How Tesco competes with deep-discount retailers

Tesco has a new weapon in its battle with deep-discount retail chains Lidl and Aldi.

It just opened two discount-price stores in a new chain it calls Jack, for Tesco's founder, Sir Jack Cohen. Short name, easy to remember, limited assortment, low prices, local merchandise. And the store openings coincide with Tesco's celebration of 100 years of low prices.

Most of the products will be branded own-label, but some will be well-known global brands like Coca-Cola. To reinforce the British origin of local merchandise, and the chain's British heritage, Jack signage features the Union Jack.

Tesco's CEO says the target market is 'economically challenged [consumers] that need a bargain and the affluent shopper that wants a bargain'. Adding a 'treasure hunt' element, the centre aisle of each Jack's store displays WIGIG promotions--bargain products that will go quickly, so 'when it's gone, it's gone'.

Lidl and Aldi have challenged Tesco and other full-service supermarkets in recent years, attracting price-conscious consumers willing to buy what they want at low, low prices in a no-frills retail atmosphere.

A few months ago, Tesco closed its Tesco Direct business, which sold non-food products directly to consumers. That business had been operating for nearly 12  years but was not yet profitable. Will Jack's enable Tesco to compete effectively in a highly pressured retail environment--and be profitable at the same time?

Metro Bank continues its 'challenger' marketing

This post updates the preview and closer look at Metro Bank in Chapter 11

Metro Bank's marketing has, from its founding in 2010, encouraged customers to 'join the revolution'. This means, for example, an emphasis on retail hours that are convenient for customers, with lively and colourful branch interiors that have an attractive retail ambiance. It also means offering safety-deposit boxes when competitors are closing branches and eliminating boxes.

Despite intense competition, Metro Bank, as a challenger bank, has become profitable and is expanding its branch network, although a bit less aggressively than previously planned. The acquisition of a home loan portfolio is another way Metro Bank has added new customers in pursuit of growth. On the other hand, rising interest rates are putting pressure on profit margins.

Understanding that many customers want e-banking as well as retail banking services, Metro Bank has introduced a 'developer portal' for third-party developers who are creating apps to complement and enhance bank services.

At the same time, Metro Bank University is providing apprenticeship training to prepare new employees for delivering quality customer service in its busy branches--service that Metro Bank sees as being a differentiating factor in its competition for customers.

Discount train travel builds customer base

Italo (nick-named the 'Ferrari train') was founded in 2012 as a high-speed, low-fare direct competitor to Trenitalia, Italy's state-controlled railway system. The combination of low fares and speedy, comfortable travel has attracted millions of loyal passengers and given Italo a profit margin of more than 30%.

Some of these customers used to ride Trenitalia's trains and some used to fly Ryanair and Easyjet between Rome and Milan. Now Italo is adding more trains and extending its coverage to new destinations as its discount pricing structure has helped it grow to the second-largest train system in Italy.

Four price levels allow passengers to choose the value they're willing to pay for. Italo even has a frequent-rider loyalty reward scheme and a cobranded American Express credit card that offers upgrades and other benefits.

Watch for discount train travel to become more of a competitive challenge for railway systems and no-frills airlines in other European nations, as well.

Grocery retailers battle for UK market share

Aldi and Lidl, both based in Germany, have been steadily capturing market share in UK grocery retailing. Recent numbers show that Aldi has increased its market share from 3.9% at the start of 2014 to 7.3% at the start of 2018. Lidl, meanwhile, grew market share from 3.1% in early 2014 to 5.3% in early 2018.

From the perspective of traditional UK supermarkets like Tesco and Waitrose, the battle for market share has another challenge: pressure on profit margins. Aldi and Lidl are deep-discount grocers with no-frills stores. Not so for Tesco and Waitrose, which are full-service grocers. To be sure consumers can see the value in shopping at a full-service store, price promotions are often highlighted--and that cuts into margins.

In fact, price is a key element in consumers' perceptions of a store. Not long ago, Aldi overtook Waitrose as the favourite supermarket of UK consumers who were asked about satisfaction. Affordable prices would naturally be important to satisfaction.

Meanwhile, UK supermarkets will continue to face pressure from the deep discounters as Aldi and Lidl both plan to expand their store networks. At the same time, traditional supermarkets are slowing their store openings to maintain cost control. Will online grocery shopping be the competitive edge for traditional supermarkets? Possibly, as a growing number of UK shoppers try or continue buying food and household products without going into a store. Consumer behaviour is changing, and grocery retailers are learning to adapt so they can compete more effectively.

Unilever shakes up its product portfolio

Unilever recently sold off its spreads and margarine brands to concentrate on other, higher-potential products in its portfolio. The company's CEO explained: 'The announcement today marks a further step in reshaping and sharpening our portfolio for long term growth'.

Brands sold to KKR, a private equity firm, include Flora, ProActiv, Becel, Country Crock, I Can't Believe It's Not Butter and and Blueband.

Although the spreads business was profitable for Unilever, with margins of about 20%, the firm wants to concentrate its marketing resources on products that closely fit its vision.

In particular, Unilever has been growing formerly niche brands like Pukka Herbs tea into mainstream brands to accelerate growth. It's also investing in personal care brands that are growing quickly and launching a number of new products for highly targeted customer segments within specific geographic markets.

This updates the Unilever examples in Essential Guide to Marketing Planning 4th edn.

Ryanair adds share, profits and partners

Not every marketer can achieve both higher market share and higher profits, but Ryanair's marketing plan has accomplished these two key objectives through price cuts.

By adding more jets and cutting fares to attract passengers, the no-frills airline has successfully boosted market share while forcing competitors to respond.

Even as Brexit proceeds, Ryanair is preparing for the future through partnerships with European airlines. The plan is to allow passengers to book longer-haul travel through Ryanair and connections with its partners, including Air Europa, Aer Lingus and Norwegian Air.

Ryanair's long-term goal is to be flying 200 million passengers yearly by 2024. Currently, the airline projects it will fly 130 million passengers in the next 12 months--with lower prices and higher profits.

This post updates the Ryanair case in Chapter 3 of my Essential Guide to Marketing Planning, 4th edn.

Legacy retailers trying to adapt

Legacy retailers like Marks & Spencer and Debenhams continue to announce store closings and changes to merchandise mix strategies. They need to adapt to changes in consumer behaviour and in the economic environment (meaning both the UK and the global marketplace).

Non-food purchases in UK stores are down, and in addition, competition from store-based and online retailers is putting pressure on the entire industry.

Now M&S is closing some stores, reducing the focus on apparel products (which typically have good profit margins) in favour of food products (not always as profitable, but purchased much more frequently).

M&S recognises that consumer behaviour is changing: 'Picking up food for now or tonight rather than doing one big shop or browsing and shopping online and collecting in store are great examples of this, and we are committed to adapting our business so that we stay in tune with our customers,' says chief executive Steve Rowe. At the same time, M&S is opening new stores in areas that hold market promise. Otherwise, the retailer may have difficulty achieving growth.

Debenhams is also closing stores amidst its ongoing turnaround effort. The retailer has a plan for targeting younger shoppers, with three main pillars: destination, digital,and different.

The retailer plans a sharper focus on in-store 'experiences' like cafes and more digital/social/mobile purchasing: 'We will be a destination for social shopping, with mobile the unifying platform for interacting with our customers', explains chief executive Sergio Bucher.

Adapting is a challenge, yet with consumer behaviour evolving, Debenhams and M&S must find distinctive and appropriate strategies for meeting needs in a profitable way.

How did LEGO do?

From LEGO's corporate newsroom

LEGO recently reported turnover and profits . . . and different media outlets viewed the results in different ways.

• 'Lego wobbles after American downturn and higher wage bill' - The Evening Standard's headline
• 'Lego continues to build up sales' - BBC's headline
• 'Building on bricks with clicks' - CNBC's headline
• 'Lego profit falls 1.8% as company builds in China and Mexico' - Irish Times headline
• 'Toymaker LEGO builds more plant capacity to revive growth in US Sales' - Reuters

LEGO's profits are down a bit because it's expanding its workforce and its manufacturing capacity. Why? Because worldwide demand continues to grow and grow and grow.

In fact, demand was so extraordinarily high in 2015 that LEGO struggled to fill all orders for Christmas.

To avoid a repeat, LEGO is investing now as it continues implementing its global marketing plan, following a long-term growth strategy. Just in time: LEGO products are, of course, on this year's lists of top children's toys for Christmas.

Tesco refocuses on core businesses

From: Tesco Core Purpose and Values

UK retail giant Tesco continues to shed non-core businesses so it can refocus resources on its main business strengths.

The company's new mission is: Serving Britain's shoppers a little better every day.

This mission statement defines the company's geographic realm (Britain--no more US convenience stores or South Korean grocery stores). It also emphasises value as a core benefit for shoppers. Finally, it defines customers as shoppers. Shoppers can be bank customers, too, by the way.

Not surprisingly, Tesco just sold its Giraffe restaurants, which it had been both standalone and in-store businesses. The company operates 6,900 stores and bank branches, with yearly revenues of £48.4 billion.

Committing to a mission focused on shoppers also means Tesco is adjusting profit expectations. Grocery retailing is a low-margin business. Price wars (several times a year) often sap profits even further as Tesco fights to defend market share.

What's next for Tesco?

Unilever's sustainability strategy resonates with customers

Unilever is seeking to support sustainability through improvements in health and well-being (blue on the chart), reduced environmental impact (dark green), enhancing the livelihoods of communities (red) and making its businesses more transparent and sustainable (light green).

What does the multinational consider to be a material issue or opportunity? From 2010, when the sustainability initiative was implemented, Unilever applied four criteria:

• The degree to which an issue is aligned with our vision and purpose, brand portfolio and geography.
• The potential impact on our operations, or on our sourcing and consumers.
• The extent of Unilever’s influence on the issue.
• The importance of an issue to our key stakeholders.

Unilever now has evidence that progress on sustainability issues resonates with its customer base. Its brands most active in sustainability initiatives (Dove, Lifebuoy, Ben & Jerry's, Comfort) 'accounted for half the company's growth in 2014 and grew at twice the rate of the rest of the business' according to CEO Paul Polman.

In other words, a solid sustainability strategy can help save the planet, improve the quality of life for stakeholders and bring the company closer to growth goals.

World's biggest clothing retailer expands online

Do you know which company is the world's biggest clothing retailer?

Hint: The company is based in Spain and has 6,700 stores in 54 nations. It designs, manufactures, distributes and retails its own products using the 'fast fashion' business model.

Not only can this company make the most of emerging fashion trends, it can minimise markdowns and increase profitability because of its extraordinary ability to capture and analyse purchase data and because it controls the supply chain.

The firm's retail brands include Pull & Bear, Massimo Dutti, Bershka, Stradivarius, Uterqüe, Oysho, Zara and Zara Home.

Yes, the company is Inditex, which has just reported excellent profits. Zara is its best-known brand in most countries. Knowing its customers' digital preferences, Zara is very social, with 3 million Instagram followers, 24 million Facebook likes, 735,000 Twitter followers and 125,000 Pinterest followers.

However, online-only fashion retailers are a threat to the parent company's retail sales momentum. That's why Inditex is expanding its online operations and also moving toward larger stores rather than smaller ones--to make a retail statement, offer more styles in more sizes and colours, and reinforce a strong competitive image in top metropolitan markets where fashion stores are almost everywhere.

Nothing is left to chance. Inditex has pilot stores where it tests marketing elements such as window displays and merchandise layout. Elements that test well are put into action quickly, and the company is always testing something new.

Ocado's long road to profitability

It's been a long road to profitability for Ocado, the online grocer that has struggled with finances, competition and other issues since its founding in 2000. Now the grocer has reported an annual profit for the first time and is building on changes in consumer behaviour that make online and mobile shopping more appealing and popular every day. And it's branching out with ventures like a deal with Marie Claire magazine to enter the upmarket beauty business.

Ocado's strategic objectives are to:

1. Increase the number of customers it serves
2. Increase the amount spent by each customer
3. "Make shopping easy" for customers
4. Continue improving efficiency
5. Commercialise intellectual property such as proprietary processes/technologies

Ocado courts digital-savvy customers with a strong social media presence on Facebook (274,000 likes), Twitter (38,000 followers), Pinterest (1,800 followers), Instagram (1,800 followers), YouTube and a corporate blog. It has both an iPhone app and an Adroid app for mobile-based customers. It has an app that allows customers to scan a UPC code on a grocery item at home and have it instantly added to the Ocado shopping list. Convenience for time-pressured customers is a major benefit that Ocado is banking on to keep it profitable in the intensely competitive world of grocery retailing.

Grocery retailing challenge: Competitors as stakeholders

Stakeholders (also known as publics) are groups such as community residents, media representatives, stockholders, financial analysts and others who have an interest in or some influence on marketing performance. Obviously, customers, employees, managers, suppliers, government regulators and others can directly influence a business and its performance, meaning they're particularly important stakeholders.

As I say in my texts and here on the blog, competitors must also be considered stakeholders, because every rival can, directly or indirectly, affect the performance of its competitors. This is particularly true in the grocery retailing industry, where activities such as price-match guarantees directly affect what competitors do.

Sainsbury's situation shows this in action. To be competitive, Sainsbury (with 1200 UK stores) has to offer good quality at good prices, as well as making sure its stores are the right size and in the most convenient locations for customers.

Its competitors are using price wars as a key element in their marketing plans--which puts the pressure on Sainsbury to cut prices, too.

Sainsbury recently complained that a Tesco matching price promotion unfairly compared some Sainsbury products with Tesco products. The high court disagreed. But taking this to court indicates that Sainsbury is concerned about the effects of Tesco's price policies.

In fact, Sainsbury just announced a major price-cut promotion of its own to fight back against what competitors like Tesco and Aldi are doing to attract customers and increase market share. Competitors are, as this shows, influencing Sainsbury's decisions and performance.

Seeking to analyse its strengths, weaknesses, threats and opportunities, Sainsbury has revealed that up to 25% of its stores are either the wrong size or not in the right location. That presents a challenge because of the company's real estate commitments. Can Sainsbury improve its financial position, fix its store situation, keep prices low and improve profits? Stay tuned.

Marketing Metro Bank in year four

'We believe customers simply want a better experience from their bank, the kind they typically get from a great retailer and that's what we intend to give them'.

The chairman of Metro Bank said this in 2010 when opening the firm's first London 'store' (what other banks call a 'branch'). The marketing plan called for opening customer-friendly stores with convenient hours and amenities--at a time when traditional banks are closing branches to cut costs and encourage online banking. Metro Bank's long-term goal is to have more than 200 stores open by 2020--an expensive and aggressive target, but important for reaching a larger customer base and achieving economies of scale. Location, location, location is key.

By now, Metro Bank has attracted 400,000 customer accounts. It still keeps its stores open Monday through Sunday, even on bank holidays. One of its fun features is the open invitation to bring dogs into the store for fresh water and treats.

Although online banking costs less to operate, Metro Bank believes in face-to-face service and wants customers to walk into a nearby branch. Yet because so many customers like the convenience of electronic banking, Metro Bank has its own app and online banking site. Profitability remains on the horizon, perhaps by next year.

To reinforce its connection with the metro London area, the bank has reserved one of the scarce .London dot-com addresses. It has nearly 6,000 Twitter followers and its website actively invites comments and complaints from the public.

This post updates the Metro Bank example of customer service as a point of differentiation in Chapter 10 of Essential Guide to Marketing Planning.