Mark Ritson: “Expect a bloodbath in the grocery aisles as the big four start an unwinnable war against Aldi and Lidl”

It’s official. We have entered a period of unprecedented decline for the big four supermarkets.

Mark_Ritson_close_up

Tesco’s half-year profits have dropped from more than £1bn to just over £100m. Sainsbury’s lost nearly £300m over the same period. Morrisons and Asda have fared less badly but both saw sales decline in their latest quarterly results. It does not take a marketing genius to work out why the big boys are losing money. The German retailers Aldi and Lidl are growing at a rapid rate with 12-week revenues up by 26% and 17% respectively, according to Kantar Worldpanel, and that growth is rocking the big four’s boats.

Mark Price, the managing director of upmarket supermarket chain Waitrose, believes the impact of German discounters on the high street is creating an “inflection point” of enormous importance for British consumers. “This is as fundamental as supermarkets coming into the UK in the 1950s and reinventing what food shopping was all about,” he recently told The Daily Telegraph.

We also don’t need any heavy analysis to work out how all of this came about. As the big four supermarkets started to run out of market share gains they used price increases to maintain their profit growth. That kept the stock market happy but over the last five years it also created a bubble in which the German discounters could grow and establish themselves as genuine alternatives. According to Goldman Sachs Rob Joyce, too much focus on profitability allowed the “discounters to get too strong”.

Now the twenty billion dollar question is what will the big four do about it?

We certainly know what they are currently trying to do which is to fight fire with (a smaller) fire. All the major supermarkets are engaged in massive discounting and sales promotions as they tussle with each other to maintain share against their traditional, suddenly desperate rivals and the growing threat from their new German competition. There is much talk in the industry of “war”, “battles” and “fatalities” and that’s more than the usual macho retail bullshit. Next year promises to be a bloodbath on the grocery aisles – the like of which modern marketers have never seen before.

What makes the imminent discount battles particularly interesting is that they won’t work. You can’t beat Aldi at low prices and to even attempt such a mission will result in billions lost and, ultimately, nothing won. “We believe that any major price investments by Morrisons, Sainsbury’s or Tesco can be exceeded by the discounters,” Goldman Sachs concluded in a new report published this week. It’s a classic strategic error – you try to beat your competitor on a core competence that you simply cannot match them on.

Aldi will tell you the same thing. Matthew Barnes, its joint UK managing director, recently admitted that the big four’s price war had benefited his business. “With all the clamour around reducing the gap on Aldi, the psyche of the British consumer has been to examine what value means,” he told Retail Week. “And that’s just played perfectly into our hands. The acceleration of our growth since the price war has begun is testament to the fact we are more than ever resonating with customers.”

So what can the big four do? The answer is to “grow small”. They will need to close a significant proportion of their stores in the next two years in order to survive. Closing stores enables them to get rid of their weakest and least profitable locations which will eventually improve margins. More importantly it will allow the big supermarket chains the chance to re-focus and rebuild their offer around a meaningful differentiation that somehow competes with Aldi and Lidl.

Shutting stores also has one other advantage – it enables the big four to catch up with the German rivals in terms of store design. The “inflection point” Mark Price speaks of is not one of low prices, it’s also caused by smaller stores. The average Tesco has 25,000 products on its shelves while the average Aldi has fewer than 1,500. British shoppers aren’t just putting up with less choice for better prices, they prefer it. The giant floor-plans and enormous ranges that made the big four so successful in the Noughties are now a potential causal factor in their downfall.

Expect 2015 to be vicious. Expect it to be price-based. Expect one of the big four to start to fail. And expect Aldi and Lidl to emerge triumphant.

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Comments
  • John Langford 19 Nov 2014 at 1:04 pm

    The big four have grown far too big in coverage and store size so I completely agree this has been part of the downfall. Customers get confused with too much choice and dislike having to walk from 1 end of a store to the other just to complete their shopping. We all know this was a marketing ploy to get you to buy more but has failed to achieve this aim

  • Annelies 19 Nov 2014 at 5:43 pm

    I really enjoyed reading this and it caused me to reflect on my change in perception of both Aldi and Lidl over the last year or so. It seems while the big four have been throwing bricks, Lidl and Aldi have been building a wall.

  • Adam Joseph 21 Nov 2014 at 10:32 am

    “Marketing
    has many definitions and many masters, but if the discipline is loosely about
    anticipating and satisfying customer needs profitably then the German
    supermarketers have done just that. But it’s not just about the
    price/value-for-money equation, it’s also about choice – value-for-time if you
    like. “Overchoice” was a term coined by futurologist Alvin
    Toffler in the 1970s.
    Overchoice has grown rampant in the grocery sector, as Private Label grows and
    grows and FMCG’s innovate and innovate to survive. As a result, supermarket
    aisles and SKUs have mutated. Master Ritson, as usual you have nailed it:
    “British shoppers aren’t just putting up with less choice for better
    prices, they prefer it”. Aldi and Lidl have solved Toffler’s
    Shocker.

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