Tesco’s Farm brands initiative, which brings to the aisles of the UK the produce from seemingly huge agricultural units (only joking), created a bit of a stir when it was launched. With remarkable seriousness (not joking), some Tesco-phobes protested that this was some form of sharp practice, as ‘Willow Farms’ does not supply Tesco with all its fresh meat (keep that secret, as Willow Farms does not exist). Mr Lewis’ expert retort to those protesting about the authenticity of Nightingale Farms & co is that it was work undertaken in close collaboration with… customers!
The substance of Tesco’s Farms initiative could be significant. In setting out the group’s FY2017 financial expectations, management highlighted the investment in this programme and the uncertainty on its uptake, making it difficult to forecast the current year with an emphasis on the likelihood of greater cost over benefit in the spring/summer.
The reason is that ‘Farms’ is perhaps the most important product development by Tesco under Dave Lewis to date. A lot of work streams have been brought together to deliver better product all round at lower prices to customers. Two layers in the private-label hierarchy have been amalgamated, with Everyday Value departing much fresh food. Supplier numbers have been rationalised with the preferred rewarded with longer production runs to drive efficiency that goes right through the distribution channel to the shelf edge.
The output is a step change in value for shoppers with lower prices and higher quality, so hitting the heart of the inadequacy of the superstores versus the grocery LADs in recent years; the average price cut is c16.5%.
What is clear is that a structural price difference in fresh food between Tesco and the LADs has been narrowed and it will not widen to prior levels. How the shopper responds will be interesting, but Lewis’ move is one of the key components of a credible superstore fightback. Furthermore, we do not believe Farms represents anything more than the end of the beginning of Tesco’s product and merchandising change programme. If Tesco has turned the corner, we may look back at the work down on the farm as being pivotal.
Clive Black is head of research at Shore Capital Stockbrokers