Sainsbury's-Asda mega-merger will not stop Aldi and Lidl

The proposed groceries behemoth can never win on price alone.

by Bryan Roberts
Last Updated: 02 May 2018

In their early days, Aldi and Lidl were unattractive to the mass market. With their weird brands, unfamiliar merchandising and cash-only policy, the discount stores were the preserve of the poor. Now they are the preserve of the smart.

Market share data from Kantar shows that in the 12 weeks running up to 4th April, 63.5% of all households in the UK visited at least one of the discount retailers. This number will only get bigger as they grow their presence in the UK: Aldi is set to increase its number of branches to 1,050 within five years, with Lidl to increase to 1,000 by 2022.

The growth of these discounters, as well as the likes of B&M, were cited as one of the driving forces behind this week’s announcement of a mega-merger between Sainsbury’s and Asda, as Sainsbury’s CEO Coupe took the City through the deal on Monday (in between spontaneous renditions of ‘We’re in the Money’ – ed.).

Coupe insisted that the prices of everyday groceries could be cut by around 10%, as a result of the group’s combined buying powers.

But Asda and Sainsbury’s still won't be able to compete with the discounters on pricing with this 10% drop. Aldi and Lidl have a unique operating model, with a limited assortment and brutal efficiency, that can’t be replicated by a standard supermarket. They will not let their price advantage be eroded and will react aggressively to any reductions by Asda.

With price supremacy out of the question, and shoppers recognising that they don't have to pay a lot to get good quality products, both retailers must focus on the added value and differentiation that their partnership could offer.

The shopping experience

The first thing is to make the actual experience more enjoyable. So often grocery shopping feels clinical, like a maze with a self-checkout at the end. With larger stores (and excess space to play with) and with a brilliant roster of exclusive brands in non-food, Asda and Sainsbury’s can really set themselves apart.

Asda has George, which includes homeware and clothing, and Sainsbury’s has Tu, Argos and Habitat. We’ve seen that Waitrose’s sushi bars, free coffee and concierge services have helped it to defend some turf from the discounters. Morrisons dominates with a clear focus on fresh, with its Market Street boasting butchers in traditional aprons, flour-dusted bakers and rubber-booted fishmongers. There’s clear potential in taking a leaf out of this book. Perhaps a return for the mooing cows and clucking chickens that used to adorn Asda’s dairy and egg displays?

Customer loyalty

The second is to offer a genuine ‘thank you’ for shopper loyalty. Our research has shown that shoppers perceive Asda as one of the worst supermarkets for rewarding loyalty—followed by Lidl and Aldi, which both sit at the bottom. Sainsbury’s was perceived as the best. So, Sainsbury’s £60m acquisition of Nectar in February – which has since seen it test a new digitally-led and app-based mechanism – could offer powerful data and a draw for Asda’s shoppers.

Online

The third is through e-commerce. Lidl has swerved e-commerce altogether, and Aldi just sells wine and special buys online. These low-cost chains have instead thrived by keeping operational costs low and staying (mostly) offline. Asda has rolled out a suite of technology for its shoppers in recent years, ranging from delivery lockers for food to an impressive suite of click & collect propositions. Sainsbury’s most recent results show that online grocery sales are a growing market for it and also has the highly lauded Argos omnichannel service to blend into its stores.

It’s undeniable that Asda and Sainsbury’s have had a rocky couple of years. But, as Asda and Sainsbury’s look to counter pressure from cheaper competition, they must focus on what could set them apart by building on their combined strengths, not heading off on an unwinnable price war.

Bryan Roberts is global insights director at tcc global.

Image credit: Billion photos/Shutterstock

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