In Depth

Britain's 'big four' supermarkets fight for their lives

German discounters Aldi and Lidl are transforming British shopping habits

This morning's news that Asda's quarterly sales figures have risen for the first time in three years garnered a number of headlines and was greeted with palpable relief by bosses. 

But in some respects the warm reaction to a modest and unusual increase in same-store sales only serves to demonstrate how far Asda – and the dominant "big four" supermarket chains in general – have fallen in recent years.

Like-for-like takings were up by 1.8 per cent. A decent lick at first glance, but this falls to 0.7 per cent once the positive effects of a late Easter are removed. It's also less than that again once you factor in inflationary price increases, says the BBC

The Guardian points out that these factors could whittle down the store's already low profit margins.

After three years of decline, including its worst annual trading performance ever last year, Asda's figures are undoubtedly good news. Yet there's a strong sense that they merely offer a degree of respite during tough times.

Dominance in decline

The past half decade or so has seen a major shift in supermarket trends marked by the waning power of the big four.

Tesco, Sainsbury's, Asda and Morrisons accounted for a combined market share of almost 77 per cent in 2012. The German discounters Aldi and Lidl had accumulated a share of around six per cent.

But the big four saw their own market shares peak around this time, with Asda the last to reach its tipping point in 2013.

By 2014, articles were being published about the nation's changing shopping habits and the rapid rise of Aldi and Lidl. In 2015, the two discounters hit 10 per cent market share for the first time and were reported to be building new stores at a rate of knots.

According to the latest update from sector researchers Kantar Worldpanel, the German duo now have market share in excess of 12 per cent, while the big four have slipped to a little more than 69 per cent.

Sector shake-up

So how did Aldi and Lidl do it?

"At the heart of the food discounters' strategy is their limited range of products," says the Financial Times. Aldi and Lidl stock product ranges of between "1,000 to 3,000 lines", compared to 25,000 to 30,000 at a typical British supermarket and as many as 50,000 at the largest stores.

They also stock mainly own-label products and one of each. This helps to drive "efficiencies and big volumes" for suppliers that facilitate the ultra-cheap headline rates. Producers are rarely asked to fund special offers as they are in rival stores. 

The strategy paid off in the wake of the financial crisis – and during a period of austerity and wage stagnation – so the discounters have now taken their brands nationwide with thousands of new stores.

The Daily Telegraph says these shops are bolstering their appeal to middle class shoppers by offering premium products like caviar and smoked salmon at bargain prices. They also offer celebrity endorsements and promote British provenance in much of their produce.

Segmented shopping

Given their modest product ranges, it's clear Aldi and Lidl are not yet, or for the foreseeable future, aiming to be the next "one-stop" shops. 

Instead they're hoping to profit from a trend they've had a big role in starting that the BBC calls "segmented shopping".

In a nutshell, British households are shunning the once ubiquitous weekly shop in favour of piecemeal purchasing: "tending to buy less but... buying items from different places based on either price or convenience".

They're also shopping more online, often to provide the base bulk grocery intake for the week. In fact the Telegraph says that for the second year in a row Britons bought more food online than consumers in any other country in the world.

This has caught the interest of Amazon, which has begun to roll out its own grocery service to shoppers in London and a couple of other cities. If it takes off, it could pose an even bigger threat than the discounters.

Changing the model

The response from most of the big four has been to radically change the model of how they expand their businesses.

Gone are the days of buying up ever-more real estate for ever-larger stores, or even "landbanking" in order to thwart rivals. Now they are rationalising product lines, closing unprofitable stores and selling or subletting idle space in supermarkets. 

Moreover, they've diversified.

Tesco and Sainsbury's have opened lots of smaller convenience stores that are becoming more profitable as shopping habits fragment. Morrisons had one go at smaller stores that it executed badly and is trying out again.

More radically, Morrisons has branched out into supply with a lucrative tie-up to provide fresh and frozen goods for the Amazon grocery offering.

Sainsbury's and Tesco have tried to head off the threat from Amazon by launching same-day delivery on online orders and branching out – Sainbury's by buying Argos to become the UK's largest non-food retailer and Tesco by striking a deal with the UK's largest wholesaler, Booker.

Still cutting prices

That leaves Asda, which is still stuck doing what it has always done: cutting prices. The other three of the once-formidable quartet have done that too, but concluded quickly there was a limit to how far this would get them. Their faster recoveries suggest they made the right call.

The problem is the discounters will always have an edge on price, or at least they will unless the supermarkets radically change the way they operate to improve profit margins that are typically in the low single digits.

Asda has dabbled in small stores, but considers these aren't its strong suit. It's considered buying in a big non-food business like the discount chain B&M, but that now looks unlikely to happen.

In the meantime it still keeps trying to cut enough prices to win back shoppers in the way it always has. 

Maybe it will work and the figures published today are a sign of a turnaround beginning in earnest. But most analysts agree that Asda will have to make much more radical changes to prosper again.


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