As Russia’s invasion of Ukraine heaps further pressure on global supply chains and commodity prices, Aldi and Lidl could permanently shift UK grocery’s established order, writes Hugh Radojev.

Lidl fascai against blue sky

Last month, Lidl attracted 1 million more customers into its stores

The most recent Kantar grocery market share figures showed that for the first time Lidl overtook the Co-op to become the UK’s sixth-largest grocery retailer. 

After 2021 was dominated by supply chain issues and rising operational costs from the pandemic, the shift from Covid to war in Europe has only accelerated already rapidly rising food prices.

At a time when food inflation has hit its highest level in well over a decade, Aldi and Lidl’s lower price points and reduced assortment make for a compelling proposition.

Also, as restrictions were lifted in the UK, customers have felt more comfortable returning to stores, which has benefited Aldi and Lidl with their limited online offers.

Shoppers have also begun returning to offices and moving away from the local shopping trends seen during the lockdown, which has impacted the Co-op and its more high street-focused c-store estate. 

While Aldi and Lidl both increased sales by 3.3% in February, Morrisons was one of the worst performers. Its sales slumped 8.2% year on year, while its market share dipped below 10%. 

Playing the long game

When Aldi and then Lidl launched in the UK in the early 1990s, the pair had ambitions to take on the established big four in an already concentrated market.

Now, the best part of three decades later, Aldi and Lidl stand fifth and sixth in the market at a time when UK living standards have dropped to levels not experienced since the 1950s. 

In short, the opportunity for Aldi and Lidl to take market share from the big four has not been this good since the 2008 financial crash.

Research commissioned by Retail Week found that 81% of consumers are at least considering switching to discount food retailers because of concerns about their financial situation.

But it is important to have perspective. At the current rate, Aldi will not overtake Morrisons in terms of market share until some point in 2025. 

“As both Tesco and Sainsbury’s invest heavily in Aldi price-match promises, the discounters are having to work even harder to get their value message across”

There is also the fact that Morrisons had a stellar pandemic by and large and, as a result, is weathering some tough comparisons.

In addition, while Tesco and Sainsbury’s have been closing counters and other in-store services, Morrisons has leaned into its Market Kitchen concept, giving it a meaningful point of difference as more are rolled out across its estate.

Now that it is under private ownership, there is a sense that Morrisons will be able to continue to innovate and invest in its offering away from the prying eyes of the quarterly investor update.

It is worth remembering that both Aldi and Lidl were in a similar position to Morrisons in 2020. Both saw footfall and market share fall during lockdowns and were criticised for not doing more – or, in Lidl’s case, anything – online.

Both retailers refused to make knee-jerk strategic changes and are reaping the benefits now. 

Four, three or six?

The next few months will not be smooth sailing for the discounters.

In the aftermath of the global financial crisis, the more established grocery players were caught on the hop by the discounters’ prices as they struggled to protect margins.

As both Tesco and Sainsbury’s invest heavily in Aldi price-match promises, the discounters are having to work even harder to get their value message across. 

The message is cutting through, though. In February, Aldi attracted 1.3 million additional customers to its stores, while Lidl brought in 1 million.

As inflation grows and the squeeze increases for customers, Aldi and Lidl’s reputation for quality food at low prices will make the case for them and the onus could shift back to Tesco and Sainsbury’s to further lower prices.

Whatever happens, consumer spending on grocery is still 8% higher than it was pre-pandemic as customers continue to eat many of their meals at home.

While only Aldi, Lidl and Ocado managed to grow sales in February on a yearly basis, every single grocer managed growth on a two-year basis. 

Whether it becomes a big three or a big six, the events of the last two years have undoubtedly shaken up grocery. With more pain for consumers on the way, the sector can expect more bumps in the road ahead.

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