Tesco launches Jack's discount store: analysts' reactions

Paul Harvey, Partner at Newton

“Firstly, finding a way to create a complementary brand that does not cannibalise its own market share will be key. Tesco will struggle to replicate the efficiency of a discounter’s supply chain, who have a significantly smaller range of products, which means that they may be faced with offering the same product for a cheaper price in a new discount format. Maintaining higher margins within current formats whilst reassuring shoppers that they are not simply paying more for the same product will be a challenge.

“The only way this venture will have longevity is if they are truly able to generate volume sales on a targeted range that doesn’t overlap significantly with the core offering within a standard Tesco store. Offering products from the current range at a lower price point will almost certainly lead to a deterioration in the value perception within Tesco and cannibalisation of its customers, switching to the discount format.

“Overall, taking risks and looking at ways to innovate is ultimately a good thing for consumers. But it’s unlikely Tesco will beat the current discounters at their own game, so Jack’s will have to offer something different to have a significant impact and win meaningful market share.”

Freddie Lait, CIO and Founder of Latitude Investment Management

“The key piece of the puzzle which has been missing in Tesco’s already very successful turnaround has been an iron tight strategy to compete with the hard discounters Aldi and Lidl. Jacks offers a perfect solution, from a brand with 100 year history and increased focus on fresh and local produce.

“Jacks fits perfectly into the current consumer zeitgeist and will drive revenues as well as protecting margins across the Tesco group.”

Fraser McKevitt, head of retail and consumer insight at Kantar Worldpanel

“There have been plenty of comparisons to Aldi and Lidl and it’s worth remembering that despite their ‘discounter’ moniker they aren’t particularly downmarket retailers – there’s a real demographic mix among their shoppers. Plenty of people buy from Aldi and Lidl – around 60% of all households shop in each of the discounters at least once a year. However, they spend just £1 in every £10 there and don’t shop at the discounters as frequently as at the big four – given the Jack’s model is so similar we would expect to see shoppers behaving the same way in its stores.

“With its heavy Union Jack branding and promises on provenance Jack’s is clearly looking to make its name as a solid British retailer. Nearly half of shoppers try to buy local produce when they can so it could be a savvy move, though it’s still very early days.”

Patrick O’Brian, UK Retail Research Director at GlobalData

“If imitation is the sincerest form of flattery, then Tesco’s new Jack’s venture must leave Aldi and Lidl feeling idolised. Less choice, cheaper own-label goods in a convenient, shoppable supermarket format, Jack’s is the first time Tesco has made a serious attempt to limit the impact of the discounters. Jack’s focus on British products gives it a point of differentiation, as does the consolidating of its own-label products into the Jack’s brand.

“Sainsbury’s tried something similar in 2014 with its Netto joint venture, only to close two years later having only opened 16 stores. The secrecy and fanfare surrounding Jack’s launch points to a much more ambitious attack but its plans to open 10-15 stores next year are surprisingly tame.

“As Tesco targets a return to a 4% profit margin by 2020, opening at a faster rate would make this more difficult and also risk cannibalising sales. After years of battling accounting scandals and pulling back from some international markets, Tesco is at least back on the front foot and taking the battle to the discounters. But we expected a more aggressive store opening schedule and Aldi and Lidl are unlikely to be too concerned about this opening salvo.”

John Perry, managing director of SCALA

“Prior to the rumoured launch of Jack’s, Tesco said it would remove up to 30% of its product lines as part of its Project Reset. But, it seems, another way to beat the discounters is to play them at their own game.

“The habits of customers in the grocery sector are also changing, with an increasing move towards ‘little and often’ purchasing. In response, Tesco seems to be further developing its Metro and Express models to incorporate customer demand for convenience and competitive pricing.

“Only time will tell as to whether Tesco’s discount venture takes off. However, it is undeniably an innovative move that’s sure to apply further pressure to the other mainstream retailers.”

Bryan Roberts, global insights director at tcc global

“Jack’s is an excellent proposition, with some nice twists on the typical discounter model. A strong emphasis on provenance as well as price – with a particular focus on communicating its local sourcing – should play very well with customers. Aldi and Lidl are also very strong on British goods, so this is by no means a USP to Jack’s, but its ability to lean Tesco’s status as a British institution should resonate in shopper’s minds over its German rivals. The fact it is putting it’s farmers front and centre in its online material demonstrates the close relationship it has built with its local suppliers.

“Particularly impressive is its coherent range—which is borne directly from this strong supplier relationship. 1,800 Jack’s branded lines across categories is a level of breadth and depth that we weren’t quite expecting, and it’s has been implemented very smoothly. As for the store itself, it’s light, airy and spacious. The store design seems to place equal importance on both shopper and employee experience, which makes it a genuinely pleasant place to visit.

“It’s announced expansion to a maximum of 15 stores by 2019 is much more modest than expected, but there does remain a danger of cannibalising Tesco sales—many of the proposed locations are existing Tesco sites, or located very close by. Dave Lewis seems bullish, however, making the fair point that ‘[we’d] rather cannibalise [ourselves] than have someone else do it.’ It’s surprising that the front of the store carries the message: ‘Part of the Tesco family.’ This might lead to some awkward questions from customers who wonder why they can’t use their Clubcard, or why there’s a price differentiation between the two stores.

“Overall, Jack’s is very impressive. It’s range, look and feel, and focus on being the ‘cheapest in town’ all point to a strong future—it should prove a hit with customers.”