Last Thursday evening I was trying to get some work done in a depressing little hotel room at London’s Heathrow airport when I was distracted by a TV show on BBC’s “The Money Programme” titled “Food Fight: The Discount Boom.” The program  highlighted the issues facing marketers during recessionary times and reminded me that those that do not learn from history are doomed to repeat it.

In the program, presenter Gregg Wallace was trying to find out how the food available from the deep discounters Aldi and Lidl compared to the more expensive food sold by traditional grocery stores like Tesco, Marks and Spencer and Waitrose.

For one comparison, he asked Chef Andrew Turner to cook two identical Christmas lunches, one using discount ingredients and one with items bought from a more expensive supermarket, which added £30 to the cost. Wallace and a panel of five schoolteachers found little difference between the two meals, with the notable exception of the Christmas pudding, where the more expensive product was preferred.

The conclusion of the program – that the deep discounters often do offer food comparable to the traditional grocery stores at substantially cheaper prices – has scary implications for the leading grocery brand Tesco.

Last year’s BrandZ™ study found that 30 percent of UK shoppers were “bonded” (i.e, had strong attitudinal loyalty) to Tesco (a proportion very similar to the chain’s market share). The percent of people Bonded to Tesco was almost double that of its closest rival, and the brand’s Voltage score suggested the brand was more likely to grow than decline in the coming year.

However, as with all forward-looking metrics, these estimates were based on conditions at the time of the survey. As we all know, things have changed rather dramatically since then, and there is reason to believe Tesco’s future may be far less rosy than it seemed a year ago.

With UK consumers experiencing the same financial woes as the rest of the world, the deep discounters have seen the opportunity to grow their market share. The Independent newspaper recently reported that Aldi is currently opening about one store a week and will open 50 stores this year. (Click here for story.)  By the end of 2008, the chain will have spent about £8m on TV advertising, a vast amount compared to previous years’ expenditures. Lidl aims to exceed 500 stores by the end of this year, and its special promotions, like its cut-price lobster for £4.99, create buzz and have people lining up at the door.

Tesco is clearly paying attention to the threat posed by the deep discounters and has decided to fight fire with fire. Its efforts to rebrand itself as “Britain’s biggest discounter” have been supported by the launch of its own range of discount brands, TV advertising and a direct comparison at the point of purchase between its prices and Aldi’s.

Long-time readers of this blog will not be surprised to hear that I think this is absolutely the wrong strategy for Tesco to pursue. Back in 2006 I posted this item, “Price War: What’s it good for?” which reviewed Albert Heijn’s attempt to fight off the spread of the same deep discounters in the Netherlands. That attempt resulted in a price war that lowered the country’s grocery prices by 11 percent. At that time I concluded, “The price war encouraged consumers to shop around, and when they discovered they could get the same quality at a better price elsewhere, they spent less time and money at Albert Heijn. Who gained? The hard discounters.”

It seems to me that exactly the same thing is likely to play out in the UK, to Tesco’s detriment. By focusing attention on lower prices and making direct comparison to Aldi, Tesco is not only undermining its ability to charge a premium on its own goods, but is helping to boost the Aldi brand from an unloved newcomer to a recognized player.

What might Tesco do instead? “The Food Fight: the Discount Boom” gave a clue. Another comparison on that TV show featured a Tesco shopper buying her family’s groceries at Aldi for two weeks. This gave her time enough to experience the shopping environment, the prices and the food quality. When asked if she would continue to shop at Aldi, she said no, that she preferred Tesco.  I think Tesco’s best option would be to focus people’s attention on the chain’s strengths rather than making direct price comparisons with the discounters. They may lose some shoppers during the current hard times, but many will return once the economy recovers. Focusing shoppers’ attention on prices is just asking to start a war that can’t be won.

So what do you think? Is Tesco doing the right thing? Or should they take some short-term pain in order to gain in the longer term? Please let me know your thoughts.

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