For over five years, Aldi and Lidl have rubbed salt into the largely self-inflicted wounds of Britain’s “big four” supermarkets. But with incumbents now holding or increasing market share, some are wondering whether the threat from the German discounters has peaked.
Aldi and Lidl arrived in the UK in the 1990s, but the big expansion in their market share started in earnest roughly seven years ago. According to Kantar Worldpanel, their combined share in 2011 was 4.8 per cent. Today it is 12.7 per cent. “The key things have been more stores, and more positive consumer sentiment towards these companies has also helped,” said Chris Hayward, consumer specialist at Kantar. Both brands now have more than 700 stores in the UK.
Some analysts say growth in the number of discounter stores is starting to slow. They use figures from Barbour ABI, a market information group, to track planning applications lodged with over 400 local authorities. This data suggests applications in 2017 were down 35 per cent from their high point two years earlier.
“Given the time delays between planning applications, starting construction and finishing the store, we have started to see that peak travel through the pipeline,” said Bruno Monteyne at Bernstein in a recent note. He thinks Aldi’s new store openings may have reached their zenith in 2016, and Lidl’s last year.
Return on capital at the discounters has declined. Aldi’s published accounts show operating profit in the UK and Ireland falling from £271m in 2013 to £211m in 2016, the last year for which figures are available — despite a two-thirds increase in sales during that time. Mr Monteyne said it was possible this could lead to a rethink on store opening plans.
“Stricter capital allocation would be unsurprising in a context of sharply declining investment returns,” said Daniel Ekstein at UBS. Steve Dresser, managing director of consultancy Grocery Insight, pointed out that the discounters’ list of target locations tended to be heavy on “leafy, well-to-do areas where land is expensive and hard to come by”.
Any slowdown in the overall rate of space addition would be positive for incumbents. Tesco, Asda and J Sainsbury have already stopped building large stores. They have cut prices to try and win back market share from the discounters, even though this has reduced their own profit margins. This week, full-year results from Asda showed operating margins dropping to 3.3 per cent from 3.9 per cent a year earlier. They have cut costs and increased scale, most notably through the planned combination of Sainsbury’s and Asda.
But not everyone thinks the land grab is abating. Stuart McGuire at Credit Suisse said it could yet extend beyond current targets. “Even in areas where it looks as if they are over-spaced, there is lots of white space on the map,” he said. Aldi has in the past pointed out that there are 400 British towns and cities where it is not represented.
It and Lidl also stressed there have been no changes to their store opening programmes, and caution against drawing too many conclusions from planning applications. An Aldi spokesperson said: “We remain firmly on track to reach our long-term strategic goal of having 1,000 stores across the UK by 2022.” Lidl reiterated that it will open 50 this year.
Even if the pace of store openings were to moderate, the discounters could still take market share by increasing the amount of spend diverted from the “big four”. Mr Hayward noted that about £500m was diverted from traditional supermarkets to discounters in the latest 12-week period alone.
The introduction of lines such as artisanal chorizo and halkidiki olives has given the discounters a broader appeal than KwikSave, a discounter that grabbed around 10 per cent of the market in the early 1990s but appealed mainly to an older and poorer clientele.
“The fresh range has grown hugely; a move to align themselves with new customers. But this adds complexity,” said Mr Dresser. “Do they need eight different types of premium pizza? Perhaps not.”
Discounters’ entire business model is based around small stores selling a limited number of product lines in huge volumes. This gives them pricing power with suppliers and keeps logistics simpler and cheaper. An average Aldi or Lidl stocks around 2,000 products, compared with 10 times that number at a big Tesco or Sainsbury’s store.
“I’ve always said the biggest risk to discounters is that they become like normal supermarkets,” said Mr McGuire.
Other countries may provide a guide to their eventual UK market share. Discounter power in France has fallen since 2009 as incumbents have fought back — helped by localised pricing, which allows individual store managers to react to the arrival of an Aldi or Lidl. In Ireland, discounters’ combined market share has levelled off at around 22 per cent, again after fightbacks from conventional rivals.
Mr Hayward said he estimates — with a lot of caveats — that the store opening programmes would leave discounters with a UK market share of at least 13.5-14 per cent in a few years’ time. Mr McGuire and others pointed out that while incumbents’ share losses may be halted or even partly reversed, smaller operators could still be vulnerable.
“The one they’re able to pick off quite strongly is Waitrose,” said Mr Dresser, noting the large price differentials and discounters’ increasing encroachment into the middle-class areas that are home to Waitrose stores.
Perhaps the pain among Britain’s grocers is merely spreading more widely, rather than ending.