Will Aldi be the saviour of our high street shops?

By announcing plans for aggressive expansion, a German discount retailer is challenging received market wisdom.

It’s fun to develop a fantasy projection of the future of retail, starting from German discount retailer Aldi’s plans to sink some &£500m into a 200-store expansion in the UK over the next seven years. It goes something like this: Aldi takes its core offer – a limited number of lines, savagely discounted – into the middle-class heartlands, challenging the superstores in pasta and sun-dried tomato territory. Tesco responds by developing its Metro convenience stores in high street locations, offering a similar basket of quality products and slashing prices.

Aldi has to respond with its own in-town convenience stores. A savage price-war ensues, until Tesco realises that it can raise prices in its Metros and compete on quality, since shoppers are prepared to pay more for the convenience of the high street offer. Asda is forced to respond (and Sainsbury’s has a go too), and Aldi eventually retreats to an out-of-town offer that simply competes on price for the parsimonious market. The convenience stores are now locked into a high street battle to mitigate the attractions of Aldi, while ensuring that those who go out of town for the big, weekly shopping expedition visit the traditional superstores for the breadth of their range.

To make the economics of extending the high street stores work, the operators decide to franchise them. This means that they work as autonomous businesses, supplied by Tesco and Asda (or more accurately, in the case of the latter, by Wal-Mart). Entrepreneurs start to develop regional chains of these franchises – not unlike the model on which the fast-food industry has operated for years. After a while, these local franchises figure that they have enough buying power from their franchisor to develop a degree of independence. This suits the characteristics of local markets, so we see high street signs appear along the lines of “Atkins Quality Foods – a Tesco store”. Later, of course, the latter phrase becomes redundant, as Tesco becomes more of a wholesaler to these franchises.

The out-of-town option is rationalised by a permanent price-war, instituted by Aldi (and other continental discounters), so the only truly high margins can be charged in the towns. Eventually, these high-quality, small franchise retailers on the high street – some of which have by now specialised in meats, vegetables or bakery products – prosper thanks to the customer loyalty generated by personal service and advice, as well as convenience. They become known as “shops”. Consumers wonder how we ever managed without them.

I accept that this is an unlikely scenario, with a few leaps of the imagination along the way, constructed on the single event of Aldi expanding its operations. It’s a bit like saying that Liverpool will win the Premiership because they beat Arsenal last weekend. But that’s in the nature of fantasies (just ask the Kop on Sunday evening). Fantasies are about unrealistic extrapolations from existing information. Why they’re useful is that they release us from conventional wisdom and, once grounded in the real world again, we can challenge such conventions from an objective viewpoint.

For instance, conventional wisdom has it that the property market for superstore development is a mature one, through a combination of a lack of supply from the “land bank” and competition regulation that restricts the opening of new superstores. But, if this is so, how come Aldi proposes to open 200 more stores and is talking of redressing its “mistake” of concentrating on downmarket areas, by expanding into middle-class neighbourhoods? It may not have the same regulatory hurdles to clear as the UK superstores, but at least it demonstrates that there are opportunities out there: the grocery market doesn’t have to stagnate, like a pond overseen by Tesco, the fattest toad on the biggest lily.

Aldi and the other German, hard-discount entry to the UK market, Lidl (are the Germans constructing some sort of anagram here? “A diddle”, perhaps), may be just the catalyst that the UK grocery market needs. And there are encouraging signs that there is a shift that could change the model that has sustained the British superstores for a generation. Some major suppliers, realising that the prevailing neo-feudal model of operating, by which they pay obeisance to their retail overlords – who can do what they like with them – cannot be tolerated forever, are finally beginning to act. Members of pressure group Farmers for Action have been blockading Asda’s milk distribution centres because, not unreasonably, they’ve decided it might be better to fight than to starve as a consequence of milk prices that are lower than dairy-gate break-even.

Neither Aldi’s hard-discount initiatives nor a suppliers’ revolt is of itself going to bring the dominant superstores to their knees. But every age has the delusion that it is permanent and such portents may be among the first knockings of a changing retail world.

George Pitcher is a partner at communications management consultancy Luther Pendragon

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