Will Tesco’s Service-Counter Closings Forecast the Future of U.S. Deli Departments?

June/July 2019 – Tesco, the UK’s largest food retailer, has begun closing fresh food service counters in many stores. Not all stores are effected, but in many stores, the expectation is that deli counters will close.

In some instances, hours are being reduced at stores that are to maintain service counters.

Tesco issued a statement explaining its efforts:

Over recent years, our convenience and online businesses have continued to grow, as have our core grocery and fresh departments in our large stores. Not only are customers shopping in different ways, but we know that they have less time available to shop, too – which means they are using our counters less frequently. We will be making changes to the counters in our large stores to ensure that we have the right offer for customers. We expect that around 90 stores will close their counters, with the remaining 700 trading with either a full or flexible counter offer for our customers.

This issue related to service departments comes in the context of what Jason Tarry, CEO for Tesco’s UK and the Republic of Ireland division, explains as a “simplification” effort:

“In our four years of turnaround, we’ve made good progress, but the market is challenging, and we need to continually adapt to remain competitive and respond to how customers want to shop. We’re making changes to our UK stores and head office to simplify what we do and how we do it, so we’re better able to meet the needs of our customers. This will impact some of our colleagues, and our commitment is to minimise this as much as possible and support our colleagues throughout.”

Tarry is referring to various other cost-saving efforts, such as the reduction of food service in employee break rooms as well as stock and merchandising simplifications.

It is motivated by one underlying fact: so-called “Hard Discounters” now have over a 12.5 percent share of the UK market. More than 60 percent of consumers in the UK report visiting either an Aldi or Lidl store in the previous 12 weeks.

There was a time when traditional supermarkets viewed the hard discounters as a different class of trade, but discounters improved the product quality, store attractiveness and services offered.

When the “great recession’ hit, a psychological barrier was broken, and most consumers considered it acceptable to shop at these hard discounters.

Over the years, supermarkets have tried many strategies to deal with hard discounters, but none have worked, often because supermarkets have conflicting interests. They want to keep and bring back the customer attracted to the hard discounter, but they often fear their own customers trading down to less profitable lines even more.

Today, the focus is on driving costs out of the system. And with perishables, labor is a big cost.

The question is whether this approach is going to accomplish what is intended. It seems unlikely that whatever costs Tesco or other traditional retailers manage to cut will drop to the level of an Aldi or Lidl. In a way, Tesco admitted as much by launching its own hard discount division, Jack’s.

Most likely, these cost cuts will leave Tesco with just a marginally less expensive cost structure, still far more expensive than that of a hard discounter. But it will also remove all the differentiating reasons why consumers might want to visit a Tesco rather than a hard discounter.

One wonders if Tesco wouldn’t do better to focus on making these departments even more of a draw. If consumers have less time available to shop, shouldn’t we let people order in advance on an app so the food is ready when they arrive? If similar products are available pre-packaged, shouldn’t Tesco focus on selling unique products from the service counters that are not so easily packaged?

Aldi has been the fastest growing food retailer in America for several years. Lidl has had some missteps in its entrance to the U.S., but with its acquisition of 27 Best Market stores in the high volume New York Metro market, it brings a shock value to the region, especially Long Island.

This means that retailers in the U.S. will be confronted with the decision that Tesco confronts now. How to compete with hard discounters.

Those who can be cheaper can compete on that level. But if you can’t be cheaper, you better be better –and that means more focus on higher quality fresh foods presented with better service. England’s problem today will be America’s tomorrow. U.S. retailers should be prepared. db