‘Got to have one of those’ syndrome can be a one-way ticket to business failure. Tesco could be punching this ticket with its new Jack’s discount grocery store initiative, the retailer’s answer to the success of Aldi and Lidl in the UK.
Tesco has come around to the conclusion that the only way to beat Aldi and Lidl in the UK is to join them. The German-domiciled discount grocers have together snared more than 13% of the UK’s grocery market and are growing at a more rapid clip than Tesco.
By taking on Aldi and Lidl directly, Tesco believes it can beat the duo at their own game. Expected to debut under the name Jack’s (named after Tesco’s founder, Jack Cohen), the new discount store is anticipated to be the first of many units.
Don’t look now, but the other guy “blinked”
Aggressive discounters pose unique challenges to incumbents, as Tesco is well familiar with. But the supermarket giant is not the first business to experience such a threat, nor will it be the last.
An almost identical scenario played out in the US airline sector about a decade and a half ago when United Airlines and Delta Air Lines struggled to find a way to compete against fast-growing discounter Southwest Airlines.
Southwest Airlines did not pioneer the discount airline industry, but it helped perfect it. In the early 1970s, just 15% of the travelling population in the US travelled by air, according to Simon Sinek, author of the book Start With Why. Southwest took aim at the other 85% that primarily travelled by car or bus by keeping things cheap, fun, and simple.
Roughly 30 years after the launch of Southwest Airlines, industry incumbents United Airlines and Delta Air Lines were feeling the heat from their now sizeable and faster-growing discount competitor. “Got to have one of those” syndrome kicked in, and Delta and United decided to try to beat Southwest at its own game by launching their own respective Song and Ted branded ‘no-frills’ discount airlines, both in 2003.
Song and Ted copied how Southwest Airlines operated, attempting to make travel ‘cheap, fun, and simple’ in the words of Simon Sinek. But neither really distinguished themselves from Southwest Airlines, and both “no-frills” airlines were gone from the marketplace after just four years of operation.
History does not repeat itself, but it often rhymes
The parallels between Song, Ted, and Jack’s are eerie. Commenting on the floorplan for the first Jack’s store which is expected to debut in Catteris, Cambridgeshire, England in what could be a matter of days, BetterRetailing.com has reported that the nearly 14,000 square foot store is the ‘size, shape and format of an Aldi or Lidl’.
The website goes on to describe the new store’s floorplan as ‘nothing like an existing Express, Metro, or any other Tesco format’ and ‘very different from anything they’ve done before’. That may well be the case, but is the store ‘very different’ from anything Aldi or Lidl have done before?
Bloomberg recently quoted Berenberg analyst Dusan Milosavljevic as saying ‘Tesco will be competing with Aldi and Lidl in what they do best’. Aldi and Lidl gained a foothold in the UK after the Great Recession in 2008, and have proven to consumers that low prices do not have to come at the expense of quality.
It isn’t clear at this point what Tesco can bring to the discount, limited-selection supermarket world with Jack’s that is superior to what Aldi or Lidl already offer.
This means that Jack’s entry into the market has the potential to fuel a ‘race to the bottom’ on price as the new grocery store chain does whatever it can to lure shoppers from Aldi or Lidl. This may work in the short term, but renting deal-seeking consumers and further commoditising the grocery market seems unlikely to cultivate long-term consumer loyalty.
‘Scale and power’ have limits
Financial analysts revel in Tesco’s ‘scale and power’ as potential game-changers for entering the discount grocery space. But these were not enough for either United Airlines or Delta Air Lines to make Ted or Song stick a decade and a half ago.
‘Scale and power’ were also not enough to propel Tesco’s ill-fated Fresh & Easy concept to success in the US, and they may not be enough for Tesco’s new Jack’s chain either.
Supermarkets have been one of the final frontiers of e-commerce, but signs are growing that the industry may make up for lost time. That will put added pressure on the Tesco’s of the world to improve the brick-and-mortar experience of grocery shopping by making shopping more convenient, entertaining, and attractive to consumers.
Instead of trying to out-discount the Aldi’s and Lidl’s of the world, Tesco’s time and effort may be better spent trying to find new ways to rekindle the love affair that consumers once had with the retailer by focusing on more than just price.
Successful supermarket chains like Wegmans in the US have avoided mud wrestling with discounters by obsessing over convenience and by delivering vastly superior customer service to the point where store fans are nearly cult-like.
Loyalty often wins over price. Just ask Apple Computer. Let’s hope Jack’s doesn’t prove to be an expensive lesson in discount supermarket retailing for Tesco.