Tuesday 23 July 2019

Discounters now pose an existential threat to the supermarket status quo

As Irish people move to shopping 'little and often', discounters now control almost a quarter of the grocery market, says Dan White

Increasingly the 'big shop' has given way to 'little and often' with shoppers spreading their custom around, cherry-picking the best value on offer from the different retailers
Increasingly the 'big shop' has given way to 'little and often' with shoppers spreading their custom around, cherry-picking the best value on offer from the different retailers

Dan White

The German discounters Aldi and Lidl are sweeping all before them in the €10bn Irish grocery market. The latest figures from market research company Kantar Worldpanel show that their combined market share climbed to 22.3pc for the 12 weeks ended May 22.

This puts the discounters' combined market share comfortably ahead of Dunnes Stores (21.4pc) and roughly equal to Tesco (22.4pc ) and SuperValu (22.7pc).

Over the past three years all of the three major supermarket groups have lost market share - with Tesco down 4pc, SuperValu down 2.6pc and Dunnes down 0.6pc, a cumulative fall of 7.2pc. The big winners have been the discounters, whose combined market share stood at just 15pc three years ago.

Health warning: Kantar changed its methodology earlier this year and now surveys 5,000 households compared to 3,000 previously. This increased coverage coincided with a jump in the discounters' combined share, from 16.9pc for the 12 weeks to March 27 to 21.1pc for the 12 weeks to April 24.

This is scant consolation for the supermarket chains as the new methodology revealed that they had been taking an even more severe kicking from the discounters before last April than had previously been realised.

The seemingly inexorable rise of the discounters is profoundly altering the way most of us shop for groceries. In the good old days before the crash the vast majority of shoppers drove to a giant supermarket once a week or fortnight and spent €100 or €200 filling up the boot.

That was then and this is now. Increasingly the 'big shop' has given way to 'little and often' with shoppers spreading their custom around, cherry-picking the best value on offer from the different retailers.

Despite a 4pc increase in the value of grocery sales over the past year, the average amount spent per shopping trip remains at just €21.80, virtually unchanged since 2012. Over three-quarters of all shoppers now do at least some shopping at either Lidl or Aldi.

'Little and often' works far better for the discounters than it does for the traditional large supermarkets. The discounters' shops are much smaller than the supermarkets - the average Aldi or Lidl store is just 15,000 square feet. Some of the big Tesco and Dunnes Stores outlets are three or four times as large.

The discounters also stock far fewer items - less than 2,000. In contrast, some of the larger supermarket outlets can stock up to 60,000 items. This means that their logistics systems don't need to be as complex as those of the traditional supermarkets. It is far easier to ensure that everything is in stock and before its sell-by date when you are stocking only a small fraction of the number of lines stocked by your competitors.

Smaller average store sizes also allows the discounters to have far more outlets than the traditional supermarkets. Lidl already has 145 stores in the Republic while Aldi has 123. This compares to 140 Tesco and 109 Dunnes outlets.

The difference is that, while the discounters are still busy opening new stores, most of their competitors are cutting back. Dunnes closed its store on Cork's North Main Street last month while Tesco is currently embroiled in a labour dispute as it seeks to buy out expensive pre-1996 staff contracts. Dunnes has also been involved in a series of legal disputes with developers and landlords seeking to force it to open new stores in recent years.

For decades the supermarkets got bigger and bigger while the small corner shops found it increasingly difficult to compete with the big boys. Only those independents who gathered under Musgrave's SuperValu and Centra franchises and BWG's Spar franchise managed to survive.

On the eve of the recession Tesco and Dunnes had a combined market share of almost 60pc while the discounters were a blip on the radar with a combined market share that barely exceeded 5pc. The big boys were openly disdainful of the discounters, arguing that purse-proud Irish shoppers would never forsake their attachment to brands.

The worst recession in recorded Irish economic history quickly changed all that. The proportion of own-brand goods being sold by Irish grocery retailers increased from approximately one third before the crash to half today. This move to own-brand was led by the discounters, virtually all of whose lines are own-brand.

It was more than just about price. For decades own-label had a poor reputation among Irish shoppers - one that was totally justified. Shoppers over a certain age will need no reminding that 'yellow pack', a cheap and nasty own-brand range sold by Tesco Ireland's Quinnsworth predecessor in the early 1990s, quickly became a synonym for anything that was shoddy or inferior.

The discounters played a major role in changing shoppers' perceptions of own-brand. As household budgets were squeezed in the wake of the crash, shoppers were forced to economise.

Many discovered to their surprise that, at the discounters at least, 'cheap' did not necessarily mean 'nasty'. Indeed, a sort of inverted snobbery broke out in some circles as middle-class shoppers regaled each other with tales of the bargains they had snagged at Aldi and Lidl.

Not alone did the discounters play a major role in converting Irish shoppers to own-label, they also, in what was a remarkable feat of corporate repositioning, succeeded in wrapping themselves in the green flag and creating a perception that they were somehow more 'Irish' than their competitors.

Aldi is now the lead sponsor of the National Ploughing Championships, the most important event in the Irish agricultural calendar, while Lidl sponsors women's Gaelic football. Who now remembers the old Dunnes Stores advertising slogan, "The difference is we're Irish"?

Meanwhile, both discounters prominently position Irish products on their shelves and feature them in their advertising. While cynics might argue that these Irish products are little more than window-dressing designed to disguise the fact that most of the items sold by the discounters are imported, they certainly help to bolster their 'Irish' credentials with shoppers.

So how big can the discounters get and what does this mean for their competitors? In Germany Aldi, Lidl and other discounters such as Netto and Penny have over 40pc of the grocery market. Their market share in other EU countries is smaller but growing rapidly.

In what is rapidly coming to resemble an action replay of the Irish experience, Aldi and Lidl's share of the UK grocery market has jumped from just 4pc in 2010 to 10.4pc today. Between them Aldi and Lidl lodged 171 planning applications for new stores in the UK last year, compared to a total of 29 by all of their rivals.

Given the speed with which they have grown their market share in recent years and the steady increase in the number of new stores coming on stream, further significant growth in the discounters' share of the Irish grocery market is inevitable.

And the bad news for the traditional supermarkets, both in Ireland and elsewhere in Europe, is that the competitive threat from the discounters is almost certainly going to intensify. Both Aldi and Lidl are experimenting with larger store formats. Aldi is trialling a larger store in the UK while Lidl is testing larger stores in several mainland European countries.

The larger Aldi store, at Louth in Lincolnshire, will be 19,000 square feet. Retail analysts have speculated that these larger Aldi and Lidl stores could carry up to 4,000 lines. This would allow them to stock more brands and to compete for the "one-stop shop".

Which of course begs the question: is the traditional large supermarket of up to 80,000 square feet - almost two acres - of floorspace obsolete?

There are certainly some indications that it is. One of the first things Dave Lewis did after taking over as Tesco boss in September 2014 was to call a halt to the retailer's UK expansion and to mothball or cancel 49 stores.

A further straw in the wind that the giant supermarket's days were numbered came during Sainsbury's £1.4bn takeover of Argos earlier this year. One of the justifications advanced by Sainsbury's for the acquisition was the fact that, with the leases on half of Argos's UK outlets expiring within the next five years, they could then be relocated to nearby Sainsbury's stores with too much space on their hands.

David Berry, executive director of Kantar Worldpanel Ireland, believes that there is still a place for the large supermarket: "Obsolete? I wouldn't say that. People make different types of shops. There is still the big shop and they supplement that with smaller shops."

A Tesco Ireland spokesperson points out that the Kantar market share figures don't include like-for-like sales comparisons with the same period in the last year and that the retailer returned to growth in the three months to the end of February, when its sales increased by 1pc.

That's the good news. The bad news is that the traditional retailers will almost certainly have to survive on a steadily shrinking market share in the years ahead.

Sunday Indo Business

Also in Business