Why Tesco now feels it is time to take on discounters

The biggest surprise about the weekend reports that Tesco is secretly planning a cut-price chain to rival Aldi and Lidl is that it's taken Britain's biggest retailer so long.

It was over 25 years ago that Aldi set up shop in the UK, opening its first store near Birmingham in the Midlands in 1990. It entered the Irish market nine years later.

At first, the no-frills German discounter was viewed both by shoppers and the retail industry as little more than an oddity, with its dimly-lit, uninviting stores and bewildering assortment of unknown brands.

Growth was slow in the early years and Britain’s “Big Four” supermarket chains – Tesco, Sainsbury’s, Morrison’s and Asda – were confident they could see off any threat.

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But Aldi – and its smaller rival Lidl – has expanded rapidly in recent years, opening hundreds of new stores, offering wider ranges of fresh foods, wines and premium products, all at knock-down prices.

Cracking Christmas

Last year, after a cracking Christmas, Aldi saw its sales in Britain and Ireland break through the £10 billion mark for the first time. Together, Aldi and Lidl have secured a combined grocery market share just short of 12 per cent.

This week, Aldi is basking in the accolade of being voted Britain’s favourite supermarket, toppling Waitrose from the top spot in the process.

The customer satisfaction survey, from consumer group Which?, showed that while Aldi shoppers still judged the stores to be a bit of a mess, the prices more than made up for it. Shoppers loved Waitrose’s service, stores and staff but not its prices, knocking it into 4th place after three years as number one. Lidl came third.

But the ultimate accolade for Aldi must surely be the prospect of Tesco effectively accepting that it needs to play the discounters at their own game, meeting the challenge head on with its own cut-price chain.

Tesco has declined to discuss any plans, but the reports set the sector alight. It would be a bold move – Sainsbury’s failed in its assault on the discount market a couple of years ago, and there is a big risk that any new chain would simply cannibalise sales from the core Tesco estate.

The disruptive influence of the discounters on the food retail sector has been increasingly hard to ignore in recent years, particularly since the last recession, as value for money became a far more important factor for shoppers. So, assuming it goes ahead, why has Tesco waited until now?

Tesco hasn’t been ignoring the discounters, but has concentrated the fight-back on cutting prices in its core stores chain. But more drastic action is required and analysts believe the crucial factor behind the timing is Tesco’s £3.6 billion takeover of the Booker wholesale business.

The addition of Booker will further boost Tesco's already substantial buying power and also brings with it a number of retail formats, including a small, but successful local discount chain, Family Shopper. But the icing on the cake of the Booker deal, which has not yet gone through, would be the arrival in the Tesco fold of its chief executive, Charles Wilson.

Wilson is one of the most highly regarded executives in the retail industry and, once the Booker deal is completed, will step up to run Tesco’s core UK and Irish retail operations. If anyone can take the discounters on at their own game, it’s him.

UK interest rates

Bank of England governor

Mark Carney

warned last week that UK interest rates would have to rise sooner and faster than markets have been expecting. Add a sticky inflation figure into the mix, as we saw Tuesday, and it looks increasingly likely that May will be the month when rates rise again.

Most economists had expected inflation to fall to 2.9 per cent in January, down from 3 per cent in December and 3.1 per cent the previous month – its highest level in almost six years. But the consumer price index stuck stubbornly at 3 per cent, leaving the cost of living a full percentage point above the government’s 2 per cent target. Core inflation, which excludes food and energy, advanced from 2.5 per cent to 2.7 per cent.

It’s not often zoos get name-checked by the nation’s statisticians but it appears one factor was a smaller than expected fall in the cost of entry to zoos, gardens, stately homes and other attractions, which offset a slower rise in fuel prices in January.

A May rate rise from 0.5 per cent to 0.75 per cent is likely to be followed by one, or possibly two further increases this year, economists say, putting them on course to end 2018 at 1 per cent or above.

Fiona Walsh is business editor of theguardian.com