When Ken Murphy stood up to deliver Tesco’s half-year results in October, he was at pains to stress the headwinds facing Britain’s biggest supermarket.
“We live in an incredibly competitive world,” the Tesco chief told reporters. “We have competitors coming at us from all angles so we’re kept on our toes.”
But, he said, Tesco was not buckling under the pressure. In fact, the supermarket was in rude health. In the first half of the year, profits rose a fifth to £1.39bn and profit forecasts for the full-year were raised to £2.9bn.
Tesco achieved its highest market share since in 2017 in the 12 weeks to Dec 1, according to industry data from Kantar: £28.10 in every £100 spent in supermarkets went to Tesco, compared with £27.40 a year earlier.
For Murphy, it was a clear indication of one thing: “Customers are choosing to shop with us even more.”
Tesco has not only cemented its position as Britain’s biggest supermarket but also seen off the threat of Aldi and Lidl, the German discounters who just a few years ago posed a significant threat.
In 2022, when Aldi leapfrogged Morrisons as the UK’s fourth-largest supermarket, no British supermarket felt safe.
Today, though, Tesco is in the ascendency.
“Do we expect them to maintain their market share and grow? Well, yes,” says Clive Black, head of research at Shore Capital. “Tesco is a transformed business. If someone wants to have a go on the price-fighting front, Tesco can stand nose-to-nose.
“When it comes to the discounters, they can say, ‘Come and have a go if you think you’re hard enough.’”
A decade ago, that was not the case. In 2014, when Murphy’s predecessor, Sir Dave Lewis, took over, Tesco was languishing under heavy losses.
Partly, this was down to an accounting scandal in which the supermarket had overstated its profits by hundreds of millions of pounds. Yet there was another major problem that needed to be addressed.
“Everybody was commenting on how people were no longer shopping at Tesco,” Sir Dave later said. “When we sat down and did the analysis, really very objectively and brutally, we found that people were not leaving Tesco.
“They weren’t avoiding Tesco, they were just doing some of their shopping elsewhere, for whatever reason.”
Shoppers were increasingly splitting their shops, buying branded goods and treats from companies like Tesco while turning to Aldi and Lidl for a bargain.
Previously bosses had disregarded the German discounters as businesses they could “quite happily” live with. It had allowed the discounters to grow rapidly without garnering too much attention.
“Aldi and Lidl saw the complacency that was evident at Tesco and the other supermarket groups in the UK,” Black says. “This was at a time just after the great financial crisis, when living standards were under immense pressure, and what Aldi and Lidl both identified was a real opportunity to basically change the basis of the UK grocery scene.”
Tesco chief Ken Murphy has overseen a dramatic turnaround at the supermarket since taking the reins in 2020 - Ben Stevens/Parsons Media via Reuters
They steered clear of price promotions – such as buy-one-get-one free deals – and instead sold a smaller range of products at much lower prices.
“Tesco, Sainsbury’s, Asda, none of them saw this coming,” says Black. “But, I would say it was Tesco that first smelled the coffee under Sir Dave. He clearly understood that Aldi and Lidl weren’t going away and put together strategies that would limit the damage for Tesco.”
In an effort to stem the switch in customers away, Sir Dave announced a sweeping plan to slash ranges at Tesco. Under the Project Reset programme, Tesco axed 30pc of products. Some areas had deeper cuts than others. It reduced the numbers of different branded toilet papers sold by 48pc.
Slimming the range allowed Tesco to bring its prices down by placing larger orders, using its scale to drive down costs. It initially focused on cutting the cost of products that were significantly cheaper in Aldi and Lidl.
By 2020, Tesco moved to take a more aggressive approach to winning customers back. It launched its Aldi Price Match campaign in March of that year, becoming the first British supermarket to do so. Rivals have since followed.
These promises have effectively cut the competition off at the knees.
“You just haven’t got that obvious price differential between the discounters and Tesco and Sainsbury’s any more,” says Richard Marwood of Royal London Asset Management, which is an investor in both supermarkets.
An aggressive loyalty card drive launched by Tesco – and, once again, copied by other British supermarkets – has put further blue water between the “big four” and German discounters.
Tesco radically overhauled its loyalty programme in 2019 by introducing “Clubcard Prices”, automatically cheaper prices for members. Shoppers with loyalty cards now get savings of between 17pc and 25pc compared to the typical prices, according to the Competition & Markets Authority.
Around 22m households in the UK have now signed up for a Tesco Clubcard.
“This has been a clear factor which has meant people have fewer reasons to shop anywhere else but Tesco,” says Black.
Shopping at Aldi and Lidl is still cheaper than Tesco even when using a Clubcard, according to Which?.
However, the gap between the two sides has narrowed. A Tesco basket of 65 items is now just £12 dearer than the same goods at Aldi and £9 more expensive than Lidl.
While the turnaround push was started by Sir Dave, it has since been seized on with gusto by Murphy, who took over the chief executive post in late 2020.
“Dave recognised there needed to be a radical reshaping to refocus the business,” says John Allan, who was chairman of the supermarket giant at the time.
“But Ken has really picked that up and done a fabulous job in making the core business even stronger and more focused with a very, very clear strategy.”
Earlier this year, Tesco sold its banking business to Barclays in a sign that it wanted to clearly focus on retail.
Such discipline has benefited investors: the sale of Tesco Bank allowed it to hand back £700m to shareholders.
“They’re generating a lot of cash,” says Marwood. “They’re actually returning quite a lot of that cash to shareholders.”
Aldi and Lidl may still be keeping Tesco on its toes. But Britain’s biggest supermarket is now on the right footing. Rather than fearing the advance of the German discounters, Murphy is relishing the competition.
“I think it’s a good thing for customers,” Murphy said in October. “And actually think it’s a good thing for us, because it keeps us much better.”
