In August this year, Tesco began to manage shareholder expectations by reducing their profit forecast by £0.4bn. Yesterday, just four months later, the retailer announced that they would not exceed £1.4bn profit on the financial year, a short-fall of £1bn against the revised target, an announcement that lead the city to witness a drop in Tesco shares by 16%.
So where did Tesco go wrong?
The reality is, it isn’t just Tesco, the British high street has witnessed real climate change in the last few years, with the discounters biting hard as the deflated market continues to push consumers to search for savings and value, and to be more guarded over discretional spending. Shopping patterns have also changed; with reduced budgets and efforts to waste less food driving smaller and more frequent trips, do consumers still want the one stop big shop? Perhaps this is why Sainsbury's has stopped plans for the introduction of more than thirty new superstores.
Proof of discounter success
This storm has forged a new supermarket landscape, in which the big four have definitely been rocked. Tesco, Sainsbury's and Morrisons are all continuing to lose market share to Aldi and Lidl, with Sainsbury's experiencing their worst sales drop in nearly 20 years. Asda have struggled too, but returned to growth through some smart and simple to understand promotional practises. As Aldi's market share overtake of M&S becomes a distant memory, the German retailer looks to rise above Waitrose for the first time too. And it is no coincidence that Netto has returned to the UK, launching a new store in Leeds under a joint venture between Dansk the Danish-owned retailer and Sainsbury's.
Is there more to it than price?
At a glance, it seems obvious that discounting and promotional pricing strategies are the predominant force behind Aldi and Lidl's success, but is that all there is to it?
While a very different shopping dynamic exists in France with independent retailers and conventional markets preserving a strong role in weekly consumer habits, the French market did experience a similar situation with the hypermarkets losing share to discounters. However, the big chains fought back not only with more aggressive promotions and keener pricing, but also by aping the ease of shopping experience that the discounters offered by narrowing the amount of choice at the point of purchase and in doing so, making it simpler to shop.
Choice exceeding critical mass
Over the last couple of decades, supermarkets have gone to great lengths to make shopping easier and quicker, introducing developments such as better merchandising architectures, self check-out, on-site petrol stations etc. While these advances are welcomed, perhaps these time savers have simply maintained the status quo, as the actual ritual of shelf mooching and product selection has become bogged down by the vast choice the consumer is now confronted with across all categories. During the same period, we have seen the biggest supermarket chains expand their range and variety of product.
In providing shoppers with a choice of 20 brands of olive oil, 20 brands of cereal, 20 brands of tea, 10 brands of toilet cleaner etc., the big supermarkets broaden their consumer net by increasing the likelihood of carrying the consumers' choice brand; but in doing so they force the need for bigger stores and actually make that brand harder for the shopper to find.
Aldi and Lidl manage to do the seemingly impossible, having narrow ranges yet offering new ideas to the UK consumer, courtesy of the inclusion of some choice European products from their overseas inventory. Furthermore, they have made 'luxury' items such as lobster accessible. Even the middle classes are warming to the discounters.
Choice is a good thing, and it is great that supermarkets carry the answer to all our needs. Supermarkets can monitor the pull data and stock accordingly, but does catering to all and sundry actually come at a cost to that common majority? Lidl and Aldi might say yes as their economy of product choice allows them to keep smaller and simpler stores, more cost effective warehousing and lower transit costs, which all add up to a saving for the consumer of both time and money.
There is a dichotomy at work here, the heart says 'I love choice'... Choice is a good thing, and it is great that supermarkets carry the answer to all our needs. Supermarkets can monitor the pull data and stock accordingly, but does catering to all and sundry actually come at a cost to that common majority?
The growth of the 'less choice' discounters shows consumers are being led by the mind. Lidl and Aldi might say yes as their economy of product choice allows them to keep smaller and simpler stores, more cost effective warehousing and lower transit costs, which all add up to a saving for the consumer of both time and money.
Let's not over-react here and suggest means ALL change, it doesn't. The big four still have the lion’s share and Tesco still accounts for a quarter of the UK market. However, there are lessons to be learnt here, and it isn't just 'go cheap'.
What are the lessons to be learnt?
The big four can continue to slug it out in the bitter pricing war but it isn't a level playing field as Tesco have found to their cost. The European discounters are using unique business models which marry incredible efficiency with a pan-European economy of scale operating thousands of stores throughout Europe.
For sure the big four need to bridge the price gap and become more price competitive, but they may need to reappraise the value consumers give to their shopping 'time investment'. The lesson to be learned from Aldi and Lidl is that consumers like spending less money, but they also like spending less time wading through the burgeoning choice that confronts them.
'Value' is the competetive edge
Supermarkets must continuously remind themselves of their values, and may well need to get back in touch with the consumer and their values? Furthermore the supermarkets need to acutely and introspectively challenge whether the diversity of their offering really represents what consumers want and need, and not just what everybody else is doing.
Only one supermarket can be the cheapest overall. The rest are going to have to find other ways to reach out to consumers and return to growth, and this has to come from providing value in ways other than price.
The big four need to bring their focus back to their reason for being. It's fine to offer banking, insurance, kitchen supplies, clothes, beauty, tools etc., but again this complicates the retailers proposition so to do this the food offering needs to be right first. Furthermore value should be being added through brand, a territory where the big four should be beating the discounters hands down in the UK.