After months of rumours Tesco has finally unveiled its new discount format – Jack’s on the 19th of September 2018. Named after Tesco founder Jack Cohen, the new stores closely follow rivals Aldi and Lidl but with a greater focus on British sourcing and a few modern touches to enhance the shopping experience.

The first two stores are in Chatteris, Cambridgeshire and Immingham, Lincolnshire. Another 13 stores are planned across the next six months, after which, presumably, Tesco will pause for some evaluation.

These stores will be either built on entirely new sites, adjacent to existing Tesco stores or in some cases see some Tesco stores converted into the new format.

Jack’s in name and nature

The rumours surrounding Tesco’s entrance into the discount sector first surfaced in February 2018, and accelerated in July when job listings were found for a ‘new format’ and August when floorplans of the format were leaked.

The rumours and leaks have proved to be largely correct, even down to the name. Jack’s arrives in the UK retail market to celebrate the 100th anniversary, 99 if you are being picky, of Tesco founder Sir Jack Cohen taking his £30 demob money and buying surplus army stock to sell on his market stall in Hackney in 1919.

Sir Jack famously defined Tesco’s strategy as ‘pile it high, sell it cheap’ and on at least the second point Jack’s is a format built in its namesake’s honour.

Jack’s is clearly modelled on Aldi and Lidl who have disrupted much of Tesco’s core business over the past decade. It has a limited range of some 2,500 SKUs across grocery and non-food in a roughly 12,000 sq ft store. The aim is to make Jack’s the cheapest option in the local area, with prices set at a regional rather than national level.

Like both of its German counterparts there is a strong emphasis on private label, some 1,800 of the 2,500 SKUs carry the new Jack’s brand, with Jack’s also featuring a middle isle of ‘special buys’, dubbed WIGIG (When It’s Gone, It’s Gone). This seems to imply a greater proportion of branded goods than one sees in an Aldi.

Whilst there is no doubting where the inspiration for Jack’s has come from, it differentiates itself in some key areas, namely its focus on British sourcing. Jack’s claims that eight out of ten products in-store are sourced in Britain, and to emphasize this point the store features liberal use of the Union Jack. This outdoes Lidl’s claim that 61% of its products are sourced in the UK, and Tesco is clearly betting on this being a clear differentiator between Jack’s and its German rivals. Jack’s even has its own take on Aldi’s weekly Super Six offers, in the form of it’s ‘Fresh Five.’

There is also a ‘scan-as-you-shop’ app, a notable development in the discount sector which may help to ease some discount shoppers frustration with the checkout procedure at discounters, with Mintel’s Food and Non-food Discounters – UK, September 2018 finding that 32% of shoppers would like to see the checkout procedure at discounters improved.

Fashionably-late?

Understandably for many the first reaction to Jack’s was why now? Across the past decade Aldi and Lidl have expanded, disrupted and carved a sizable niche within the grocery sector, helping to place discount shopping firmly within the mainstream of grocery buying behaviours. Combined the two now operate a store estate of over 1,400 stores and away from this retailers such as B&M, Poundland and Home Bargains have also carved out niche but important corners of the food market.

Figure 1: The Big Four vs The Food Discounters, 2010-18
[graphic: image 1]
Note: The Big Four are Tesco, Sainsbury’s, Asda and Morrisons
Source: Office for National Statistics/Company Reports and Accounts/Mintel

However as highlighted by Mintel’s Food and Non-food Discounters – UK, September 2018 Report, the discount sector, particularly on the food-size, still has much room to grow into. The food discount market grew by 14.5% to reach £17.7 billion in 2017, with further growth of 11.9% estimated in 2018. With both Aldi and Lidl having store pipelines of around 250/300 stores each in the medium term, and the market expected to grow by around 60% between 2018 and 2023 there is certainly still much room for Jack’s to carve out its corner of the market.

Still it can be argued Tesco could have carved out a much larger portion of the market if it had taken this step five years earlier. However the Tesco Dave Lewis took over in 2014, was in no state to be making such an aggressive move and it took two to three years to right the core operations. It is also no coincidence that the arrival of Jack’s comes just nine months after the Booker merger completed. Whilst Jack’s has clearly been in gestation prior to the completion of the Booker deal, this deal adds significant buying power to Tesco perhaps enough to create the low-cost private label needed to fuel such a format.

Giant killer or master of none?

The first 15 Jack’s stores will cost Tesco around £25 million in capital expenditure, a meagre fee for a company of Tesco’s size with costs kept down by the ability to reuse existing space. Indeed in the context of a wider 3,435 store estate, the 15 store Jack’s estate is almost a free hit for Tesco, a new venture to try in underperforming areas.

However the fact that it carries its founders name, means that this is no throwaway for Tesco. It is also in no way a guaranteed success. Many have tried to best Aldi and Lidl at their own game and to date very few have even got close to success. Sainsbury’s failed Netto relaunch in 2014 is just one cautionary tale, though Jack’s does not seem likely to struggle with a lack of suitable store locations or investment that plagued Netto 2.0.

The heart of any food discounter is founded on the strength of its private label. Aldi and Lidl are far more than low-cost operates they represent exceptional value-for-money and their recent success in the premium-end of the market suggest they are comfortable at both ends of the market. With roughly 70% of the products in Jack’s being private label, there is very little room for error in both the pricing and quality of the new Jack’s brand. Tesco does have a strong track record in this regard, particularly at the value end with the 2016 farm brand launch a significant success in this regard.

The British sourcing claims are significant, Mintel’s The Savvy Food Shopper – UK, April 2018 found that 47% of grocery shoppers would like to see more British produce at food shoppers. However whether this is enough to encourage discount shoppers to switch allegiances is yet to be seen, particularly as Mintel’s Food and Non-food Discounters – UK, September 2018 found that 42% of discount shoppers believe Aldi and Lidl source a majority of their products in the UK.

For all the necessary focus on the new private label and its British sourcing, Jack’s trump card is actually likely to be its branded offering. At around 30% of the SKUs in-store, this is a much higher proportion that Lidl and Aldi. The non-food discounters, B&M, Poundland et al, have seen great success in a low-cost branded offering, and if Jack’s can get the mix correct it is a format that has the potential to combine the strengths of both sides of the discount sector.

Better to try

At 15 stores and a relatively small capital investment Jack’s represents almost a free hit for Tesco. Should it fail, it will have no lasting impact on the business outside of a PR blip and a stain on Dave Lewis’ to-date exceptional record of stewardship of Tesco.

To succeed Jack’s cannot simply be the cheapest alternative in the market, it must also back up its prices with quality to create a viable alternative in the market. Tesco certainly has a good track record on private-label and the higher mix of branded goods may serve to be a more significant differentiator than its British-sourcing claims in the long term.

Ultimately if Jack’s is to become a staple alongside, Extra, Express and Online than it needs far greater scale than the initial 15 store run. Netto 2.0 hit 14 stores in two years and couldn’t create the scale to sustain itself. By naming the new format after its founder Tesco certainly seems to be ready to back Jack’s in the long-term, should the initial stores be welcomed by shoppers.

Where next?

In one sense, it doesn’t really matter whether Jack’s works or not. The important thing is that Tesco is experimenting and it is prepared to fail. This is what a market leader should be doing and over the last couple of years we have seen Tesco move out of its recovery stage into thinking about how to drive the business and the sector forward. Food retailing is changing. The growth phase for superstores has come to an end. The emphasis has moved towards convenience retailing and towards food service and at the same time the discounters have improved their retail proposition and for the first time mounted a real challenge to the Status Quo. Booker and Jack’s are two of Tesco’s responses to these challenges. We can expect more.

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