Author: Aaran Fronda
7 Sep 2015
In recent years, two big names in the grocery business have been making gains at the expense of almost all rivals. German supermarket chains Aldi and Lidl have made a massive success of their low-cost business model, which, at its core, aims to offer customers high-quality products at very low prices, allowing them to undercut their competitors in the process.
This winning formula has allowed the two supermarkets to grow much faster than the UK’s ‘big four’ supermarket chains – namely Morrisons, Asda, Sainsbury’s and Tesco. This has happened to such an extent that financial services firm Moody’s expects the big four’s market share to fall by as much as four percent over the next five years, leaving the door wide open for their German rivals to grab a larger slice of the pie for themselves. Indeed, Moody’s senior analyst Sven Reinke has predicted that Aldi and Lidl could soon hold a combined market share of around 12 to 15 percent.
“Although the discounters’ sales densities have caught up with the big four retailers, Aldi and Lidl could continue to gain around [one percent] market share every year, supported by their store expansion plans, at a time where the big four selectively close unprofitable stores in order to save costs”, said Reinke.
UK market share
Number of stores
Spend a little, live a lot
UK market share
Number of stores
Shop a Lidl smarter
Moody’s also mentioned in its announcement that there was a significant risk of an “intensifying price war” developing in the UK market, as a result of the major supermarkets struggling to find “strategies to operate successfully with lower market shares”. In its view, none of the major retailers, with the exception of Asda, has the ability to slash prices any further in order to mitigate the impact of their German rivals, and will find it difficult to “absorb further margin declines”.
However, it is not just UK supermarket chains that have been forced to compete with Aldi and Lidl. For some time now, both German chains have seen sales grow year-on-year, helping them to open new stores in various countries. What’s more, unlike their rivals Tesco, Walmart and Carrefour, they have managed to break into these foreign markets quite successfully, disrupting established brands in the process. In Australia, for example, Aldi first arrived in 2001. In the years since, it has acquired a 10 percent share of the market, reducing the dominance of major supermarkets like Woolworths and Coles, who maintain a near duopoly in Australia.
In the UK, the story is much the same, with 2015 is shaping up to be another big year for the discount retailers. Between them, they are in the process of developing 53 new projects, which will see new stores built, as well as an expansion of their existing facilities, in order to provide customers with home deliveries and new click-and-collect services, applying yet more pressure to the big four. But, is this recent boom just the beginning, or will the two supermarkets see their impressive growth start to level out?
Less is more
One of the best ways to disrupt a market is to differentiate your business from the rest of the crowd. This is something that Aldi and Lidl have achieved with great success. Many established brands like Sainsbury’s provide customers with a lot of choice. If customers’ wallets are a little light, then they can purchase products from its ‘Basics’ range, which retail at a fraction of the cost of premium-branded products. Equally, if consumers want to buy better quality, then they have the option of purchasing premium items from the ‘Taste the Difference’ range, which boasts “quality ingredients, authentic products and, most of all, fabulous taste”.
However, discount retailers have bucked this trend entirely. On its website, Aldi proudly states that over 90 percent of the items on its shelves are “Aldi exclusive brands” – meaning that they are produced by smaller independent manufacturers, such as German company Luhns, which specialises in producing a range of detergents for the discount retailer. By employing this exclusive brand approach, Lidl and Aldi are able to pass on savings to the consumer, with in-store products selling for as much as 50 percent less than well-known brands.
Everyone has ventured into a supermarket at some point and been completely overwhelmed by the sheer selection in front of them. When shoppers walk along Aldi’s aisles or look at the shelves in Lidl, however, they are instead struck by the limited range of products to choose from. This is because both stores aim to keep their product ranges as simple as possible, in order to avoid what is known in the retail world as ‘range overload’. This technique might seem like it takes choice away from the consumer and would actually hurt sales, but, according to researchers, huge variety can work against supermarket chains, and helps to explain yet another reason why the two discount retailers are out-performing the big four hand over fist.
“When it comes to managing product assortments, offering more variety is not always the best option”, noted Alexander Chernev, Professor of Marketing at Kellogg School of Management, in a research paper about the psychology of choice overload. “Empirical research in the domain of retailing, consumer packaged goods, and financial services shows that in many cases large assortments can lead to lower purchase likelihood, lower customer satisfaction, and decreased customer churn.”
Recipe for success
When the above approach is combined with other cost-cutting measures, such as asking customers to bring their own carrier bags, no 24-hour stores, and the adoption of a highly streamlined distribution network, it is easy to see why both businesses have found it so easy to undercut the major retailers.
In fact, according to a recent report from consultancy firm Kantar, at the end of Q1 2015 Aldi had risen up the ranks, overtakung Waitrose, to become Britain’s sixth-largest supermarket. “Aldi has recorded double-digit sales growth for the past four years and is now Britain’s sixth-largest supermarket, with 5.3 percent of the market”, explained Fraser McKevitt, Head of Retail at Kantar. “Growth has been fuelled by over half a million new shoppers choosing to visit Aldi this year, and average basket sizes increasing by seven percent. The German discounter’s sales have increased by 16.8 percent in the latest period; still high compared to other retailers, but slower relative to its recent performance”, he added.
The firm also noted that, out of all the other retailers in the UK market, only Lidl and Waitrose saw their sales figures grow, allowing them too to increase their market share during the first quarter of 2015.
In fact, Waitrose increased sales by 2.9 percent compared to the previous year, and now holds a 5.1 percent share of the UK grocery market. Comparatively, Lidl’s Q1 sales grew by just over 12.1 percent, helping it to acquire a 3.7 percent share of the market for itself. Interestingly, from the data compiled by Kantar, supermarkets with business models at either end of the spectrum were the most successful, with premium sellers like Waitrose and discounters like Aldi and Lidl all having a comparatively better start to 2015 than the big four.
Of all the traditional major retailers in the UK, only Sainsbury’s can take something positive away from Kantar’s report. For first time since August 2014, the supermarket chain saw its sales grow, though not by much. It may have managed attract more shoppers to peruse its aisles, but sales grew by only 0.2 percent, merely slowing the speed of its market share decline – down just 0.1 percent, to 16.4 percent. Tesco faired similarly, seeing sales up by just 0.3 percent, while Asda and Morrisons saw sales decline by as much as 1.1 and 0.7 percent respectively.
“The changing structure of Britain’s supermarket landscape is illustrated by two facts”, said McKevitt. “Firstly, the so-called discounters Aldi and Lidl now command a combined nine-percent share of the market. In 2012, the same two retailers only accounted for 5.4 percent of grocery sales. Secondly, the 72.8-percent share taken by the biggest four retailers is now at the lowest level in a decade.”
The discount business model is clearly helping grow Aldi and Lidl’s bottom lines, along with improving their overall position in such a competitive market. More importantly, however, it is a huge hit with shoppers. This year, at the Fresh Produce Consortium (FPC) Fresh Awards, which is one of the UK supermarket industry’s most prestigious events, Aldi was named Retailer of the Year.
UK top 10 supermarket market share
Each year, the FPC surveys consumers via social media. This year, roughly 11,000 votes were cast across various categories, with Aldi coming out on top, highlighting the popularity of its business model with consumers.
“Aldi has proved that a supermarket chain can thrive and grow in challenging times, without compromising on quality or customer service”, explained Nigel Jenney, FPC CEO, in an interview with Produce Business UK. “Its commitment to high quality at low prices, dedication to staff development, innovative marketing and enthusiastic engagement with customers make it a clear winner.”
After taking home the vast majority of the awards, Tony Baines, Managing Director of Corporate Buying at Aldi, told Produce Business UK that “the results are a testament to the relationships we have built with our suppliers and our customers, who have taken the time to vote for us”.
“The results further demonstrate that, while we continue to open new stores across the country and expand our fresh produce range by 50 lines, we remain dedicated to offering our customers quality products at the everyday low prices that they have come to know and love, enabling them to shop with us week in, week out”, added Baines.
The bargain-hunting culture that helped raise the profile of Aldi and Lidl arose in the aftermath of the economic downturn and the ongoing austerity that has been imposed
“We are seeing big cutbacks by consumers as they continue to respond to this current period of austerity”, wrote Edward Garner, Director at Kantar Worldpanel, in a 2012 report titled Austerity Bites Back. “The success of the discounters, Aldi and Lidl, is a clear example of shoppers watching their purses, with both retailers continuing to surge ahead. Once again, they both achieve all-time record shares of 2.9 percent, and remarkable growth of 26.1 percent for Aldi and 11.5 percent for Lidl. Similarly, although Waitrose is still growing at over double the rate of the whole market, this growth has fallen back to 4.8 percent from 7.5 percent last period − suggesting there are signs that the premium sector is beginning to slow.”
Fast-forward to today and what Garner observed back in 2012 has become deeply engrained in consumer culture, with many shoppers basing their entire consumer approach on bargain-hunting, which is only helping Aldi and Lidl to grow their market share. “Discounters aren’t going away”, contended Clive Black, a Shore Capital analyst in an interview with Retail Week. “Even if the superstores hadn’t fallen over in the last five years, they wouldn’t have gone away. At the same time, the discounters will continue to open stores and the majors won’t, so you would expect the discounters to gain market share. But they aren’t going to be the be-all and end-all for shoppers like they have been over the past two or three years.”
It is certainly true that Aldi and Lidl have made significant gains in recent years. However, those gains might not be as impressive as they first appear, and may say more about the state of the UK’s dwindling middle class than the effectiveness of the discount business model.
According to a recent analysis of census data by Benjamin Henning and Danny Dorling from Oxford University, from 1980 to 2010, the number of middle-income households across England has declined considerably – falling from 65.5 percent in 1980 to just 48.4 percent three decades later.
This has changed the distribution of wealth at both ends of the spectrum considerably, with poor and rich households making up 27.2 percent and 24.4 percent respectively. Therefore, when looking at the figures provided by Kantar in this context, the changes in market share appear to fall in line with the economic landscape.
“The Kantar figures also show that the cumulative market share of the big four has changed little since 2008, with the market share losses of Tesco and Morrisons largely offset by gains achieved by Sainsbury’s [and Waitrose]”, noted Mark Teale, Head of Retail Research at CBRE. “Whatever switching is occurring, it is happening at both ends of the value spectrum (quality and discount).”
For Teale, the real reason major retailers like Tesco and Morrisons are struggling, has more to with the them being “caught in the squeezed middle”, with discounters “chipping away from below”, while premium retailers like Waitrose and Sainsbury’s apply pressure from above.
Therefore, the real force shaking up the UK grocery market is the tightening of household incomes, which has created a much larger market for the likes of Aldi and Lidl to capitalise on, and has stripped away a portion of the market from middle-ground retailers like the big four. What’s more, with the UK economy showing only smalls signs of improvement thus far, this trend looks likely to continue in the coming years.