It’s nearly four 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. Aldi has overtaken the Co-Op to become Britain's fifth biggest supermarket by market share, according to data from Kantar Worldpanel, while Lidl is chasing Waitrose for seventh place. In the 12 weeks to March 26 2017, Aldi commanded 6.8% of the UK grocery market, and Lidl was on 4.9%.
To put that in perspective, their combined share has grown 75% since the summer of 2013. That's billions extra passing through their tills each year.
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 a period of groceries deflation from the middle of 2015 to the end of 2016. The rising pound has now pushed this up to 2.3% inflation over the latest period.
The results have been mixed. Tesco, which was the first to concede significant ground, was also the first to return to growth, in a sign that Dave Lewis’s strategy - of fixing the budget first before building up the brand – may be beginning to work. However, sales recently have stalled, falling 0.4% in the 12 week period.
Sainsbury's fared worse, with sales dropping 0.7%, while Asda's fell 1.8% - it remains the hardest hit. Only Morrisons actually grew sales, by 0.3%.
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 14.3% and 15% at Aldi, compared to 22% two years ago, though Lidl's steady on 15%.
Those who would hope Aldi and Lidl are just going to go away will be disappointed. For a start, the ‘discounters’ (they hate the term) traditionally grow faster once the intense competition of the Christmas period is out the way, as has already started happening this year.
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 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 has 650 as of April 2017).
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.
Image credit: Bidgee/Wikipedia