Thursday 25 April 2019

Store wars: is the force still with German discounters?

German discounters Aldi and Lidl are ramping up new store openings to reverse slowing sales growth in €10bn-plus grocery market


Dan White

The post-Celtic Tiger crash was a bonanza for the German discounters Aldi and Lidl. Cash-strapped Irish consumers, many of whom had previously shunned the discounters, quickly embraced them. The discounters' combined share of the €10bn-plus Irish grocery market almost doubled to 23pc between 2008 and 2015.

But then something happened. Instead of powering ahead to 30pc the discounters' growth virtually stalled, with their combined share for the 12 weeks to July 16 barely inching ahead to just 23.5pc, according to figures compiled by market research company Kantar Worldpanel.

So why has the discounters' exponential growth slowed? Lidl has now grown to a 12.1pc market share with 152 stores while Aldi has an 11.4pc share and 129 stores. They are no longer the new kids on the block but major players.

Part of the reason for the slowing growth in the discounters' market share has been the response of the incumbent players. With the Germans rapidly eating their lunch Tesco, SuperValu and Dunnes were forced to raise their game.

Irish consumers had traditionally been extremely brand-loyal - not too surprising when one recalls that one retailer's particularly grim 1990s-era "yellow pack" private label range quickly became a synonym for cheap and nasty. The arrival of the discounters with their excellent private label ranges quickly demonstrated that cheap didn't have to be nasty.

The incumbent retailers were forced to follow suit. Private label now accounts for 55pc of total grocery spending, according to Kantar, up from 47pc since 2012. The Irish love affair with brands is drawing to a close as shoppers opt for cheaper, but equally high quality, private label products instead.

Whole categories such as biscuits, tinned fish, sugar, jam, confectionery and cleaning products, that were once the virtually exclusive preserve of branded products have now been largely overrun by private label. For many of today's consumers it is the retailer rather than the producer that is the "brand".

That is at most only part of the explanation. Aldi and Lidl first entered the Irish market in 1999. With no existing stores and their post-2008 growth turbo-charged by newly value-conscious consumers, they were able to grow their sales rapidly through new store openings.

But with almost 280 stores between them how many more new stores can the discounters open? There are now very few, even medium-sized, towns without at least an Aldi or a Lidl store with many, Kenmare in Kerry or Macroom in Cork for example, having both.

Are the discounters reaching saturation point? Lidl, which recently announced plans to grow the number of its Irish stores to at least 200, certainly doesn't seem to think so.

Even so their experience in the UK, where the discounters' combined 12.1pc market share is less than half of what they enjoy in Ireland, is instructive. In September 2016 Ronny Gottschlich suddenly quit as head of Lidl's UK operation.

While no explanation was given for his departure, Gottschlich left at the same as UK retail analysts were calculating that same-store sales at both Aldi and Lidl were growing at just 1pc annually.

What this means is that virtually all of the UK market share growth at Aldi (up from 6.4pc to 7pc over the past 12 months) and Lidl (4.5pc to 5.1pc) has come from new store openings rather than same store sales. How have Aldi and Lidl's Irish same store sales been performing over the past two years?

"As Ireland's fastest growing retailer we have seen some of our strongest growth coming in the past few years in a period where our store numbers have not been growing as rapidly. For example, in 2007 we opened 14 new stores compared to five that will open by the end of 2017. Despite the grocery market currently experiencing deflation our market share has gone from under 8pc to over 12pc in the last three years alone", says John Paul Scally, managing director of Lidl's Irish operations.

Kantar rejigged its methodology, increasing its sample size from 3,000 to 5,000 households, in April 2016. This revealed that it had been underestimating the discounters' market share which, as a result, it increased from 16.9pc to 21.1pc. Even allowing for this once-off and artificial "increase" in its market share, Scally says that business is still growing at Lidl's existing stores.

"We are seeing steady rises in our customer numbers with more and more people coming through our doors which is contributing to our strong sales growth. We are investing significantly in upgrading stores and in 2017 have knocked and rebuilt four stores."

The Irish grocery market is now split virtually evenly four ways. In addition to the discounters with a combined 22.9pc, SuperValu is the market leader, just, with a 22.1pc share, followed by Tesco with 21.9pc and Dunnes 21.5pc. When one allows for the inevitable sampling errors, the Big Three are in a dead heat.

Between them the Big Three and the discounters now have a combined market share in excess of 88pc leaving everyone else, symbol groups, independents, corner shops etc, to compete for the remaining scraps.

While both SuperValu and Dunnes have seen their market share slip in recent years, probably aided and abetted by the afore-mentioned rejigging of Kantar's methodology, the erosion of Tesco's market share has been far more significant. Its market share is down from 28pc in 2011 to less than 22pc today. Even when distortions caused by the changes in Kantar's methodology are filtered out it would appear that Tesco's market share is down by almost fifth in just six years.

The rise of the discounters has hit all of the traditional supermarkets hard but it would seem Tesco has suffered much more than either SuperValu or Dunnes. What can it do to halt the slide in its market share?

"At Tesco Ireland, we're focused on investing in value, quality and service and our customers are responding very positively to this. We also recently opened our 149th Tesco store at the Airside Retail Park in Swords," says a Tesco spokeswoman.

"We're number one in volume and our average selling price is down which is good news for our customers, as result we're seeing more shoppers visit our stores and we're pleased with the improvement in our market share. We're focused on continuing to serve Ireland's shoppers a little better every day."

Kantar estimates that total value of grocery sales rose by 2pc or €45m to €2.35bn in the 12 weeks to July 16. However, it reckons that annual rate of deflation (falling prices) in the sector is now running at 0.5pc. This means that the volume of grocery sales increased by about 4.5pc.

"Despite a decline in the average price per pack, the market has continued to grow. In response to lower prices, shoppers have been putting more items into their baskets, which has kept market performance on an upward trajectory", says Cora Campbell, consumer insight director at Kantar Worldpanel.

The challenges facing the traditional retailers are illustrated by the 2016 results of Musgrave Group, which owns the SuperValu franchise and is the only one of the major Irish retail groups to publish its full financial results. It recorded unchanged sales of €3.7bn last year. However, a combination of lower cost of sales (squeezing its suppliers harder) and distribution costs meant that it was able to push its operating (pre-interest) profits over 70pc to €79m.

While the founding Musgrave family, who still own almost four-fifths of the company, will welcome the improved profits after a few torrid years they still represented an operating margin of just 2.1pc. Such improvements are likely to be largely once-off - a company can only squeeze its suppliers and distribution chain so hard.

Musgrave estimates that the total Republic of Ireland sales of its SuperValu franchisees were €2.67bn last year. The SuperValu sales figures would on the face of it lead one to conclude that the Irish grocery market is somewhat larger than the €10bn-€11bn indicated by the Kantar figures, perhaps as much as €12bn.

The difference between the two figures is almost certainly caused by differences in the definition of what constitutes "groceries". Are such items as the electrical goods, DIY tools and hardware one frequently finds in the aisles of the local supermarket or discount store groceries? Much of what the smaller symbol groups, including Musgrave's Centra, sell is much closer to fast food than conventional grocery retailing.

While the Musgrave annual report has nothing to say about the volume as opposed to the value of its sales, the company is unlikely to have been immune from the deflationary forces affecting its competitors. The reduction in its cost of sales, ie the cost of goods bought in from suppliers, certainly points in that direction.

Now that Lidl has thrown down the gauntlet with its plans to open up to 50 new stores, the competitive pressure on the traditional supermarkets will intensify even further. While the discounters will reach saturation point eventually, Lidl's latest move demonstrates that we are not there yet.

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