‘Britain’s biggest discounter’ has had a bit of a market share issue of late.
To wit, this chart from JPM analysts Jaime Vazquez, Alastair Johnson and Bianca Brebnor.
The analysts believe the loss of market share is down to a pricing problem at the UK grocer — and they’ve gone on a bit of a field trip to Tescos around the capital to prove it, summarising their findings in a 32-page note out this morning (emphasis ours).
Tesco has a price problem in our view, and this price problem stems from its strategy of customer segmentation, range flexing and own-label tiering within a single-brand, multi-format business. We believe the business will only regain traction in the UK market when it lowers the basket price to customers: no pain, no gain.
The analysts note that in most price surveys, Tesco scores very close to the likes of Asda and Morrison, and better than Sainsbury. But, they contend, the issue isn’t pricing on individual products — but the ultimate basket price, which is higher than its competitors.
Tesco manages individual comparisons favourably because of its tendency to segment its product offerings; Its discount brands are aimed at the cheapest of customers, then there’s Tesco Value, Tesco Own Label and Tesco’s Finest for the more price-resistant, in addition to brand-names. And of course, prices and product offerings range from store to store. The analysts find two major problems with this.
Firstly, they contend that the discount brand hasn’t had a big impact on sales or bottom line profit.
The consensus view of the Tesco story at the moment is that the introduction of the Discount Brands last summer impacted overall sales growth due to the step change in the price positioning of these products. Most commentators think that 5% of Tesco’s sales comes from the Discount Brands at present and, given that these products are on average 30% or so cheaper than the ones they are substituting, they have given up about 2ppts of sales. … The Discount Brands themselves (excluding Market Value) accounted for 0.7- 0.8% of Tesco’s in-store sales according to TNS. The impact on sales of the discount brands directly could only be around 30bp; therefore, we think (and this assumes no volume uplift in the short term, which is a bit aggressive).
Secondly, they’re worried that the Tesco brand, with its aim to be all things to all people, has overextended itself. For example, in London:
… several years have passed and people have forgotten the savings Tesco delivered them from this move into small stores. All they know now is that grocery shopping in these Tesco stores isn’t so cheap: the stores cannot be as cheap as the supermarkets and hypermarkets because the economics of the business are very different. Tesco always says that prices are only a couple of percentage points dearer than elsewhere but on basket basis we imagine the prices are much higher: these stores tend to carry a rich offer with lots of Finest products and less promotional activity… The examples above are to illustrate a bigger point: that Tesco is hitting, or has hit, some sort of natural limit to its growth and the strategies that had propelled the brand forward are now beginning to undo it…
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There are a few smaller problems as well, for which, we bring you the JPM analysts’ in-store findings.
In store, we noticed that the Discount Brands are often placed on lower, less visible, shelves. But what we see as the most striking evidence that Tesco is keen to discourage discount purchases probably comes from their on-line offer – we advise the reader to visit the Tesco website and check the chicken and sirloin steaks.
Which FT Alphaville has duly done, a picture of the sirloin steak offering is shown below left. There’s also inconsistent pricing — with brands that should be selling the same or cheaper than their identical counterparts, the analysts say, citing the example of in strawberry jam, below right.
There’s also a bit of cross-subsidisation going on, the analysts say.
In our November report, we referred to situations in which Tesco appears to have raised the price of the own label product to accommodate the new discount product. This was the case of the mint sauce, for which Tesco raised the price of the own label product from 36p in September to 38p as it cut the price of the discount brand from 35p to 23p (rightly so given that 1p discount was clearly inappropriate pricing vs. the own label). In our recent store visits, we actually noticed that the price of mint sauce had been raised again, to 57p. … We wonder whether this cross subsidization is an extended practice. If it was, we would find it dangerous as it would increase the cost of the basket of the core customer that does not bother to buy the discount products.
And also the issue of selling identical products at different prices…
Why is Tesco selling a product with almost identical quality and taste for twice the price? The answer, we believe, is that Tesco is aware that there is a customer segment that associates ‘expensive’ with ‘good quality’ and aims at extracting the maximum profit out of these customers. If we are right with this analysis, we could conclude that Tesco is not defending its customers here and excessive use of this practice can undermine customer trust on Tesco.
None of which is new of course — the notion that supermarkets tailor their product ranges and offerings to extract the most money possible from the customer is well-known. But if these particular JPM analysts are right — that Tesco has over-extended the practice, then perhaps we can expect some pretty hefty reductions? Or just a rush to the lowest common denominator – Tesco Discount Brand all the way?