August 28, 2014

Tesco and the German discount challenge

Tesco Brand Outlet discount shelves (photo: Steve Dresser/ Grocery Insight)
Tesco goes discount: Is this how the UK grocer sees competitors Aldi and Lidl? (photo: Steve Dresser/ Grocery Insight)
Tesco's roll-out of a discount aisle in its larger UK stores since early 2013 continues to puzzle trade observers here on the Continent.

According to trade press sources, the retail giant has already introduced these 'Brand Outlets' to c. 180 Big Box stores in poorer catchment areas and wants around 100 more by the end of this year.

The dressed-down, matt-orange shelves carry a range of groceries, pet food, beauty goods and household products, including top brands such as Surf, Persil and Tetley. In keeping with the marketing claim 'Big Brands, Small Prices', items range from around 30 pence to £2.50.

As Tesco established a '£1 section' in 50-odd branches only two years ago, the media interpret these Brand Outlets as another attempt to combat the increasing popularity of 'pound shops' such as Poundland.

If, however, the Brand Outlets are also trying to compete with Aldi and Lidl UK, then the whole exercise looks counterproductive.

Tower of Babel prices

The overriding impression customers must now have when visiting a Tesco store is one of confusion. Over the years they have been confronted on the shelves with a number of price fighter own label ranges (Since 2000 'Tesco Value' has been followed by 'Discount Range' and the 'Discount Brand' umbrella label) which are already drowned in a sea of BOGOFs (buy-one-get-one-free offers).

So the new Brand Outlets risk creating a further
 layer of complexity for shoppers and more problems than they were intended to solve.

Years of consumer research have shown that customers are not only attracted to the German discounters because of their low prices. Customers also appreciate the clarity and time-saving simplicity of their offer. Shoppers at Aldi and Lidl are delighted at not having to trudge around huge stores and to sift through hundreds of brands for one pot of yoghurt.

Many do not wish to be tempted (some would say importuned) to buy more than they actually want or can afford.

But Tesco seems determined to complicate (some would say obfuscate) its overall offer rather than matching the discounters on prices and outpointing them on range and real USPs such as cheap petrol.

Experts lambaste the idea

Many of the experts asked by Lebensmittel Zeitung doubt the efficacy of Brand Outlets as a means of combatting the stellar growth of Aldi and Lidl in the UK.

Insead Professor Marcel Corstjens is highly critical: "It all looks like rearranging the deckchairs on the deck of the Titanic. These discount areas risk making less price-sensitive customers more so, and, if they are successful, they would devastate the already thin margins of the Big Box retailers."

"They also reinforce the impression that Aldi and Lidl are right and that the big guys have been exploiting their customers. Even if Tesco discontinues the idea at some stage for whatever reason, it may well find that it has simply created more shoppers for the German discounters."

Jasmijn Prinssen, Creative Director at Dutch design agency JosDeVries, also has her doubts: "I think any such idea is only advisable if the products have a strong in/out character and not a fixed range, but I doubt whether this is the right way to compete with Aldi and Lidl."

"In the Netherlands the discount aisles of leading grocer Albert Heijn were not successful. The atmosphere and lighting were poor, and the whole area was separated from the main store. It was simply too far away from the core identity of the company, and customers almost felt ashamed to be seen there."

Her colleague Ernst Consenheim, Director of Strategy & Format, agrees: "The only way to respond to discounters is to match their low prices on the 1,000-odd range of 'critical products' which drive customer price perception."

"Ideally, these should be part of a consistent 'good/better/best' approach which the shopper can immediately recognize within a clear shelf-plan structure. Higher prices can be charged where the Big Box retailer is offering really excellent fresh food or something innovative and unique."

An invitation to Germany

Michael Gerling, CEO at EHI Retail Institute, views Tesco's Brand Outlets in the light of the experience gained by Aldi's and Lidl's German competitors:

"I don't find discount aisles at all customer-friendly. Shoppers come to a store looking for specific items and they ought to be offered a broad range of prices and qualities. The whole trade has worked hard for years at seeing things through the eyes of the customer, and now Tesco is offering a product group of 'discount lines' as though the words category management had never been heard of."

"In order to compete with discounters one needs strong own brands at comparable prices. Above all, one must have a differentiation strategy. In Germany the growth of the discounters was only slowed when supermarket and superstore operators stopped copying them and started to discover their own qualities. I therefore recommend that Tesco has a close look at what Edeka and Rewe are doing."

German discount expert Professor Thomas Roeb concurs: "French retailers have been experimenting with discount aisles and discount islands for 20 years, but have largely abandoned the idea, despite a few recent experiments at Auchan, Cora and Carrefour."

"The only way to combat discounters is to pitch your own label at their prices. If you do that, you won't need a discount aisle or island. If you don't match their prices, then a discount space won't work anyway."

German supermarket and superstore operators Edeka and Rewe had with Gert Schambach viz. have with Manfred Esser two former discount managers leading their buying team who understand the phenomenon. This is probably why Edeka's 'Gut & Günstig' and Rewe's 'ja!' own label price fighter ranges still work so well today."

Former Globus CEO and current management consultant Josef Schmidt even teases Tesco: "Good morning, England! Do you really think your customers even notice a brand aisle in your Big Box stores? And if you think your Brand Outlet shelves can match those of a modern German discounter, then you are living in the Stone Age!"

Given the above tongue-in-cheek invitations to Aldi- and Lidl-stressed UK retailers to come and visit Germany, it seems strange that one never bumps into a Tesco manager in a local store. After all, if Aldi and Lidl are stealing the most customers from you on your home market, why not look at how German competitors cope with them both in their own country?

Doubtless, however, Fresh & Easy in California was a far more attractive destination for study tours. After all, they speak English over there, the wife couldn't insist you fly back the same evening, and you returned with a suntan. But now that your US subsidiary has failed, why not leave head office in Cheshunt for a day and come to Germany?

Podcast microphone (photo: Gerhard Seybert-Fotolia)
(photo: Gerhard Seybert-Fotolia)

Podcast. Click arrow to listen to an audio version of the text:

Lebensmittel Zeitung print and digital (photo: LZ)
Our German B2B newspaper, Lebensmittel Zeitung, in print & digital
Read in German: 'SB-Warenhaus auf dem Discount-Trip' 
by Mike Dawson & Gerd Hanke on pages 30 & 31 of Lebensmittel Zeitung, no. 35, 29.08.2014

German Retail Blog

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