Tesco to take the fight to Aldi and Lidl?
Tesco reportedly considering entry into the discount arena, trading updates from Laura Ashley, H&M and continued expansion by Smiggle.
4 minutes to read
- H&M has issued a profit warning for its global operations. The business warned investors that sales could continue to fall despite rising online sales. H&M has seen sales fail to rise as much in recent months, ending years of high growth rates. The retailer forecast growth of at least 25% in online sales and in its new brands such as COS and H&M Home in 2018, but said sales from existing core brand stores would fall further, highlighting a tough start due to high stock levels and problems with its ranges.
- Smiggle (a rare example of an internationalising retailer getting it right) is to open a flagship store on Oxford Street as part of an ongoing expansion push. The Australian stationery retailer currently has 125 UK stores and reported a £3.8m pre-tax profit in 2016, on sales of £29m. The business is targeting a network of ca. 200 stores and revenues of A$200m (£112m) by 2019.
- Home furnishings and clothing specialist Laura Ashley has issued a profit warning following disappointing Christmas trading. Like-for-like sales fell 0.5% for the 26 weeks to 31 Dec, while pre-tax profit nearly halved to £4.3m. Group sales fell 7.7% overall, although online sales grew by 5.1%.
Stephen Springham, Head of Retail Research:
Leaked reports in the week-end papers that Tesco is drawing up plans to launch a discount chain could scarcely have divided opinion more.
The arguments of those heralding the move are far weaker than those that call it into question. The supposed logic of the venture is twofold. Firstly, with the proposed acquisition of Booker, Tesco will be active across all grocery channels – superstores, supermarkets, c-stores, online, cash & carry and wholesale.
The only gap in its multi-channel armoury is discount stores, so this move would complete the full set. Secondly, the discount channel is clearly a high growth one and Tesco is patently missing out on this, to the ongoing benefit of Aldi and Lidl.
So, essentially the ‘pro’ camp are advocating that Tesco needs to tick a box and that ‘if you can’t beat them join them’. To the first of these points: better to operate in one core channel (e.g. supermarkets) effectively than be a compromised jack of all trades. To the second of these points: better to compete on your own terms rather than those of others.
The more cynical camp (and guess which one I’m in) can put forward a multitude of counter arguments. The most obvious one is that the launch of a discount chain would be an ill-timed distraction, with the business having enough on its plate with the integration of Booker.
Likewise, the precedents of previous incursions by the Big Four into the discount sector do not bode well. Asda Essentials never took off a decade or so ago. More recently, Sainsbury’s joint venture with Dansk Supermarked to relaunch Netto was aborted after just two years, with CEO Mike Coupe concluding that “to be successful over the long-term, Netto would need to grow at pace and scale, requiring significant investment and the rapid expansion of the store estate in a challenging property market.” Those with a good memory (or own up to being that old) may also recall Tesco’s previous attempt to enter the discount market in the 1980s under the Victor Value banner.
The two key downside risks are that a discount chain will not so much compete with Aldi and Lidl as cannibalise Tesco’s mainstream business. Also, that it will alienate substantial parts of Tesco’s existing shopper base at a time when customer loyalty is desperately hard to come by. The same products available at different prices at two chains operated by the same retailer will undermine any clarity and consistency on pricing generally.
There are also ‘middle ground’ arguments between the pros and cons. The merger with Booker will add over 5,000 new Family Shopper, Budgens, Premier and Londis sites to the existing 2,700+ strong Tesco Express and One Stop Network (not to mention a still sizeable land bank).
Tesco is clearly not short of options to selectively convert sites to a discount format and roll-out would not be entirely organic. Whether it is the right thing to do or not, my feeling is that Tesco is the only one of the Big Four that could make a semi-decent fist of it.
There have also been suggestions that Tesco is simply looking to ‘disrupt’ Aldi and Lidl. ‘Disrupt’ is one of the most over-used terms in retail and it tends to be viewed a positive thing to be championed. Positive ‘disruption’ is fine, but where’s the merit in ‘disrupting’ to spite your own face and causing collateral damage to your core business?
Read the latest Knight Frank UK Retail Monitor here