Aldi and Lidl Growth Potential - Three Key Numbers

Institute of Grocery Distribution research about how shoppers plan to buy their Christmas food reveals three telling figures about the potential for Aldi and Lidl.

Of those shoppers intending to visit a discounter -

-          62% will do so to save money

-          40% will go because of the quality of the food

-          17% will go because of fancy foods like lobster tails

The numbers confirm what we already know, namely that low prices are the overriding reason for discount shopping. But what may be surprising is that low prices are so much more important than quality.

Equally telling is the finding that, even at Christmas, only 17% will visit a discounter for speciality foods. The lobster tails and fine wines may be attracting the media hype, but at heart they are a publicity gathering fringe activity, unlikely to be generating big volumes. It is the low prices that matter to most discount shoppers, and the presence or absence of more exotic foods will not matter a jot to them.

The current gap between price and quality puts a ceiling on discounters’ growth potential, but finding the right solutions will not be easy.

The key is to understand what consumers mean when they talk about quality, but not all consumers will view quality in the same way.

Many regular Aldi and Lidl shoppers are delighted with the quality of the foods they buy there, not because they are prepared to compromise, rather they have tried the various products, and know the ones that they like. These precious core customers must not be alienated.

It is likely that the gap between price and quality is greatest among less frequent shoppers. But quality takes many forms. It could be lack of choice that makes shoppers down rate product quality. It could be simply that the discounter version does not taste as good as a branded equivalent. On fresh foods it could be lack of consistency -some days the products are top notch in terms of freshness, appearance, texture and flavour, but some days they are not.   Aldi and Lidl seem to have taken the view that the answer is to add a premium range akin to Tesco’s Finest or Asda’s Extra Special, and throw in the exotic range of food and wines. They will need to do more to bring the number of shoppers buying because of quality closer to the number buying on price, and they must not lose their price position in the process.

Meanwhile, their competitors have their own tightrope to walk, and theirs is the degree to which they can reduce prices, yet keep their shareholders on side. 

Recent performance statistics issued by Kantar Worldpanel indicate that quality issues are not yet hampering the discounters who continue to forge ahead, helped by a number of new stores, and the continued lack of radical pricing action from any of the traditional supermarkets There have been murmurings that the tide may be turning in favour of the mainstream supermarkets, but if so, it is turning very slowly.

Consumers Unwilling to Splash Out on Groceries– Even at Christmas

Perhaps the most surprising feature of Xmas trading results from the major supermarkets is that even at this traditional “throw caution to the winds and spend” time of year, shoppers were not prepared to loosen their purse strings when it came to food and groceries.

We do not know yet what total supermarket sales were like over Xmas, but given Tesco’s 0.3% decline in like for like sales, Sainsbury’s 1.7% drop,  a not unexpected plummet of 3.1% from Morrisons, and a disappointingly flat performance from Marks and Spencer who are supposed to be immune from penny pinching habits, the picture is unlikely to be rosy. Waitrose fared a little better, recording a 2.8% increase, and discounters Aldi and Lidl are both claiming their “best ever” Xmas, but as the combined market share of these three companies is just over 13% their better numbers will not compensate.

Hence the racheting up of price cutting announcements from the “Big 4”.  In a time of low inflation with shoppers just not prepared to spend on food, the only way for grocers to grow is by stealing market share. Tesco is to drop the price of 350 core lines, and claims that over Xmas some of its vegetables were cheaper than Aldi.  Asda is to spend £300m on cutting prices in the first three months of this year, and Sainsbury £150m.

Where will it end? Many in the industry are saying that prices generally will need to be rebased  regardless of the impact on profit margins. Morrisons chief executive, the second CEO, after Philip Clarke of Tesco to lose his job due to poor performance,  has declared that the only way forward is to “neutralise on price”, and then find ways to differentiate from the competition.

The big grocers will be able to manage their way through price wars more or less unscathed through a combination of slashing costs and offloading real estate. They can cherry pick which products to price reduce, and the scale and duration of any cuts. They can, and will, raise prices on many goods to offset reductions on others.

The unknown and little discussed issue is the knock on effect to others in the supply chain, many of whom are small businesses, already operating on wafer thin margins.  The drop in commodity prices will help. And there may be a boost to demand. Consumption of beef and lamb for example has dropped due to high retail prices. If, on the other hand, goods are already being produced at below cost, as in the case of some dairy farmers, then a boost to consumption does not help at all.

What is clear is that a low price, low growth , low profit world is here to stay for those connected with the grocery supply chain.