Why Tesco stuck its neck out to buy the Giraffe chain

Supermarket giant has to find new ways to attract shoppers

Tesco's chief executive Philip Clarke would be the first to admit that his supermarket has a lot more than horsemeat on its plate. Last year the once-formidable supermarket giant issued a profits warning, reported its first profit decline for two decades, and saw its market share drop amid a recession, rising food prices and a feeling that Tesco was becoming just too ubiquitous.

To make matters worse, Tesco is harbouring a format which even Mr Clarke concedes needs to be warmer just as the rise of online shopping increases the need to make its stores more attractive to shoppers.

Tesco is addressing its format conundrum by buying separately branded consumer-friendly chains to put in or near to its stores and stepped up its campaign yesterday, acquiring the child-friendly 47-outlet Giraffe restaurant chain for £48.6m from shareholders such as a fund run by former PizzaExpress chairman Luke Johnson. Over the next year, it plans to open 10 new Giraffe outlets next to Tesco Extra hypermarkets with further sites planned over the next few years.

The Giraffe deal builds on Tesco's acquisition of a 49 per cent stake in the 13-outlet Harris + Hoole coffee shop chain, which plans to more than double in size this year. Tesco has also snapped up an undisclosed holding in Euphorium Bakery.

Tesco's commercial director, Kevin Grace, summed up the retailer's thinking on the supermarket's blog: "We've been doing a lot of thinking about retail destinations and how our stores might become somewhere our people spend more time, as well as shop. With more general merchandise moving online, we have a great opportunity to rethink how we use the space in some of our larger stores."

He pointed to the success of shopping centres, with many customers attracted by food outlets, and concluded "there's no reason why supermarkets can't offer something similar".

The City has broadly welcomed Tesco's strategy of buying into cosy, family-owned businesses, while there is a caveat. "There is always a danger that when a big corporation takes on a brand it could kill it. But as long as it keeps the chain separate and maintains the entrepreneurial spirit it should be fine," Shore Capital's Clive Black said. He added that Tesco's purchase of the Dobbies garden centre chain in 2008 has worked well, with outlets growing from 22 to 31. Giraffe founders Russel and Juliette Joffe and Andrew Jacobs will remain in place after the deal, which could help Giraffe avoid being subsumed wholesale into Tesco.

But with the UK heading for a triple-dip recession, and Mr Black forecasting like-for-like sales growth of, at best, 0.5 per cent for the fourth quarter of 2012 and negative publicity around the horsemeat scandal, Mr Clarke still has his work cut out.