The battle is only just beginning for Britain’s 'big four' supermarkets

Graham Ruddick
07 May 2015
The danger for Tesco and co is that the cost-cutting measures designed to shore up their balance sheets will hand further advantages to the discounters
The rise of discounters Aldi and Lidl is showing the first signs of stuttering. Or that is at least what authoritative figures in the retail industry believe.
Mike Coupe, the boss of Sainsbury’s, has said their sales growth has slowed “reasonably dramatically”, which is backed by up industry data from Kantar that show Aldi’s sales rising at the slowest pace for four years.
Coupe offered a few explanations for this supposed slowdown when Sainsbury’s posted annual results on Wednesday.
Firstly, the price war among the “big four” supermarkets has encouraged consumers to spend more with Tesco, Asda, Sainsbury’s and Morrisons.
The main problem for the established supermarkets amid the turmoil of the past two years has not been getting consumers into their stores, but making them spend more when they are there. The growing popularity of little-and-often grocery shopping at the expense of one weekly shop has led to consumers buying less from supermarkets, and more from discounters and convenience stores.
But by cutting and resetting their prices, the supermarkets have encouraged families visiting a store to put more items in their basket. On the 1,100 items that Sainsbury’s has cut prices on, the number of products sold has risen 6pc.
Management changes and strategic reviews have also led to the grocery retailers doing a far better job of getting the most out of their larger stores, which had been written off as obsolete. For example, Sainsbury’s has scrapped a “three for £10” offer on meat and instead priced all products at £3.50.
The “three for £10” did not appeal to shoppers only looking to buy their dinner for that evening – they felt they would be ripped off buying just one product. So, by restructuring their prices, Sainsbury’s is appealing to a broader array of shoppers and emphasising how large supermarkets can still be the most convenient way to buy food. Where else can you pick up all the groceries you need for the week in one hour?
Coupe picked out another reason that the discounters are finding life more difficult – saturation. This comes in two forms – saturation in stores themselves, and saturation in terms of geographic expansion.
Aldi and Lidl stores are not to everyone’s tastes. They stock far fewer items than a major supermarket, which is what allows them to charge lower prices, and only a few brands. As consumers have been tempted to explore their stores, some have discovered they don’t like the lack of choice or Fair Trade products, while others have been put off by the lack of amenities such as toilets, a restaurant and a bagging area at the till.
The discounters’ stores are also smaller than traditional supermarkets – measuring an average of 10,000 sq ft, compared with 30,000 sq ft to 40,000 sq ft for a supermarket – which obviously limits the number customers they can serve at any one time. As Aldi and Lidl stores get busier, this is likely to emphasise their downsides to shoppers.
The discounters will also find it tough to counteract this problem by opening new shops, according to Coupe. The Sainsbury’s boss said it is increasingly difficult to find “white space”. In other words, there are few places in the UK that Aldi and Lidl could open without fierce competition. “Quite often you see four or five [discounters] on the same high street,” he explained.
But while these are all genuine issues for the German discounters, it would be foolish to dismiss them as more than growing pains. Make no mistake, Aldi and Lidl will continue to shake up the grocery market.
Aldi may be growing at its slowest rate for four years, according to Kantar, but its sales are still up 15.1pc year-on-year, with Lidl up 10.1pc. This is still well ahead of the market. The only other retailer that is growing sales is Waitrose, which is also enduring a more subdued period. In contrast, Tesco, Asda, Sainsbury’s, Morrisons and the Co-operative are all in decline.
Aldi and Lidl will continue to grab market share simply because they are opening more stores than everyone else.
Both the discounters want to double the number of stores they operate by 2022. Over the next year, Aldi will open more space than Tesco, Sainsbury’s and Morrisons combined.
This is why momentum is so hard to stop in the grocery industry. Once a retailer starts to grow sales it can fund the opening of more stores, improved products and more marketing.
Dave Lewis, the chief executive of Tesco, has admitted that he is concerned by the fact that Aldi and Lidi now spend more on marketing than the rest of the industry. In March, Lidl spent £5.9m on marketing, up 160pc on last year, ahead of Asda on £4m and Aldi on £3.5m.
The discounters are in a virtuous circle, while the “big four” are in a vicious circle.
The danger for Tesco and co is that the cost-cutting measures designed to shore up their balance sheets will hand further advantages to the discounters.
Cutbacks in advertising and marketing are one example, but so is a reduction in the range of products that supermarkets stock.
Lewis has pledged to cut the number of SKUs, or products, that Tesco stores sell by roughly a third. This will help the retailer to be more efficient, but it also means less choice for shoppers. One of the products that Tesco is removing is Kingsmill bread, instead opting to focus on rival brands Warburtons and Hovis. This will encourage fans of Kingsmill – and I am sure there are some out there – to shop elsewhere.
To be fair to Coupe, he acknowledged that the discounters were “formidable competitors”.
Sainsbury’s still forecasts that it will account for 15pc of the grocery market by 2022. That is up from 9.2pc today, so represents a potential increase in comparable sales of 63pc over the next seven years.
This would be a further dramatic shift in the market. The extra market share for Aldi and Lidl will obviously be taken from other retailers – primarily supermarkets, given current trends – meaning serious disruption for the established players. To illustrate this point, the Co-operative has just sold six large food stores. The buyers? Aldi, which snapped up five, and Lidl, which bought one.
The battle is only just beginning for Britain’s “big four”. Aldi first arrived in the UK in 1990 and has spent 25 years building a foothold in the UK market, a period which involved highs and lows. They are not going anywhere without a fight.