Blurred lines: Are the big four becoming discounters?

The discount duo have been responsible for radically re-shaping the landscape of British grocery since entering the market almost three decades ago.

Admittedly, they took a little time to leave a real mark on their mainstream rivals – Aldi’s 1990 launch and Lidl’s debut four years later barely registered on UK grocery’s Richter scale.

But the economic downturn of 2008 proved the catalyst for the German grocers to begin hoovering up market share at a pace that F1 champion Sebastian Vettel would be proud of.

Already gaining traction among poorer demographics, Aldi and Lidl’s rock-bottom prices, no-frills approach to store merchandising and the promise of a speedier shopping experience began wooing the UK’s increasingly frugal middle-class in their droves – finally forcing the big four sit up and start treating them as serious competitors.

The discounters’ combined market share sat at around 5% in June 2008. A decade on, that figure has grown to 12.7%, according to the latest Kantar Worldpanel data. In other words, Aldi and Lidl now snap up £1 in every £8 spent at grocery retailers in the UK.

Mimicking tactics

Numbers like that simply cannot be ignored – and the big four certainly can’t be accused of doing so.

But to some onlookers, the strategic responses triggered by the likes of Tesco, Sainsbury’s, Asda and Morrisons represent defensive stances that mimic the tactics of their discount rivals.

Although Sainsbury’s has acquired Argos, Tesco has bought Booker and Morrisons is building a wholesale business, all have pursued other paths already well-trodden by their discount rivals.

In varying degrees over the past few years, the big four have reviewed their ranges to reduce SKU counts and simplify the shopping trip.

“They are trying to beat the discounters at their own game – and they simply aren’t going to win”

Former grocery executive

Store workforces have been restructured to create leaner operating models – in some cases to the detriment of frontline staffing levels.

Packaged stock is increasingly appearing on the top shelf to make the replenishing of shelves more efficient.

Supermarkets are revamping their entry-level tiers across key fresh, meat and poultry categories, removing the stigma associated with purchasing value ranges by creating more attractive, discounter-esque private-label brands, such as the farm brands and Hearty Food Company both introduced by Tesco.

And hundreds of millions of pounds have been ploughed into lowering prices to narrow the gap to Aldi and Lidl.

Indeed, the Sainsbury’s-Asda merger will see the grocery powerhouse slash prices on core lines by 10% to better compete with the discounters.

And Tesco, fresh off its acquisition of Booker, is seriously exploring the option of leveraging its enhanced buying power to create a discount chain to go toe-to-toe with Aldi and Lidl.

They are tactics that leave one former grocery executive worried for the big four.

“They are trying to beat the discounters at their own game – and they simply aren’t going to win,” he tells Retail Week.

“You can’t operate big stores with big ranges in the same way that the discounters run their stores and expect service and availability not to suffer. Aldi and Lidl must be rubbing their hands.

“If you’re a big supermarket chain cutting service levels and streamlining ranges, you are effectively damaging two of your USPs. It’s a dangerous game to play. You’re making the customer ask the question: ‘Why am I shopping here and not at Aldi or Lidl?’”

A merging of strategies

It is a question that plenty of Asda’s customers will presumably have asked themselves in years past when they deserted the Walmart-owned grocer, sparking a sharp downturn in its topline sales performance.

The supermarket giant’s former boss Andy Clarke believes there has been “almost a merging of strategies” between the big four and the discounters.

He highlights that Aldi and Lidl have also taken on some of the characteristics of a mainstream grocer by broadening ranges, investing in product quality and installing in-store bakeries to attract a different consumer demographic.

“If you walk into a discounter, it’s still a very different shopping experience than if you go into a Tesco. It has invested in its service proposition, as has Morrisons”

Former Asda boss Andy Clarke

However, he insists that, despite such convergence, the big four will always retain a proposition that is differentiated enough from that of the discounters.

“The breadth of offer that sits in the multiples is still something that you would say is an advantage – the fact that you can shop clothing, general merchandise, homeware and food all under one roof is an advantage from a customer perspective because you don’t necessarily need to shop around,” he explains.

“If you walk into a discounter, it’s still a very different shopping experience than if you go into a Tesco. It has invested in its service proposition over the past few years, as has Morrisons – its investment in frontline service is quite visible.

“I still think there is a genuine differentiator there – you get a better experience as a shopper than you would in a discounter.”

“Supermarkets have got to look around their stores and say: ‘Where are we different from the discounters? Why do our customers like that difference and how do I make the most of it?’”

Phil Dorrell, Retail Remedy

But Retail Remedy partner Phil Dorrell doesn’t consider the big four to be doing enough to differentiate themselves from Aldi and Lidl.

“Supermarkets have got to look around their stores and say: ‘Where are we different from the discounters? Why do our customers like that difference and how do I make the most of it?’ Instead of following too much, they have got to start amplifying the differences,” Dorrell suggests.

“It’s got to be about more experiential stuff and a more holistic view of what the reason for the store visit is – increased range, better service, food counters – all those things have got to be the difference the big four make. If you drive too far towards the discount model, the point of difference you have is eroded. That’s a dangerous game.”

Clarke agrees. “It’s important, for any business, not to lose sight of their fundamental purpose in life.

“But it doesn’t matter whether you are a discounter or a mainstream grocer in this market, you can’t afford to stand still. They’ve got to be continually testing, changing, trialling.

“The market is moving in line with customer expectations – the customer is king and queen. You have to follow the customer or lead the customer, and we are starting to see greater evidence of that behaviour from retailers.”

Danger for the discounters

TCC Global insights director Bryan Roberts suggests it’s not just the big four, but the discounters as well, who could be in danger of deviating too far from their core values in the increasingly fierce battle for market share.

“I do have some concerns that the discounters will lose some of their hard discount basics, certainly on range, where there seems to be unnecessary duplication,” he says.

“In the good old days, Lidl would have two types of butter, now you go in and two SKUs have become upwards of 10. That just means more complexity and more man hours towards replenishment”

Bryan Roberts, TCC Global

“In the good old days, Lidl would have two types of butter, now you go in and two SKUs have become upwards of 10. That just means more complexity and more man hours towards replenishment.”

As Aldi and Lidl broaden their ranges and improve quality, while the big four focus on in-store efficiencies, Roberts admits he has “a real worry” about what that blurring of lines means for the supermarket groups – in particular, Sainsbury’s.

“Shoppers are being charged a premium to shop in a mainstream supermarket. That premium is justified if service, availability and the overall in-store experience is where it needs to be,” Roberts explains. “When you start dialling down on staff levels and racing for efficiency, that makes any sort of premium harder to justify.

“If you look at Sainsbury’s, anecdotally and observationally there seems to be some issues with housekeeping, availability, queue times. Suddenly the premium you’re paying to shop there becomes harder to justify.

“Supermarkets need to face the reality that the discounters are growing, you are going to lose market share and work out the best way to co-exist alongside them and play to your strengths.”

As former Waitrose boss Mark Price put it some three years ago: “Eventually you’ve got to find something else. The only way to win long-term is to get customers trading up again or giving people another reason to come to your stores.”

As the lines between the mainstream and discount grocers continue to blur, they should serve as words of warning to the big four.