Discount Grocers - Growing Now But Will it Last?

With Morrisons announcing a halving of their profits and a 7.4% like for like sales decline, and Waitrose facing profits down 9.4%, despite delivering a bit of growth (up 1.3% in like for like sales) it seems timely to examine reasons for the seemingly unstoppable rise of discount grocers.

New store openings are a big contributor to their growth. Aldi opened 42 stores in 2013, and will add a further 54 new stores this year.

Another key factor is their ever-widening appeal. Discount grocers can no longer be seen as a specialised shopping experience favoured by the financially hard pressed. Recent IGD (Institute of Grocery Distribution) data suggests that 26% of shoppers visiting discount grocers fall into the affluent AB category compared with 27% for traditional supermarkets. Conversely 26% of DE shoppers visit discounters compared with 25% visiting supermarkets. In August 2014, 54% of all shoppers in the UK claimed to have  visited a discount store in the past month, up from 45% in August 2013, and the average spend per visit has increased by 15%.

Despite the growth, discounters rely heavily on top up shopping. They have not captured a big share of the main grocery shop. Just 15% say that a discounter is their main store. If discounters want to continue growing they need to get more shoppers spending more per visit.

In theory they seem ready and willing to do so. A third of them agree strongly that they would use discounters more if they could get their main shop there.

But before they make an Aldi or Lidl a main shop, customers want to see more products. They want more fruit and veg , and they want to buy food for their evening meal. They want to be able to buy products for special occasions, and they want a range of staples.

So basically what they are asking for is supermarket variety at discounter prices. That is a challenge for discounters as they try to fit customer demand for more products into a business model which until now has relied on a small, high volume range manufactured at rock bottom prices. Discounters also need to address the march of technology. They are a long way behind mainstream grocers in producing smartphone and tablet friendly apps designed to make shopping quicker and easier.

It is probably safe to predict further years of fast growth. Aldi is committed to a near doubling of stores by 2021, up from the current 531 to 1000. The number of shoppers visiting a discounter will rise from the current 54%, and the emergence of Netto as a Sainsbury partner will mean even more opportunities for shoppers to visit a discount store.

Thereafter the going might get tougher as mainstream grocers start fighting back with competitive pricing strategies, intelligent use of variety and choice, and customer friendly technology.