How Tesco’s new discount chain can compete with Aldi and Lidl

Tesco is reportedly set to launch a discount chain, dubbed Jack’s, across the UK this autumn but can it build a brand from scratch to truly rival the already well-established German discounters?

Tesco is reportedly set to launch its own discount supermarket chain in the UK as early as September as it looks to rival the German discounters Aldi and Lidl and shore up its market share.

Speculation arose after it was discovered this week that the retailer is currently advertising for staff for a new format at a number of locations in the UK. It then surfaced that it had recently registered the chain ‘Jack’s’ as a retail trademark, after Tesco’s founder Jack Cohen.

At first sight this might seem like a strange move for the UK’s biggest supermarket chain. Why distract its staff and send customers to another brand?

But while it is the UK’s largest supermarket with a 27.6% market share, according to Kantar Worldpanel, there are areas where it has work to do. Figures from YouGov BrandIndex, show it ranks fifth in terms of value with a score of 16.4. That is some way behind Aldi on 49.4 and Lidl on 43.5, as well as Asda and Morrisons.

The data shows Tesco has its work cut out to improve its value perceptions among the UK population, meaning its own discount brand could fill the hole. But GlobalData retail analyst Thomas Brereton says orchestrating the emergence of a new brand without damaging the reputation of the main Tesco image will require “pinpoint precision in order to succeed”.

Part of that precision will be the realisation that offering competitive pricing alone will not be enough to compete. Tesco will need to put careful thought into where Jack’s will sit from a branding perspective and how it will differ from the supermarket’s core proposition.

If the new concept is too different from the main brand, it will struggle to establish itself in an already fiercely competitive grocery market. If it is too similar, Tesco runs the risk of cannibalising its core supermarket sales.

There is also a risk in over-complicating its offering; the opposite of what Tesco CEO Dave Lewis has been doing since he joined by disposing of non-core assets and reducing its product range. While, over the past 18 months, Tesco has been growing the number of product sub-brands it offers, adding Jack’s could confuse the situation, especially given the number of retail brands it now owns.

The deal for Booker, which Tesco bought for £4bn last year, includes brands such as Londis and Budgets and it has since introduced ‘Chef Central’, in a number of Tesco Extra stores.

Differentiating in discount

Bryan Roberts, an analyst at TCC Global, says the new value concept will need to trade at a distance from Tesco to avoid any brand confusion – from both an operational and shopper perspective. That means it is unlikely there will be any Tesco-branded products or services such as Clubcard within the new venture.

Jack’s will also need to offer something different from the discounters, as Nathan Watts, creative director at retail consultancy Fitch, explains. That includes its marketing, which will also need to be differentiated.

Aldi and Lidl have built their loyal legions on a combination of clever ranging and canny branding. Put simply, they’ve managed to create excitement in a category defined by bulk deals and bland experience.

Nathan Watts, Fitch

The Aldi and Lidl brands are built on quality and value, key to their success has been making shoppers feel like they are getting a good deal rather than being cheap, so it will be crucial that Tesco makes sure Jack’s offers something that stands out for more than those things.

“Aldi and Lidl have built their loyal legions on a combination of clever ranging and canny branding. Put simply, they’ve managed to create excitement in a category defined by bulk deals and bland experience,” says Watts.

“They have worked tirelessly to build their own ranges through trust and differentiation, whereas Tesco is a retailer built on the brands of others.

“Known brands carry a certain reassurance, but can Jack’s stand out by plugging the same old brands, even if at better prices? I hope Jack’s carries its own own-label products. If it does, they will need to be compelling, strongly represented across all categories, and built with unique category beacons to drive interest and talkability.”

As Watts suggests, there are opportunities for own-label products. But rather than developing its own, Jack’s could make use of product supplied by Booker, alongside Tesco’s discount ‘Farm’ and ‘Value’ lines, which now include brands such as Stockwell for cupboard staples, Nevill’s for bread and Hearty for chilled.

Avoiding déjà vu

However, just because there is an opportunity, it doesn’t mean a discount brand will succeed – as Tesco already knows. The company made a similar move in the mid-1980s with the Victor Value brand, but as with Sainsbury’s partnership with low-cost retailer Netto, it was eventually scrapped for “undermining the main Tesco brand,” GlobalData’s Brereton explains.

READ MORE: Fresh, cheap and Scandinavian’ – How Netto’s marketing director plans to take on Aldi and Lidl

Yet market dynamics are different now. People are more inclined to buy own-label, something that held back Victor Value, and more discerning over value for money.

“CEO Dave Lewis will be keen to avoid déjà vu, and may feel that the price-led customers of 2018 will not be as discriminating against own-label products as shoppers were 30 years ago,” adds Brereton.

And of course, the threat from Aldi and Lidl – and now Sainsbury’s and Asda with the proposed mega-merger – is much greater now, and so too will be the drive to make a challenger brand succeed.

Tesco’s market share is currently 27.7%, down from 27.9% a year ago, while Aldi and Lidl now account for a little more than 12% of the market between them, according to Kantar Worldpanel.

Meanwhile, the Sainsbury’s/Asda deal – if it goes ahead – will give the combined entity about 31% of the supermarket sector.

Tesco’s acquisition of Booker and recent deal with French retail giant Carrefour shows it is a business that knows it has to make drastic moves if it is to stay ahead of the market.

However, Jack’s success will ultimately come down to whether consumers see it as a genuinely valuable alternative to the already well-established discounters.

“There’s no doubt Tesco has the resources, knowledge, marketing team and supplier base to make it a success logistically,” says Mark Dodds, chair of the Chartered Institute of Marketing food, drink and agriculture committee.

“But as we learn every day, the UK consumer can be fickle and they will ultimately decide whether the venture is a success.’’