German Grocery Discounters Are Down But Not Out In Britain: Gadfly
Britain may have achieved peak discounter. But the big four supermarkets should still be worried.
Financial results published Monday by the U.K. arm of German supermarket Aldi show sales growth last year slowed to 12 percent from 30 percent in 2014. Operating profit fell for the second year running, down 1.8 percent to 255.6 million pounds ($330.7 million).
Sales growth is also slowing at the British division of rival Lidl, according to Kantar Worldpanel.
Aldi and Lidl haven't escaped the price war that the big four British supermarkets have been slugging out for the past two and half years.
Tesco's recent move to cut the prices of fresh meat, fruit and vegetables hits the pair where it hurts, because fresh food is their sweet spot. Asda's dismal performance may lead it to open up a new front in the price war, while Sainsbury and Morrison are showing no signs of capitulating.
But the discounters are still opening new outlets apace. And that's why they will remain dangerous to the big four.
Aldi said it remained on track to increase its store base from 659 to 1,000 by 2022. It opened 65 new stores last year, and will open 70 in each of 2016 and 2017.
Lidl has said it plans to double the number of U.K. stores to at least 1,200 from 630, although it has not set a date for achieving this goal.
As the discounters push further into the south east of England, that puts them on a collision course not only with Tesco, but also increasingly Sainsbury. In Maidstone, a relatively affluent town in Kent, Aldi has just opened a new store right next door to a large Sainsbury, and that's not an isolated example.
Some of the slowdown in sales growth might also be from Aldi and Lidl's stores being just too popular. There are not enough staff to serve customers properly, and not enough car parking spaces. That could be alleviated as they open new supermarkets.
The danger is that they fall short of their aggressive store opening plans, and so won't be able to turbocharge sales growth with new space.
There's also a risk that as they respond to the increasing competition from the big four supermarkets, they, well, stop being discounters.
Their business models are simple, with stores stocking 1,000 to 3,000 product lines, compared with more than 50,000 at the biggest U.K. chains. Increasing variety could jeopardize their slick supply chains and economies of scale.
Aldi will spend 300 million pounds upgrading U.K. stores, including increasing the space dedicated to fresh and chilled food -- that is likely to mean higher costs from more wastage as fresh food is trickier to handle than packages of biscuits.
It is also adding more chichi items. Indeed, this Christmas, Aldi will stock 14 super-premium products, under the Specially Selected Exquisite banner, compared with just a handful last year. Aldi says its most upmarket products were the best-selling in 2015. But expanding these high-end ranges risks alienating its core low-income shoppers.
But even as Aldi and Lidl face these challenges, the big supermarkets would be foolish to bet against them.
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