With the announcement of a new fascia called "Jack's," Tesco appears to be consolidating control over the food and grocery markets in an effort to directly neutralize the growing threat posed by German discounters Aldi and LIDL.
Although orchestrating the emergence of a new brand without jeopardizing the main Tesco image will require pinpoint precision, it is a bold move if it is true.
Online job ads showed evidence of a new project, with 60 locations (a mix of new openings and rebrandings) designated for the project.
Furthermore, moving at such a rapid pace to Carrefour SA Enterprise Tech Ecosystem amounts to a plunge into the deep end—Tesco appears to be convinced that this strategy is the right one, as the potential jobs will begin within six weeks.
Additionally, it is difficult to disagree given the rapid growth of Aldi and Lidl.
Rapid expansion of Discounters Since 2008, the pair has increased their market share from 2.9% to 9.4%, with Tesco being a victim of their success along with the rest of the "Big Four." Therefore, Tesco and Booker, its recently acquired wholesale rival, have arrived at the straightforward conclusion that "Discounters are here to stay; and we're big enough to eat some of it.
However, Tesco must carefully consider two issues: the project's longevity in light of the scale required to make a discount fascia profitable, as well as the fact that it disrupted sales at the main brand by tarnishing its image.
Through a partnership with NETTO, Sainsbury's attempted a similar concept in 2014. Two years later, the company failed due to its inability to expand quickly or sufficiently.
Tesco may face a situation similar to this in the future; 60 stores is a lot to start with, but it will be hard to get to the couple hundred or more needed for viability without taking too many sales from Tesco's existing locations.
Can the Tesco discounter format function?
Tesco will believe that the purchasing power it currently possesses will be sufficient to make this a success thanks to its relationship with Booker and its new partnership with the European retail giant Carrefour.
Under Victor Value, Tesco last tried the discounter strategy in the middle of the 1980s. Similar to Sainsbury's-Netto, it was eventually abandoned, but this time the discount brand that was undermining the main Tesco brand was held accountable.
CEO Dave Lewis will want to avoid a repeat of the past and may believe that 2018's price-driven customers will not be as picky about own-label products as they were 30 years ago.
Tesco will need to make good use of every aspect of its business in order to accomplish this. Booker has impressed since the acquisition and will likely play a significant role in the anticipated Jack's format, which may more closely resemble a cash-and-carry model like Costco's.
However, it will need to do so in a way that does not divert too much investment away from innovations like the cashless store trial and maintains its focus on developing its core convenience structure.
In addition, it will need to target price the most in order to differentiate itself from Aldi and Lidl.
