A lot will be written this week about the venture by Tesco in to the discount world, by opening Jack’s (we assume the name is such) and therefore moving in to the brave new world of discount retailing.
There has been some real high level insight offering little to the debate, irrelevance about whether the store will feature F&F clothing for example. It misses the point entirely…..
This isn’t a flash in the pan for Tesco, not a case of mere window dressing as they fiddle whilst Rome burns…. Not like the old days, it’s a strategic move that makes sense on a number of fronts and is reasonably low risk too.
Well, there are numerous reasons.
1.Tesco have resolved their value challenges.
The value proposition in Tesco is now as strong as it has been in recent years, particularly within own label and the work in value tiers, replacing value with a variety of brands, akin to farm brands means that they’ve been able to distinguish their value tier versus Aldi / Lidl brands and open up some price gaps on products that ‘look comparable’… There will always be a degree of cannibalisation, but the reality is that Tesco cannibalised themselves hugely on Produce and Meat with farm brands and lived to tell the tale.
Opening a Jack’s is not going to deviate too much from the core Tesco proposition, given the relative strength here.
2. Jack’s offers a solution for under performing space
The new world sees supermarkets and superstores close down, it never used to, Tesco would keep stores open even if they were loss making. This meant that a presence was retained in areas where the store was suffering. However this makes no sense any more, as noted when Dave Lewis closed 52 stores and ironically, didn’t open Chatteris, nor Immingham – both of which have been sub let and Jack’s will open in the retained portion of the store.
The ongoing picture will see stores venture in to the loss making territory all the time, some stores come back out unscathed like a number of Extra stores had done once the Lewis recovery took hold. However for other stores, the future remains unclear and they are often on a knife edge awaiting a German discounter opening to truly push them over the edge.
Add in costs that Lewis cites all the time. Business rates, taxes and rising wages all forming that ‘lethal cocktail’ which means a store tips in to loss making territory.
3. Particularly formerly acquired space
The former space race saw Tesco pick up stores from all manner of retailers, Somerfield and Kwik Save to name but two. These sites were often borderline in terms of returns but Tesco, with their operation could typically make them work better than their former owner had done.
However as noted above, the current picture on rising costs is not a positive one. Some space was acquired 10+ years ago when the world looks far different to now. A discounter opening up in a small town can take a big chunk from the existing Tesco Metro / Superstore, enough to swing the pendulum certainly.
4. Because, what is the alternative?
Eventual closure. You can’t refit these stores to defend against a discounter opening up. It’s just putting money in to an asset that is losing money anyway, it’ll only get worse. Plus a refit doesn’t work, especially in a Metro for example as the price gap is just too big. So a new format makes sense in this respect as it provides a defence for Tesco versus discounters and indeed, other competitors.
5. It’s a separate company so if that still doesn’t work….
There will be far less shame in exiting. Like Sainsbury’s / Netto; no one threw rocks at Sainsbury’s for abandoning the joint venture after saying they had learnt a lot etc. Indeed they retained some stores for the core format too. If a Jack’s conversion doesn’t work for any sites, then Tesco can abandon these knowing that they gave it a real shot. For some sites, it’s never enough.
6. There can be enough deviation with the value ranges so as not to cause concern
Certainly with the value tier ‘exclusive to Tesco’ brands that have been developed, these could comfortably form part of a discounter range, alongside some Booker lines, some tertiary brands that don’t impact larger store sales / price comparative and there’s always enough non food to work with.
There is a lower risk of direct comparatives being made as Jack’s will likely sell value tier products that you can get in the core stores but at greater volume, with more space given over to said products. Alongside lots of special buys!
7. Maintain the Tesco ‘eco-system’
Can you use Clubcard? It remains to be seen but to quote Steve Jobs (who, alongside Malcolm Tucker is often quoted by myself) “it’s better to cannibalise yourself than have others cannibalise you.” Therefore developing Jack’s means that Tesco are able to keep the spend potentially in the Tesco world via Jack’s and then also pick up that extra ‘25%’ shop too.
Of course, Jack’s could convince customers to go to the larger Tesco store anyway if there is value range overlap too. Why let Aldi pillage sales from the bottom of the car park?
8. It’s something new and larger competitors should be aware
Sales will be propelled in the early days by the majority of the retail world going for a look around and then considering what is next in terms of locations and how that may impact their own operation.
We talk about Aldi and Lidl of course, but there is equal weight given to the fact that larger competitors could also be impacted by a Tesco switching in to a Jack’s based format of course.
9. Look, listen and learn
Tesco can use their work on reviewing Aldi and Lidl and use their tactics to great advantage internally within this new format, huge focus on British sourcing is a must for example when you consider discounter strength in this area. A receptive customer base to discount generally also makes things easier – especially at the front end.
More to see and hear on Wednesday and in the coming weeks, but there are c.6 in the pipeline that have closed already and are being converted and then reopened.
Interestingly, closures continue apace in the Tesco world. A number of One Stop stores are closing down, some are likely to be closed entirely, others sold. Whether Tesco think some of those could work at Jack’s(?) The store size would be relatively small though in terms of the operation…..
Also of note; Metro stores continue to close. This format looks ripe for further conversions to the Jack’s world.