Tesco Confronts Budget Rivals - Leading Retailer Reforms to Compete Against Insurgent Budget Stores

Confronted by the threat of rapidly expanding competition from budget food retailers, Tesco has undertaken reform. The business has been slimmed down, foreign ventures ended and prices lowered to improve competitiveness. However, there are other threats the company must respond to amid declining relevance of the megastore concept on which Tesco built its fortune. Amazon is seeking to supplant Tesco as the leading online grocery store and the merger with Booker, on which the Tesco board has staked much, is under pressure from regulators and shareholders.

Key Questions Answered

- What impact has Lidl and Aldi had on the Tesco model?

- Can the out-of-town megastore model survive?

- Can Tesco compete on price against budget stores?

- Will the slimming down of Tesco work?

Scope

- Tesco has responded to the rising threat of Aldi and Lidl by reforming product ranges and reducing costs. The main aim of the company is now to compete directly on cost grounds to prevent further depletion in market share on a long-term basis.

- The company is changing how the out-of-town megastore is operated in the face of changing consumer behavior. Along with lower prices, the cost of running that part of the business has been reduced, essential if the company is to avoid further decline in a central part of the business.

- Tesco has slimmed down the business in order to concentrate on growing the core business. Foreign adventures during the past decade have achieved mixed success, but even the most profitable foreign brands have now been sold off to help the company recapture old fortunes.

Reasons to buy

- Examines the impact budget stores have had on UK food retail.

- Looks at the future of the out-of-town megastores.

- Analyses the new threats to Tesco.

- Examines the steps Tesco have taken to compete against budget stores.

Table of Contents

Table of Contents

Overview 2

Catalyst 2

Summary 2

Insurgent budget stores put Tesco under pressure 5

Tesco response: Threat from German entrants is serious ...

Table of Contents

Overview 2

Catalyst 2

Summary 2

Insurgent budget stores put Tesco under pressure 5

Tesco response: Threat from German entrants is serious, not disastrous 5

Unilever dispute reveals cost pressure Tesco must respond to 6

Tesco own brand takes on Aldi, Lidl and Asda by price matching 7

Tesco slimmed down business to stay competitive 9

Foreign ventures have been sold off to streamline business 9

Selling in-store services refocuses attention on core market 10

New brands launched to repel low-cost alternatives from rivals 11

Tesco needs megastores, but doubt surrounds their long-term future 13

Shopping habits have changed, placing the idea of the megastore under pressure 13

Tesco makes big stores cheaper to run to pay for price cuts and remain competitive 14

Tesco trials Currys PC World brand in megastores to boost profitability and entice footfall 14

Merging with booker is a risky move, if it happens 15

Attention from regulators raises uncertainty over multi-billion-pound deal 15

Some shareholders are not happy with proposed merger, increasing pressure on Tesco board 16

Amazon Fresh creates new threat to Tesco dominance 17

Amazon Fresh brings fast delivery and low overheads: Tesco responds 17

Tesco trials 1-hour delivery service in London, taking on Amazon and rival brands 18

Conclusions 19

Tesco has changed much to meet growing budget store threat, but there is no guarantee of success 19

Appendix 20

Sources 20

Further Reading 20

Ask the analyst 21

About MarketLine 21

Disclaimer 21

List of Tables

List of Figures

List of Figures

Figure 1: Tesco revenue (£bn) 2005-2016 5

Figure 2: Empty shelves at Tesco during Unilever dispute 6

Figure 3: UK food prices ...

List of Figures

Figure 1: Tesco revenue (£bn) 2005-2016 5

Figure 2: Empty shelves at Tesco during Unilever dispute 6

Figure 3: UK food prices, Detailed indices of food consumer prices, Jan 2014 – Jan 2017 (Jan 14’ = 100) 7

Figure 4: Fresh & Easy losses (£m) 9

Figure 5: Giraffe restaurants, formerly owned by Tesco 10

Figure 6: New ‘farm food’ brands at Tesco 11

Figure 7: UK online grocery retail ($bn) 2011-2016 13

Figure 8: Booker Group Operating Profit (£bn) 2006-2016 15

Figure 9: Amazon Fresh 17

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