Britain's Tesco takes on discount rivals with new Jack's chain

By James Davey

CHATTERIS, England (Reuters) - Britain's biggest retailer Tesco is going head-to-head with fast-growing German discounters Aldi and Lidl on price with a new grocery store it says will be the cheapest in town.

Chief Executive Dave Lewis unveiled Tesco's new Jack's format on Wednesday, saying it would sell 2,600 essential items including 1,800 Jack's-branded products.

That compares with the thousands of goods on sale in its traditional supermarkets, and mimics the German chains' focus on simplicity and own-brands to keep costs down - a strategy that has seen them grab 13 percent of Britain's grocery market.

Some 10-15 Jack's stores will open over the next six months, with the first two on Thursday - at Chatteris and Immingham in eastern England.

Jack's is named after Jack Cohen, who in 1919 founded the business that became Tesco, and is a significant move by Lewis, who has rebuilt Tesco after a 2014 accounting scandal capped a dramatic downturn in trading.

But the limited number of openings and initial capital expenditure of about 25 million pounds ($33 million) disappointed some analysts, as media reports had said that up to 60 existing Tesco outlets could be converted.

"This is first and foremost about how we celebrate the centenary," Lewis told reporters at the Chatteris store, which was built as a Tesco supermarket but mothballed in 2015 when the group was in crisis.

"We only have plans for 10-15. If we feel that customers are absolutely supportive of what we're doing then yes of course we have optionality going forward," he said.

And he played down Jack's' financial significance to the group: "It's not a calculation that we're currently doing," he said.

Shares in Tesco were up 0.5 percent at 1515 GMT.

Patrick O'Brian, research director at GlobalData, had expected a bolder store opening schedule. "Aldi and Lidl are unlikely to be too concerned about this opening salvo," he said.

CONSUMER ZEITGEIST

Some Tesco investors were, however, thrilled.

"Jack's fits perfectly into the current consumer zeitgeist and will drive revenues as well as protecting margins across the Tesco group," said Freddie Lait, chief investment officer of Latitude Investment Management.

Aldi and Lidl have steadily grown market share in Britain since the 2008 financial crisis, chipping away at Tesco and its three biggest rivals Sainsbury's, Asda and Morrisons.

"The intention is for us to be the cheapest in town," said Lewis, adding Jack's could benefit from Tesco's buying power.

Eight out of ten of Jack's food and drink products are grown, reared or made in Britain. A large chicken is priced at 3.19 pounds, while four pints of semi skimmed milk will cost 1.09 pounds.

The stores will also stock some familiar major brands, such as Coca Cola, as well as a range of general merchandise on a "When it's Gone, It's Gone" basis.

Jack's stores will be a mixture of entirely new sites, sites adjacent to existing Tesco stores, and converted Tesco stores.

Tesco currently has a 27.4 percent share of Britain's grocery market, according to the latest industry data, although it could be overtaken by Sainsbury's proposed 7.3 billion pound takeover of Asda.

The tie-up between Tesco's two nearest competitors, which regulators on Wednesday said would be scrutinised in depth, is also driven, at least in part, by the rise of the discounters.

Britain's "big four" grocers are trying to adapt to changing habits, including the declining popularity of big weekly shops and the growth of online shopping.

They have cut prices and improved service, but analysts say that with sales at Aldi and Lidl growing at 10 percent each year it makes sense for Tesco to try to capture some of that growth.

Analysts do, however, have concerns that Jack's could take sales from Tesco's existing stores - fears played down by Lewis.

"I'd rather cannibalise myself than somebody else cannibalise me," he said.

($1 = 0.7613 pounds)

(Reporting by James Davey, additional reporting by Simon Jessop; Writing by Sarah Young and Paul Sandle; Editing by Susan Fenton and Mark Potter)