete with Aldi or Lidl and chose to keep prices high.

Just as Clarke took control in 2011, Tesco had a store portfolio weighted towards large out-of-town locations. Recently, Tesco has been writing down properties to the tune of nearly €1bn. However, the company has been slow to sell these sites for fear that they would be snapped up by their fast-growing German rivals.

The future

O’Reilly believes Lewis has three options:

As a brand man, Lewis is likely to reinvigorate own brands, with higher quality at both ends – one to compete with M&S and another to compete with Aldi and Lidl. He may need to take the Tesco brand back to basics where customers believe it is returning to its core purpose.

How Lewis will innovate at Tesco will also be critical. O’Reilly believes that the majority of bulky products such as washing powder will be bought online by 2020. He adds that competitors such as Dunnes or SuperValu will struggle to compete online if Tesco get this right.

Lewis needs to forget the legacy margin, which has been around 5%, more than double the industry average of 2%. O’Reilly says he will probably drive prices further down to take share. Although not good news for suppliers, for Lewis, losing market share brings reduced buying power. Stores then become unviable and eventually close, causing a domino effect.

Tesco has silently become critical to Irish agriculture. What happens at Tesco can affect meat and dairy processors and farmers directly.

Not only do they purchase 75m litres of Irish milk and 31,000t of Irish potatoes, Tesco is the largest export destination for Irish food and drink. 7% of Irish food and drinks exports are bought by Tesco internationally and, at €705.8m, that is more than what we export to the US, Germany or France.

While a change in leadership may bring some fresh thinking at Tesco, how Lewis repositions it to overcome the structural shifts in the grocery sector will be his biggest challenge. Unfortunately for Tesco, over half its stores are huge out-of-town outlets.

While their scale should allow them to operate more efficiently than competitors, there is little doubt the business model needs to be reviewed.

If Lewis is successful, Tesco should recoup market share at the expense of Dunnes in Ireland and Morrison’s and Sainsbury’s in the UK. Aldi and Lidl may be limited to 20% of the market.

The German discounters’ strategy

At the core of the discounters’ strategy is their limited product range. They stock between 1,000 and 3,000 lines, compared to close on 40,000 at a typical Tesco store. The majority of discounters’ products are own-label, rather than brands, which gives them more clout with suppliers. It also gives them control of their business from end to end. The range suppliers are asked to provide is narrower – perhaps four to six products compared with 30-40 at a larger retailer, driving efficiencies and big volumes.

They tailor their ranges to local tastes, sourcing products such as vegetables locally. They are also innovative. Lidl always puts multiple bar codes on each product, making them easier to scan, reducing the time at tills.

With shoppers flocking through their doors, the Mercs and BMWs in the car parks are perhaps the greatest sign that these discounters continue to appeal to the more affluent.