Newly opened discounter brand by Tesco Jack’s could struggle against Aldi and Lidl while eroding the company’s margins.

In September Tesco unveiled its first discount store, Jack’s, the move is a  response to the growing popularity and market-share of Aldi and Lidl.

The UK big four supermarkets have all seen their market share eroded by Aldi and Lidl, as these discount stores have become increasingly popular with consumers in the UK. What’s more, a potential merger between Sainsbury’s and Asda threatens to knock Tesco from its leading spot.

According to MarketLine data the UK food & grocery market grew at a rate of 2.7% in 2017. The market is expected to grow with a compound annual growth rate (CAGR) of 3.5% between 2017 and 2022.

Aldi has grown its market share from 1.5% in 2000 to 7.6% in September 2018, while Lidl’s share has increased from 1.3% in 2000 to 5.5% in June 2018.

Tesco CEO Dave Lewis has directly mentioned Aldi and Lidl, claiming that the prices in Jack’s stores will be lower than those seen in Aldi and Lidl.

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Jack’s will also follow a similar model to the German discounters, stocking drastically less products than Tesco stores, the majority private label and a more simplified store layout.

Discounter model could eat into profit and dilute Tesco’s advantage

Tesco’s CEO has done a lot to transform the retailer following the accounting scandal of 2014, which wiped £2bn off Tesco’s value due to alleged financial fraud committed by some of its leadership.

The opening of this new discount chain could distract from the progress made so far. Tesco still remains the clear market leader and its advantages include a wide product range, its Clubcard loyalty program, and its visibility in almost every postcode in the UK.

If the company wants to diversify it needs to be more innovative than trying to take on the discounters.

A focus on service or shopping experience or improving home delivery could help the retailer to stand out from the rest. The opening of Jack’s is likely to attract those customers who already use Tesco, taking profit away from the company’s own business.

Existing and established competition

If Tesco had come up with the concept of Jack’s before the explosion of Aldi and Lidl in the market, it could well have been on to a winner.

However, Aldi and Lidl have grown in dominance and created a strong reputation for themselves.

Both retailers have won numerous awards for both quality and price.

For example, Aldi won more awards than any other retailer in both the Great Taste Awards 2017 and Grocer Awards 2018. Meanwhile, Lidl was voted the UK’s best supermarket for grocery deals in the Grocery Deals Awards 2018.

Other rivals have already failed to replicate discounter model

Sainsbury’s has already had a failed attempt at taking on the discounters through its partnership with Netto.

The Scandinavian brand was re-introduced in 2014 in partnership with Sainsbury’s, but its 16 stores were closed in 2016.

Netto was unable to match the economies of scale and brand recognition of the discounters. While Tesco can undoubtedly learn from the mistakes made here, the retailer may find that it would have more success concentrating on what it does best.

Regurgitating a model that is suited well to the German discounters could prove to be a costly move for Tesco.