Tesco has brought forward negotiations with suppliers to find alternatives to passing on inflation, as customers have once again started deserting to the discounters.
Speaking as he reported Tesco’s first full year of UK like-for-like sales growth (0.9%) since 2009/10, CEO Dave Lewis said he was willing to “do everything, and I do mean everything” to prevent cost hikes being passed on to consumers.
Lewis admitted Aldi and Lidl had been resurgent since the turn of the year, which he warned could signal a “fundamental shift in the industry” that Tesco would have to respond to.
But Lewis said Tesco believed it had a key weapon in the market via the scale of its supplier base, which it intended to use to its advantage in resisting price hikes.
Tesco’s chief product officer Jason Tarry told The Grocer talks had already begun with suppliers in key categories, with the grocer bringing forward range review talks due under its ongoing Project Reset in some cases to thrash out deals to keep prices down sooner rather than later.
“It depends on where suppliers are in the cycle but in some cases it has meant us bringing forward that conversation,” Tarry said.
Tesco was in some cases offering longer-term deals, for their products to be on the shelves in return for keeping prices down.
In other cases, he said, Tesco was negotiating to reduce SKUs compensated for through projected increases in volumes, and remixing promotions “so they are maybe not so rich or so frequent, meaning we can maintain our base price at a lower level”.
“The first conversation we are having is about understanding if it’s really justified,” said Tarry. “Is there some underlying cost pressure in that supplier’s business that leads to the need for them to recover that cost, whether it be currency or raw materials or any other input costs? If there is a real underlying reason, we are saying what are our opportunities to mitigate this because we don’t believe inflation is a good thing for our customers or our businesses?”
“The sorts of things we look at is whether there an opportunity to remix some of our promotions so they are maybe not so rich or so frequent and does that mean we can maintain our base price at a lower level.
“Another way is to say can we look at the range and see is there an opportunity to be able to have less range but not reduced choice because of substitutability and therefore we can have fewer products going through but with bigger volumes.”
However, he denied Tesco was being “brutal ” with its suppliers, and promised that the same standards that had been introduced - which in November saw Tesco top the Advantage Survey - would be maintained.
“We also look at whether there is an opportunity to resource some of the raw materials and whether to look to the futures market and whether it’s right to fix the price now because we can see it inflating further going forward. We are open to longer term deals.”
“We do understand the issues facing suppliers. The fact that there is some inflation in the market place against any measure, the fact that we’ve seen currency move to the extent that it has and the fact that there are some key raw material price increases, for example wheat, you can see that there is plenty of challenge for some businesses.”
“Whilst we’re having these conversations we’re having them in a constructive business like way,” he added.
Despite Tesco claiming a typical basket is 6% cheaper at the retailer than it was in 2014, that figure has slipped from 7% last year and it admitted to alarm at a renewed surge by the discounters, after it regained share from them last year.
Tarry added: “if you look at the Kantar data post-Christmas it looks like there has been a bigger shift into the discounters, although our intelligence shows there is nothing they are doing that is fundamentally different. Once Easter is out of the way we need to make a call as to whether that is a blip or something more fundamental going on in the market.
“We have got to be able to compete. The competition is too fierce not to.”
Tesco has also unveiled trials of a new store concept for its Extra stores, with hypermarkets in Swansea and Scunthorpe the first to receive major makeovers.
It comes with this week’s figures showing despite having achieved LFL sales growth earlier in the financial year, the performance of its Extra estate had gone flat by the fourth quarter, hit by a major drag on GM sales.
Tarry said he was pleased with customer reaction to the trials so far. Tesco is also understood to be planning a similar revamp of its smaller supermarkets in months to come