After years of incremental growth, Aldi has finally overtaken Morrisons in UK grocery market share and ended decades of the ‘big four’. What does this seismic moment mean for grocery in the long term?

  • Aldi and Lidl are predicted to capture 20% of UK grocery market share between them by 2026
  • Aldi’s disruption of the big four is the result of price focus and new space acquisition
  • Morrisons has suffered the sharpest market share loss among the big four in the past year
  • Own-brand strength is likely to prove crucial in the future

For decades, the UK grocery market has been dominated by four big players: Tesco; Sainsbury’s; Asda; and Morrisons. 

But in a watershed moment for the sector, that stranglehold on the market has been broken after Aldi’s market share overtook that of Morrisons for the first time. In the 12 weeks to September 4, Aldi sales grew 18.7%, taking its market share to 9.3%, usurping the 9.1% occupied by Morrisons. 

It is a moment that’s been coming for a while amid discount duo Aldi and Lidl’s relentless march on these shores. The golden age peaked in the early 2000s – following Morrisons’ acquisition of Safeway in March 2004 – when more than £7 in every £10 spent in food retail went to the big four.  

However, following the global financial crash in 2008/09 and the lengthy period of austerity that followed, Aldi and Lidl’s laser-sharp focus on price and rapid store expansion plans allowed them to steadily erode the dominance of the UK’s established order.  

The pandemic gave the big four, and Morrisons in particular, something of a stay of execution, as the natural advantages of the discount model were temporarily blunted – housebound customers shopped at local convenience stores, switched online or treated themselves to more expensive fare at a time when bars and restaurants were closed.

But as consumers increasingly returned to pre-pandemic shopping habits, Aldi and Lidl’s footfall numbers have soared, while the cost-of-living crisis has only pushed price up the list of priorities for cash-conscious shoppers. 

“I wouldn’t rule out that Lidl could be number five in the market in the near future”

Clive Black, Shore Capital

Clive Black, head of consumer research at Shore Capital, believes Aldi’s charge into the big four is an irreversible shift – and suggests it could get worse for the traditional giants. 

“It’s unlikely that Morrisons will retake Aldi’s position without new space openings,” he says. “The way things are going, I wouldn’t rule out that Lidl could be number five in the market in the near future.”

The era of big four domination is officially over. But just how seismic a moment is this for the UK grocery sector – and what comes next? 

Exterior-of-Tesco-Halifax-store

Bar Tesco, the remainder of the big four have all been steadily losing market share to the discounters over the years

Survival of the fittest

The British food retail market is widely heralded as the most competitive in the world and the pandemic sent that reputation into overdrive. 

Office for National Statistics data shows that Brits spent more than £240bn on food and drink last year. While some of that spend went to pubs, restaurants and caterers, considering the first quarter of the year was spent in lockdown, the lion’s share would have gone to food retailers. 

Even with all Covid-era restrictions having been removed, the continuation of flexible working combined with soaring prices has meant consumers continue to eat more of their meals at home.

The size of the pie has therefore grown and 9.1% of that enormous market – the reduced share that Morrisons now holds – will remain the envy of thousands of retail businesses in the UK and internationally. 

However, bar Tesco, the remainder of the old big four have all been steadily losing market share to the discounters over the years. 

 

“Basically every percentage point of market share gained by the discounters has come at the expense of the big chains,” says one former big four boss. “That’s partly a function of the discounter’s value proposition, and partly a function of the capacity and supply side, and has been happening over a number of years. 

“When you take all of that and add in the current cost-of-living crisis, you could argue that’s going to put even more pressure on the market. In these types of situations, the weaker players will find it more and more difficult to compete.”

This customer flight to value – and the need to have a strong, keenly priced own-label proposition – combined with changing shopping behaviours, has already fuelled the demise of convenience store chain McColl’s. Smaller players at the bottom end of the market could find life equally tough in the coming years.

But just how difficult will the former big four find trading? Could one of those major players find itself in danger of going out of business? It is an almost unthinkable scenario but one that, while not likely to happen any time soon, is not beyond the realms of possibility, the ex-chief executive suggests.  

“You’re always worrying if you’re losing market share,” he says. “The life of the CEO of any big grocer is one of permanent worry, because it’s a hard game. But do I think they’re going to go pop any time soon? No is the short answer and I think that’s true of all of the big grocers. 

“If one of the big supermarkets [found itself in that position] in the next few years, I’d be amazed. You might get to a situation where one of the main players was under that much duress in 10 years’ time but it’s going to be more on that kind of timescale, if not longer.

“In the end, they’re big cash-generating machines and you can keep a grocery retail business alive for years and years, if not decades, because they throw off a lot of cash.”

Morrisons-aisle-2022

Kantar data suggests that Morrisons has suffered the sharpest market share decline among the big four over the last year

Where to next for Morrisons?

Morrisons has responded by claiming customers are not concerned about market share. A spokesman said: “Market share is partly a function of new store openings and although Morrisons has not put on any significant new space for a while, some competitors are still opening many new stores. But customers don’t really care about market share statistics – they care about value, quality, provenance and service, and that is where our focus is going to remain.”

Despite their strong financial positions, mainstream players will be looking nervously over their shoulders in a trading environment that clearly gives the discounters the edge. Bernstein forecasts Aldi and Lidl capturing 20% of the UK grocery market between them by 2026, up from 16.4% now and 12.8% in 2019.

By contrast, Kantar data suggests that Morrisons has suffered the sharpest market share decline among the big four over the past year, while Asda has broadly flatlined in terms of growth. Until relatively recently, the discounters have focused new store openings more firmly in Asda and Morrisons’ Northern heartlands, while matching or even exceeding on quality at lower prices.

Both Morrisons and Asda are also in transitional periods – the latter still does not have a chief executive – having both been acquired in major private equity deals during the pandemic. 

Some have drawn parallels between the current economic environment and post-financial crash, anticipating another sustained spike in market share growth for discount retailers – particularly as Aldi and Lidl place increasing focus on growing within the M25 and stealing share from Tesco and Sainsbury’s in those regions. 

The boss of one value retailer emphasises that likelihood, insisting the big four are “still asleep at the wheel on price” despite their ongoing investment programmes. 

“There is plenty of evidence to suggest that the major supermarkets are more adept at defending market share through initiatives”

Bryan Roberts, IGD

IGD global insight lead Bryan Roberts insists, however, that the supermarkets are better prepared for the German onslaught this time. “Virtually all of the major grocers are ceding market share as the discounters continue to open swathes of new space, but there is plenty of evidence to suggest that the major supermarkets are more adept at defending market share through initiatives in private label, price-matching, loyalty, and general price and promotions,” he says.  

Tesco and Sainsbury’s have both introduced Aldi Price Match initiatives and better leveraged their Clubcard and Nectar schemes, respectively, to drive loyalty. Asda, meanwhile, has relaunched its ‘Asda Price’ campaign – and rolled out a new loyalty scheme of its own – and Morrisons has also invested heavily in price. 

The grocers have also sought to capitalise on Aldi and Lidl’s smaller own-brand offers, investing heavily in the breadth, price and quality of their ranges. Such investment appears to be paying off – sales of own-label products rose £393m in the four weeks to September 4, meaning 51.1% of all food spend went on own-label lines. Own-brand strength is likely to prove a crucial weapon in the armoury of the grocery winners during the cost-of-living crisis.  

But in an environment where value reigns supreme, it is not just the discounters that traditional grocers need to worry about. The likes of B&M, Home Bargains and Poundland have all improved their fresh, frozen and ambient food propositions over the past few years. B&M acquired Heron Foods in 2017, while Poundland acquired Fulton Foods in 2020 and has also been experimenting with a c-store Poundland Local format. 

Such investment in growing their exposure to the grocery market, combined with their already strong presence in convenient shopping destinations such as high streets and retail parks, will present further challenges to established players seeking to defend their market share. 

Asda rewards screenshot

This year, Asda rolled out its loyalty scheme Asda Rewards

Consolidation for UK retailing?

It is a backdrop that begs the question: is the UK grocery market ripe for consolidation? 

Neither Morrisons’ parent company Clayton, Dubilier & Rice (CD&R), nor Asda owners the Issa brothers and TDR Capital, could be accused of standing still following their big buys. Both have made further acquisitions this year in a bid to grow market share. 

Asda shelled out £600m to snap up the Co-op’s 132 petrol forecourt sites, while Morrisons is on the cusp of rubber-stamping its purchase of collapsed c-store chain McColl’s. The Competition and Markets Authority (CMA) is set to wave through the Morisons–McColl’s deal after only finding competition concerns in “a small number of local areas”. The authority is considering whether Asda’s play for the Co-op stores also warrants a closer look. 

Both deals pale in comparison to the blockbuster Sainsbury’s–Asda merger that the CMA kiboshed in 2019 – a stance that effectively slammed the door on any direct consolidation between the UK’s major food retailers. Although the leadership of the watchdog has changed since that ruling, Black does not believe the CMA would greenlight any merger or acquisition of that scale in the present environment. 

“You’ll always see M&A activity around the margins of the industry, but I struggle to see any major supermarket M&A in the absence of major distress,” he says. “The CMA has shown it is willing to step in and intervene in the past, and it remains the major factor behind the structure of the sector.” 

“Amazon hasn’t really done anything. They don’t even register in terms of market share”

Grocery analyst

The shift in the market share make-up of the big four may also leave the door open for Amazon to either make a multibillion-dollar play for a major grocer or push ahead with its own brand aspirations in the UK. Many were surprised that Amazon did not build on its relationship with Morrisons by mounting a takeover bid but could it have a bigger prize up its sleeve? 

Retail Week data and insights director Lisa Byfield-Green believes troubles in its home market and slow take-up of its existing grocery proposition in the UK may make the US titan think twice about expanding its presence on these shores. 

“For the past four quarters, Amazon has reversed falling revenue to grow in double digits through its US grocery stores, but it has been a long journey to get there. There is still much to develop within the US market and while this takes up focus and attention it is unlikely to invest heavily overseas,” she says. 

“The slowdown in the rollout of Amazon Fresh convenience stores in the UK can also be seen as an indicator that Amazon is not making the progress that it would like in convincing shoppers of its physical retailing appeal or its grocery credentials.” 

That is a view shared by another grocery analyst: “Back in 2015/16, all the major UK grocers were worried but since that time, despite a few different approaches, Amazon hasn’t really done anything. They don’t even register in terms of market share. 

“They probably do a couple of hundred million of sales in the UK today. It’s tiny, and I think they’ve realised that it’s much harder to do grocery than they perhaps expected.”

Lidl Putney High Street

Lidl wants to operate 1,100 stores by the end of 2025

Aldi and Lidl march on

Given that the discounters’ extended period of growth is being driven by new store openings, the supermarkets will be concerned that both Aldi and Lidl are showing no signs of slowing.

Aldi is targeting 1,200 stores by the end of 2025, while Lidl wants to operate 1,100 in the same timeframe. That would equate to adding 4-5% more floor space a year.

But Shore Capital’s Black says that once those store numbers are reached, the discounters may be forced to move into other areas of the market in order to grow their market share any further.  

Aldi’s disruption of the big four is the result of decades of unwavering focus on price and targeted new space acquisition

“In time, these businesses will reach their natural level,” he says. “Limited assortment supermarkets will then be faced with a choice between going into limited convenience or into superstores – is that their forte? Is that what the cost structure is about? It becomes riskier.”

Aldi’s disruption of the big four is the result of decades of unwavering focus on price and targeted new space acquisition. The success of Aldi and its great rival Lidl has forced the supermarkets to become more competitive on price, invest in new channels and strip back additional services and overseas operations to focus on their core UK food businesses.

But the German duo’s seismic growth could soon leave them pondering their own changes in strategic direction in order to maintain their rapid sales gains and hard-earned places in the new-look big four.

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