Tesco fine-tunes retailing strategy

UK retailing giant Tesco continues to fine-tune its retailing strategy, both on the store side and online.

As shown above, it recently announced the closing of Tesco Direct, the company's profitless e-commerce initiative for non-food products. (Tesco.com is the company's grocery website.) Fulfilment is costly, maintaining an online shopping platform is costly and the company saw no way to profit from this venture. Most likely, competition was also a factor, with Amazon and others offering so many of the same brand-name products that were sold on Tesco Direct's site.

Yet Tesco continues to invest in physical stores. It opened a new supermarket in Dublin that features eco-friendly features such as energy conservation systems and recycling facilities.

The Tesco Clubcard is a major competitive strength, enabling the retailer to communicate with loyal customers and personalise offers. And Tesco will need this strength as it faces the soon-to-merge Sainsbury/Asda combination.

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.

UK legacy grocery retailers continue to evolve

Sainsbury strapline

As in the rest of the world, UK legacy retailers are buying specialised firms and sharpening their competitive positioning. 

Why? Changing consumer behaviour and evolving industry dynamics.

Nisa logo

With fierce price wars raging amongst UK grocery chains, and online competition growing, legacy retailers are looking for new marketing roads to customer loyalty and for supply chain efficiencies to help the bottom line. For example:

• Sainsbury is expected to buy Nisa convenience shops, a 'family' of 2,900 'independent grocers' that serve local neighbourhood shoppers.
• Tesco announced the acquisition of wholesale food firm Booker, a deal that is currently being evaluated by regulatory officials and may result in industry changes.

Meanwhile, US grocery retailers are responding to the news that Amazon has acquired Whole Foods Market, giving the online giant an instant brick-and-mortar distribution channel. In fact, UK and European grocery retailers may also be affected. And European deep-discount grocer Aldi is aggressively expanding across the US, adding to the pressure on legacy supermarkets--just as Lidl opens its US stores.

So grocery retailing is increasingly global even as the industry adjusts to low-price, no-frills competition and the growing popularity of online shopping via Amazon and others.

Private brands continue strong

Aldi's exclusive range of household cleaning products

Private brands -- such as the brands marketed by grocery chains and clothing retailers -- continue to be strong sellers, year after year. Even as the recession reverses course and growth returns, consumers have learned through experience that private brands often are excellent alternatives to manufacturers' brands. And of course private brands, generally priced lower than manufacturers' brands, represent the majority of products at deep-discount grocery giants such as Aldi and Lidl.

Consumers recognise that private brands can offer quality, not just value. Aldi's coffee recently was named the best in a taste test that included Starbucks, Costa and other well-known global brands. Marks & Spencer's private wine brands took home multiple medals at this year's international wine challenge, where a number of grocery chains were awarded medals.

The image and reputation of the marketing entity makes a difference in how its private brands are perceived. Sainsbury is launching its private brands in an online retail environment to reach consumers in China who are interested in the cachet and quality of foreign brands.

Private brands are increasingly a key point of differentiation in the intensely competitive grocery industry, where supermarkets are using price promotions to attract shoppers week by week. Because private brands generally have higher profit margins, they can help retailers compete on the basis of value and quality.

Tesco, Hudl and multichannel marketing

Now that Tesco is out of its disastrous Fresh & Easy US convenience store chain, the UK retail giant is (like every smart retailer) focusing on multichannel marketing strategy. It's also thinking global and looking beyond retailing to enhance relationships with consumers.

• Tesco has been introducing drive-through grocery pickup at select locations. Shoppers log onto the Tesco website to buy, indicate a two-hour window for pickup and then collect their groceries from the store or pickup location of their choice.
• Supporting its online grocery sales, Tesco has opened its sixth warehouse for picking and packing customer orders.
• Tesco is getting good reviews for its Hudl budget-priced tablet computer (right), and plans a new model this year. Putting the spotlight on tech updates the retailer's image and reinforces its commitment to multichannel marketing. It also helps Tesco compete against Asda, which has its own Lifetab tablet.
• Tesco is moving ahead in India, a continuation of its partnership with Tata that began in 2008, to build sales and gain experience in this unusual retail environment.
• Years after launching Tesco Bank, the company has begun offering a current account, which in combination with its mortgage offerings will raise the firm's profile and attract new interest. Especially with the "easy switch" banking rules now in effect, Tesco Bank sees new opportunity to deepen its relationships with consumers who shop in its stores.

Battleground: Online grocery shopping

According to one forecast, UK online grocery shopping will reach almost 10 billion pounds by 2015, about twice the amount that UK shoppers spend today. No wonder so many supermarket chains are fighting for position in such a potentially lucrative market.

Morrisons is the #4 UK grocery firm and, until now, it has not been very active in online grocery sales/delivery. The company just invested in the very successful US company Fresh Direct, which has a fresh approach to the online grocery business. In addition to the usual farm-fresh fruits and vegetables, Fresh Direct offers 600 prepared meals, made fresh daily, for the convenience of its customers. It serves the New York City area and is quite profitable, not to mention popular--and it's growing day by day.

If Morrisons can learn lessons from Fresh Direct, it will be better able to battle Ocado, Sainsbury and other rivals active in Internet-based grocery shopping and delivery. Richard Pennycook, finance director for Morrisons, says the firm would only get involved in online grocery sales if it can expect to make a profit: "We will not go into a model where we haven't figured out how it is going to work." Morrisons plans to launch its online site in 2013, if it decides to move ahead.