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How Discount Grocery Chains are Changing U.K. Retail
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How Discount Grocery Chains are Changing U.K. Retail

The term discount isn’t what it used to be, particularly in the grocery aisle. In fact, savvy discount grocers have been able to build on the momentum they established due to the slow economy and create a burgeoning niche that exemplifies value and quality.

Quickly growing into a sizable force in the U.K., the discount grocery market is a fertile opportunity for discounters hungry to do business and adapt to shopper needs. At the end of 2012, Aldi and Lidl, the two German-based discount supermarket chains that have a dominant foothold in the space, had a combined 7.7 percent share of the U.K.’s fast-moving consumer goods (FMCG) market. Given recent growth, Aldi and Lidl appear poised to push that level to 10 percent by 2015.

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Discounters Are in it for the Long Haul

Before the Great Recession of 2008-2009, discounters struggled to wow the British shopper. As the economy worsened and shoppers found their way to Aldi and Lidl to save money on their weekly food bills, they were pleasantly surprised to find that these retailers offered quality food at discount prices.

Now, as current trends suggest that economic growth will be slow for the next three years, shoppers have gotten used to living on less. These market conditions will favour the limited-range discounter business model, which includes stores of 7,000 to 10,000 square feet with stock of approximately just over 1,000 SKUs.

However, both retailers have adapted to the U.K. marketplace by opening stores in more affluent locations and offering new options like fresh and chilled products. They’ve also embraced the premise of communicating about quality and value.

This strategy has been largely successful. In the last five years, Aldi and Lidl have increased their penetration of all households to 45 percent from 36 percent, and the spend-per-visit has increased to £19 from £15 (Source: Nielsen Q4 2007 vs. Q4 2012).

What’s more, shoppers are finding that Aldi and Lidl meet more than just their basic grocery needs. In response, they’re buying more items, which contributed to 28 percent growth in the two companies’ 2012 FMCG sales, far more than they would have garnered from new stores alone.

Clear Points of Differentiation

Currently, these discounters pull in most of their sales from their own private labels, which may have lower price tags than comparable products at many supermarkets. But discounters also hold regular promotional events and special one-off deals, which attract sales from consumers that aren’t opposed to shopping around.

But discounters aren’t relying on their promotions to secure long-term and consistent results. Recent trends suggest that discounters are appealing to the everyday needs of shoppers by offering value on everyday essentials and by being conveniently located.

Value Retailing is Poised for a Bright Future

Together, Aldi and Lidl have created an established trade channel in the U.K. and highlight strategies for success in a low-growth environment. Long term, the winners in the discount space will be those that innovate and take share from weaker players.

No retailer can afford to stand still, and these discounters are set to expand their presence—not just geographically and in store numbers, but also in diversity and scope. Possibilities include offering fresh food categories, attracting more families, communicating provenance, and adopting digital strategies—and maybe even online shopping.