It’s nearly three years since German budget supermarkets Aldi and Lidl began in earnest their assault against the established ‘Big Four’ British grocers. Both stores had been slowly growing in the UK for many years, but the hubristic expansion of Tesco, Sainsbury’s, Asda and Morrisons created a distinct opportunity.
The mood among shoppers had turned from range to convenience, while value was more important than ever. Burdened with a network of half-populated hypermarkets, Tesco and the gang were therefore woefully unready for the price war the expansive Germans unleashed.
Their campaign was a great success. In the 12 weeks to Jan 1 2017, Aldi and Lidl between them commanded 10.4% of the UK grocery market, up from 7.1% at the start of 2014. In harder figures, that represents 55% more cash in Aldi's tills, and 46.5% in Lidl's. Between them, the two retailers took in taking in £986m more during the comparative 12 week period than they did three years ago.
Every penny and every basis point was wrenched from the hands of the Big Four, who have gutted their own margins in an effort to stop the rot, leading to an period of groceries deflation from the middle of 2015 to the end of 2016. (Indeed, this has only just ended, with inflation of 0.2% over the latest period.)
The results have been mixed. Tesco – which at first conceded the most ground – has certainly managed to pull it off. Sales during the last 12 weeks grew 1.3% according to Kantar Worldpanel, in a sign that Dave Lewis’s strategy - of fixing the budget first before building up the brand – may be beginning to work.
Morrisons appears to have joined the club, growing sales 1.2% over the period. Till roll at Sainsbury’s on the other hand fell 0.1%; at Asda it fell by 2.4%.
Aldi and Lidl 12 week market share, viewed in 12 week increments. The apparent slowing in growth likely reflects both seasonal trends and decelerating - but still impressive - till roll growth. For more detail, take a look at Kantar Worldpanel's interactive chart.
There are some signs that the German assualt is losing steam. Year on year, till roll growth was 11.8% and 7.6% at Aldi and Lidl respectively, compared to 22% and 15% two years ago, when there was still plenty of low-hanging fruit and their rivals were in disarray. Market share growth, meanwhile, has slowed to a crawl, even falling back as the seasonal festive splurge disproportionately boosted the Big Four.
Those who would hope Aldi and Lidl are just going to go away will be disappointed, however. For a start, the ‘discounters’ (they hate the term) traditionally grow faster once the new year gets underway.
More importantly, they have permanently changed the dynamics of the grocery market by forcing down margins. While the big supermarkets can live with that, albeit as less profitable entities than they once were, it means they will need to continue shutting their less profitable stores to shore up their dodgy balance sheets. The discounters on the other hand have low prices built into their business models from the beginning, emphasising bulk over brand and price over range.
Without a depreciating UK property portfolio hanging around their necks, Aldi and Lidl remain well placed to expand into the gaps their rivals are leaving.
In November 2014, Aldi announced a plan to increase its store tally from 450 to 1000 by 2022. It’s already more than a fifth of the way there. Lidl, on the other hand, is investing £1.5bn over the next three years to build 40-50 stores annually (it had 150 as of November).
To put that in perspective, Morrisons has just under 500 stores (though it has a much bigger footprint), while Tesco has over 6,000 including its Express convenience stores. There’s clearly still a long way to go before the discounters’ position in the market stabilises, but until then they will continue to expand their geographical reach and therefore market share.
If both German chains do indeed double their store numbers over the next several years, it wouldn’t be a tremendous leap to expect their market share to increase accordingly, by which time the term ‘Big Four’ may no longer be appropriate. It's quite feasible to see Aldi and Lidl nipping at the heels of Morrisons before the decade is over. Get ready for the Big Six.