Price Still the Most Important Consideration for at Least 35% of Shoppers

From IGD comes research which groups shoppers by attitudes and behaviour rather than the more traditional demographic analysis of AB, C1 etc..

IGD have found 6 categories of shopper:

Brand purists (26%)
These shoppers are more brand loyal than the average shopper, and will plan their shopping in the knowledge that they will be able to find the brands they like.

Habitual loyalists (13%)
Like to plan their shopping, buy familiar products and stick with one or two stores rather than shop around. They tend to be older, with an average age of 59.

Savings seekers (18%)
This is the group that puts price ahead of all other considerations.

 Discounter enthusiasts (17%)
Like savings seekers this group is also concerned with how much they spend on food and groceries but are not willing to compromise on quality 

Technology adopters (16%)
These shoppers have the highest interest in using technology for food and grocery shopping and do more online shopping than the average to save their precious time. They tend to be younger, London based, and shop frequently.

Foodie adventurists (10%)
Are the most likely to cook from scratch, try new recipes, and to buy new products on impulse.

It is dangerous to be overly definitive when assessing how to make snapshot data like this actionable, and shoppers will fall into more than one box, but some points jump out.

First, it is perilous to underplay the importance of price.  At least 35% of shoppers (savings seekers and discounter enthusiasts) are very price conscious, and it would not be rash to suggest that a good proportion of those in the other boxes are price conscious too. Indeed it is striking that the IGD has not found a category that subordinates price in favour of some other attribute.

Aldi certainly feels that price remains critical. It announced yesterday that it intended to be "cheapest for ever" in Britain, and cut its prices on meat fruit and vegetables. Meanwhile Sainsbury announced that it was pulling away from multi-buy promotions in favour of everyday low prices.

Secondly, people remain very traditional in their food buying habits. Only 10% can be described as adventuresome compared with the 39% of brand purists and habitual loyalists who do not stray too far from the familiar.

Thirdly, the percentage of technology adopters is surprisingly small given all the hype we read about consumers supposedly turning in droves to shopping on smartphones and tablets. The number may explain why online grocery shopping  is not reaching the average 15% per annum growth rate some had predicted. Ocado, the dedicated online grocer, clocked up 13% growth in the most recent quarter, and Sainsbury just under 10%. Tesco stated that their growth over Christmas was around 5%. Tellingly, Dave Lewis, Tesco chief executive officer, said that the company was being “much more thoughtful about the economics of online versus the offer elsewhere in the estate.” , which suggests that Tesco does not intend to push for high online growth rates at the expense of profit.

Aldi and Lidl – How Big Can They Get?

This is a question being addressed with some trepidation in the boardrooms of traditional supermarkets, their anxiety heightened by the news that  Aldi and Lidl combined have now reached a 10% share of the Uk grocery market.  What is particularly scary is that it took 9 years for Aldi and Lidl to get from 2.5% share to 5%, but only three to double again to the current 10%.

 At the moment they seem unstoppable.

For starters they are building more stores at a time when all other supermarkets are contracting. Aldi and Lidl between them have plans to open 171 new outlets, compared with 29 for the Big 4, and Lidl has stated that it wants to more than double its number of stores, from 629 now to 1500. Aldi is aiming for 1000.

And , a factor that is not often commented on is that both companies are privately owned and so, unlike the Big 4, (Tesco, Sainsbury, Asda and Morrisons) are not constrained by shareholder demands for ever higher profits. The discounters can invest as much as they want, be it in ever lower prices, or store refurbishments, or colossal marketing campaigns, without wondering how the City will react.

Their aggressive marketing seems to be working. According to research company Kantar Worldpanel, Aldi and Lidl have added 1 million more shoppers in the last year, and they have gone more up market, with the result that 31% of their shoppers are now in the wealthier AB social group.

They have taken the upcoming Christmas season very seriously with blanket advertising campaigns, and glossy brochures given away free in Saturday and Sunday papers. A flip through the Aldi brochure reminds readers that they can buy Canadian lobster, British free range goose,  British RSPCA assured Bronze free range turkey, British leg of lamb, and British Caramel and Bourbon ham joint.

Lidl reminds us that it won “Grocer of the Year”, then points out its Marine Stewardship Council certified lobster, RSPCA assured pork, British Bronze turkeys, organic and free range eggs.

How clever to acknowledge major consumer trends in this way – British, welfare friendly, and a bit special.

Both companies pride themselves on their wine and spirits expertise, and compete well with the big 4. Aldi in particular has recognised a competitive opportunity by setting up an online wines and spirits arm, which, some suggest will compete with thatt offered by Waitrose.

So far so rosy. What might stop the march of the discounters?

Four factors could hinder growth

First, Aldi and Lidl might lose sight of what made them great in the first place, namely rock bottom prices . This is what happened to Morrisons who, in an effort to broaden appeal to more affluent shoppers, took their eye off their core customers who could no longer find the good value to which they were accustomed, and were turned off by gimmicks such as misted vegetables and overly fancy foods. There are already signs that this could be happening to Lidl who are refurbishing stores and changing their range of goods to more closely resemble premium outlets. 

Secondly, the big 4 might take decisive action on becoming price competitive, as opposed to tinkering around the edges, which is the case at the moment. Asda for example say that they have reduced the price gap between themselves and the discounters to 10%, and are aiming for a 5% gap. They say that 4 years ago the gap was 20%. Of course this assumes that the discounters would not reduce prices still further, leading to a zero sum game.

Thirdly, discounters might lose out because they do not offer online shopping, apart from the Aldi alcohol venture. Online growth is predicted to continue, as retailers make their websites easier to use, particularly on smartphones and tablets, and more convenient with initiatives like click and collect.

Fourthly, many shoppers feel that they cannot  get everything they want from the limited range offered by discounters which means having to shop twice. There may be some who find this too inconvenient to bother with the discounters.  

Where might it end? Growth rates are slowing from the heady levels of a year ago, but still run at around 16%. The general consensus among industry watchers is that Aldi and Lidl will achieve a market share of around 15%, similar to that in Ireland, due mostly to store openings. Whether they get much beyond that is debatable.  In Germany, discounters have a 37% share, but the trade structure is different to the UK with fewer traditional supermarkets, but Source: BPEX).

even here there are signs that growth is levelling off.  In France, which has a grocery trade structure similar to the UK, the discounters got to around 14% market share, but traditional supermarkets fought back and share in 2014 fell to around 12%. (

One thing is not in doubt though – the discount grocers are now a significant part of the British grocery scene, and will continue to be so as long as they stick to what they are best at – low, low prices.

Grocery Growth Forecasts - Severe Implications for Supermarket Suppliers

The Institute of Grocery Distribution has just published forecasts of growth in the grocery market to 2020. In a nutshell they endorse trends already highlighted for online and discounters, saying that sales will continue to power ahead in these sectors. They signal that growth rates in convenience stores will decelerate, and that big stores, whilst remaining the place where most of us will do most of our grocery shopping, will show a sales decline.

One could challenge the exact numbers, for example the near doubling of online and discounter sales seems optimistic, but the shape of the growth makes sense, and whilst pages of commentary have been written about the effect of the forecasts on the grocers themselves, few write about the impact on suppliers – which could be huge.

Here’s why.

The key issues are the nature of the shopping environment in the growth sectors, and the steps mainstream supermarkets will  take to maintain profits as sales through bigger stores start to fall.

Consumers shop online for reasons of speed and convenience. Sitting in front of a small computer screen, or worse still, fiddling with tiny buttons on an even smaller smartphone or tablet, they just want to call up a previous order, tick what they need, possibly look at what’s on “special” and check out. Few can be bothered with browsing through hundreds pages of products on the off chance that they see something that takes their fancy. So, if a product is not on a favourites list, or being sold at a discount then it will not be bought.

Discounters too offer a different shopping environment. Typically they offer a very narrow range and stock few national brands. So the chances of getting listed by an Aldi or Lidl are small, which means that many suppliers will miss out on the discounters’ growth potential.

Convenience stores, who may be growing more slowly over the next years, but will still be a big sector, can only stock a limited range because of their size.

On the other side, mainstream grocers, grappling with falling sales in their big stores, are on a mission to streamline, which means stocking fewer brands and fewer pack sizes.

The outcome of all these factors means that the winners in the next 5 years will be:

-           big global companies who can buy their way into wherever they want to go. Examples are Coca Cola, Unilever, Nestle 

-          middle ranking companies who own leading brands with a loyal following. Examples would be Warburtons, McVities , Mueller

-          suppliers of retailers’ own brands who can operate at lowest costs

-           niche specialist players who appeal to supermarket operators because they offer something genuinely different, and who only require a listing in a small number of big stores to be viable.

Companies who may need a strategic rethink are those with brands which are rarely top of mind, non essential,  poorly advertised and promoted, and often bought on impulse because they caught the eye in store. Examples of this middle group might be Dairy Crest, Premier Foods, and smaller confectionery and soft drinks companies.

The impact on suppliers does not stop there. These middle ranking businesses also have suppliers and they too will be squeezed. Either their products will not be required, or they will have to offer sharp prices to maintain the business. We saw signs of this with Premier Foods “pay to stay” demands. Premier swiftly saw the injustice of this. Other businesses might not.

Discounters, Convenience, Online - Growth but Momentum Slowing

The general consensus among supermarket watchers is that to grow sales you have to be represented in  the three growth areas of discounters, convenience stores and online.

Today’s results announcement from Sainsbury, Tesco results a couple of weeks ago, and the most recent Kantar Worldpanel figures on grocery market performance all provide helpful detail about how the three areas are performing.

It remains true that these three areas are still showing fast growth, but the rate of increase is slowing markedly.

Discounters

Aldi and Lidl are coming down from the highs experienced in early 2014, when Aldi was clocking up increases of 30% plus, and Lidl was growing in the late teens. Latest data from Kantar indicates that Aldi growth has slowed to +15% and Lidl to +10%. These growth rates do though remain streets ahead of rival supermarkets who all, with the exception of Waitrose, are in negative  territory.

Convenience

Sainsbury has shone here with a 16% sales increase in the last twelve months. They opened 98 stores last year and remain committed to opening around the same number in 2015. Their growth suggests that by stocking the right quality and range, particularly food that can be translated into quickly prepared meals, shoppers will prefer to buy locally rather than trek to a supermarket.

Tesco has fared less well, with their Metro stores showing flat sales for the first 6 months of last year, but climbing back to growth of 4% in the final quarter. These rates are well ahead of their performance in larger stores, and may accelerate if Tesco turns their whole trading performance around.

Online

The battle for online shoppers is fierce. Most stores have dropped their minimum order size, Sainsbury, Tesco and Asda to just £25 and Ocado to £40. Delivery costs have been slashed through offers like delivery passés. First orders receive an attractive discount.

Despite these lures, growth rates are slowing. Numbers of orders are growing, but are not being matched by revenue growth. Sainsbury reported a 13% rise in orders but only 7% in revenue, Ocado in the first quarter grew orders by 18% but revenue by 15%. Tesco did not report orders but revenue grew by 11% in 2014. These growth rates are some way off levels seen in previous years. They suggest that talk of online sales doubling by 2019 are optimistic, and that the already very slim profit margins from online sales are being further eroded. After all, it must cost as much to process and deliver a £25 order as it does one of considerably higher value.

Growth but what about profits?

Whilst representation in discounters, convenience and online may provide the elusive growth so many retailers and suppliers seek, all three present severe challenges. Online is a huge drain on profitability for retailers, and difficult for suppliers of all but the most recognisable of brand names. How, suppliers will be asking themselves, do they remind online shoppers to buy their goods, unless they pay for visibility on the computer screen via money off promotions.

Convenience also poses profit challenges for retailers because of the high distribution costs involved, and suppliers face the issue of limited ranges being available in such small stores. Suppliers are also strapped when it comes to getting listings in discounters because they stock such a limited range.

Growth is achievable by supporting discounters, convenience and online. The challenge is to operate profitably whilst achieving the growth.

Are Grocery Shopping Habits Changing as Much as the Hype Leads Us to Believe?

Waitrose and Sainsbury have recently reported trading results. Waitrose’s were shocking on the profits front, down 24%. Sainsbury is struggling with declining sales, down 1.9% on a like for like basis for the 10 weeks to 14^th March.

These two businesses are not alone in facing challenges. The average growth in sales through supermarkets changed from an annual average of 4.7% in the years 2008-13, to a growth of just 1.3% in 2014.

Conventional wisdom notes that deflation is playing a part, but attributes most of the slow growth to seismic changes in the way shoppers shop, citing the switch to discounters, the demise of the big weekly supermarket shop in favour of smaller buys from convenience stores, and  online shopping,

Few would deny that discount stores are taking sales from traditional supermarkets. Certainly price deflation is playing a part as commodity prices drop and mainstream stores try and compete with discounters. As for the rest, Kantar World panel, the research company, offers a different view, based on their panel of 30,000 households.

Kantar are saying that the number of supermarket trips per shopper each year has not changed – 221 trips in 2010, and the same in 2014.

Neither has the number of items per basket changed – it is 10.5 items per trip, the same as it was in 2010.

Nor are consumers shopping around more. The average household visits 5 different supermarkets every 12 weeks, just as they did 4 years ago.

The rise of convenience/ top up shopping seems somewhat exaggerated too. In 2010 40.5% of spend went on the main shop, it is now 38.8%. And sales through convenience stores grew by only 0.2% in 2014 compared with 2013. What is happening in the convenience sector is that the big supermarkets have expanded their reach into smaller shops, taking trade from the independent sector. The result is a virtually static market/

As to online shopping, this has contributed to growth rather than slowing it down.

So what is going on?

Understanding  grocery sector performance requires separation of slow market growth from structural changes. The main reasons for the big growth rates between 2008 and 2013 were rampant food price inflation and greedy supermarkets. Both are now being corrected as commodity prices fall and supermarkets scramble to be seen as cheaper, having realised that their rapid price hikes have left them exposed to damaging competition from the likes of Aldi and Lidl.

Structural changes impact profit in two ways. Internet shopping is considerably less profitable than store shopping. The former requires costly ordering systems, personnel to pick and pack the goods, and van drivers and vans to deliver to the customer.  In the latter the customer  bears all of that cost. The rise in internet shopping means fewer sales through  bricks and mortar stores, leaving them underutilised but as expensive to run as they ever were, a problem compounded by the rise of Aldi and Lidl resulting in even fewer customers walking through  traditional supermarket doors.

The one thing industry watchers do agree on is that prices will not rise any time soon, neither will grocery profitability 

Tesco Growing, Discounters Slowing, But No Sign of a Return to Traditional Shopper Behaviour

Its a funny old world when grocery market watchers are full of smiles when Tesco manages to grow by 0.3% in the 12 weeks to 1^st February 2015, but signal gloom because discounters Aldi and Lidl “only” grew by 21% and 14% over the same period. (Kantar Worldpanel)

It depends where the start point is of course and a move into positive growth for Tesco after months of dropping sales probably does seem like a turning point. Equally, when a company has been growing by over 30% year on year as is the case with Aldi, then a slow down to 21% may seem like a turning point too.

What is clear though is that there is no sign of a rush back to traditional mainstream shopping patterns. Sainsbury's sales are declining by 1% and Asda by 1.7%, and the evidence suggests that the march of the discount grocers is likely to continue, albeit at slightly lower growth rates.

Take for example Aldi’s stated plans. They have committed to opening 70 more stores in 2015, and one of these will be its biggest ever, at 19,0000 sq feet compared with an average of 16,000 sq ft just now. More stores mean more shoppers, and bigger stores with their capacity to offer a wider range may mean a bigger spend per shopper.

There is no doubt that increasing numbers of us go to discounters. The IGD says that 55% of shoppers visited a discounter in December 2014 versus 36% in December 2010. This could be due to well publicised offers on alcohol, but there are also signs that increasing numbers are using discounters to do their main shop – 15% in December 2014 versus 3% in December 2010. And shoppers seem to like what they find when they get there - 52% of those visiting a discount shop spend over half their food and grocery shopping budget there.

Whilst it is the retailers who tend to get the headlines, the changing shape of the grocery market continues to cause headaches for suppliers. There are the well documented demands for reduced prices and extended payment terms from the big 4 mainstream grocers, and in a total grocery market which is growing by just over 1% the demands are rarely compensated for by growth. The problems then deepen, as the discount sector which is showing growth, tends not to stock brands, and buys most of its product lines from abroad.

Thriftiness Now a Way of Life for Today's Food Shopper

Anyone who thought that shoppers would give up buying habits acquired during the recession may want to read the Waitrose Food and DrinkReport for 2014. Even those who visit this most upmarket of food retailers keep a close watch on what they spend. As Mark Price, Waitrose CEO says “Britain has become alot thriftier ...and that trend is here to stay”.

Budget consciousness, and its sister waste reduction are now ingrained across all ages and incomes. It means fewer trips to the supermarket, more buying only what is needed for that night’s evening meal, a constant eye on price, and more spending in discount stores like Aldi and Lidl.

Which  is not to say that consumers shun premium products buying only the cheapest, rather that in making a buying decision they want to be sure that they are not over paying, that the price charged is a fair reflection of quality, and that they could not buy similar products somewhere else more cheaply.

So we see that Sainsbury’s Taste the Difference premium range growing sales by 4% in the last 6 months when total sales were down 0.3% , and discounters cottoning on to the interest in premium products, offering expensive wines, lobster, free range Bronze turkeys, and luxury versions of standard favourites like puddings and mince pies. Waitrose’s own growth illustrates shopper willingness to buy the exotic, even if only occasionally, and the company says that 2015 will see further “premiumisation” with more luxury versions of standard foods like “uber special cupcakes”, new fancy doughnuts and ready to drink cocktails.

Amidst all the hype it is worth remembering that the vast majority of food spend goes on the basics - “sustenance and survival” in Waitrose’s words, and it is day to day expenditure that will receive greatest shopper scrutiny. The “Big 4” supermarkets have not fully recognised this, but are slowly seeing that budget consciousness is now a way of life for shoppers, and is here to stay. Asda has stated their commitment to closing the price gap with the discounters, and in a letter which will spoil Christmas for many, Tesco’s new CEO has indicated to his suppliers that as they are benefitting from falling commodity prices they may have to reduce their prices in January, as the company tries to compete against the discounters.

It is difficult to see anything but continued pressure on suppliers and ultimately primary producers, especially where products are heavily commodity reliant and have limited added value.

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.

Not Only Consumers Love Aldi and Lidl - Suppliers Do Too

You might think that discounter retail prices are so low that suppliers’ profits from serving them are thin to the point of non existent.

Not so. Yes it is true that Aldi and Lidl negotiate hard, and a recent article in the Financial Times suggests that margins are of the order of 5-10% lower than for traditional supermarkets. But the discount model means that there are many upsides.

The keys are the limited range of products on offer and selling at the same price every day. Aldi and Lidl stock around 3,000 lines compared with a standard supermarket range of 40,000-50,000. This means that suppliers can manufacture long runs of product instead of incurring cost by stopping the line to change to another variant. Everyday low pricing means that volumes are consistent and easier to forecast, as opposed to volatile and unpredictable, which is the case when goods are sold on promotion. Because there are few promotions there are few demands for add ons like promotional support. And listing fees seem to be a rarity.

Aldi and Lidl tend to be loyal to their suppliers and the narrow range and everyday price mean that suppliers need fewer people to manage the account, and waste little time in meetings.

Discounters operate efficiently and this philosophy benefits suppliers. No costly chopping and changing in manufacturing, no cash draining peaks and troughs in volumes, no wild and expensive ideas about promotions, no rug pulling at the last minute when an activity seems to have been agreed, and minimum numbers of meetings – it all adds up to a financially beneficial relationship.

Add to that the enormous growth potential that discounters offer, and it becomes clear why suppliers find that dealing with the likes of Aldi and Lidl a satisfactory experience.

  

Why Shoppers Like Aldi's Pricing Strategy

There is no stopping Aldi – or fellow discounter Lidl.  Sales in Aldi grew by 36% in the last twelve weeks, and those in Lidl by 20%. And this in a market which grew by just 1.9%, the lowest level for 11 years (Kantar Worldpanel).

We know that shoppers like the discounters’ low prices, but they also like the way they price.

To get value in the “big 4” supermarkets shoppers have to buy what’s on promotion. Often the products on offer are not the ones that they want, or the offer is not in a form that they want. Multi buys like buy 3 get one free, or get the second half price are particularly disliked by shoppers. Fine if the product in question is not perishable and likely to end up in the bin, or if it is something that is regularly bought, but too often that is not the case.

Kantar tells us that 45% of all sales made by the major supermarkets come from promotional offers, up from around 40%. Compare that with Aldi where just 3% of sales are on promotion.

So there is the draw for Aldi customers. Having worked out which products they like they can shop with confidence knowing that the price will be the same day in and day out. Contrast that with other grocers where prices can be hiked for a while just to be able to drop them later, and shoppers are never sure what might be available on promotion on a particular day.

Morrisons, Asda, and Tesco have cottoned on to this, and permanently (they claim) lowered prices.

While price is the main reason to go to discounters, the IGD has done some research on what other aspects shoppers find attractive. Some are surprised by the quality, some like the speed and ease of shopping, and the reduced range, others enjoy finding continental brands that are not available elsewhere. As the IGD says, discounters are moving mainstream. 51% of people have shopped in one in the last month, compared with 41% two years ago and 12% are saying that their main store is a discounter, up from 5%. Hence the worry among traditional grocers and the change in pricing strategy.

The Increasingly Complex Consumer

It is becoming harder to work out what is going through the consumers mind as they do their food shopping.

On the one hand we could conclude that all roads lead to lower prices.

The growth of  discounters ALDI and Lidl with sales up 30% and 13% respectively versus prior year, has forced the big 4 retailers to re-evaluate their strategies. Morrisons who are the worst hit of all have led the way, declaring that they will drop prices by £1 billion over the next three years to help them compete. Where Morrisons led, others were swift to follow particularly Tesco and ASDA, the former also struggling to grow sales, and the latter keen to preserve their position of always being 10% cheaper. Indeed, like lemmings hurling themselves over the cliff, the race to the bottom has started with all the major retailers dropping the price of milk, bread and eggs.

 

It is not just the Aldi Lidl phenomenon that is leading to change. The last few years have seen the rise of the disciplined shopper who sticks rigorously to a pre-planned list. 48% did so in 2008, the figure is 67% in 2013.(Bord Bia) As a result, the amount that the shopper spends per trip has dropped. Retailers have responded with  heavy, value orientated promotions, but have not found the magic growth formula. Indeed, in the last 12 weeks, grocery growth was 2.2%, just 0.3% ahead of inflation.(Kantar worldpanel)

As to the future, work done by IGD suggests that consumer confidence is increasing, but feeling better is not encouraging people to slacken the purse strings. When asked about their priorities for 2014, 64% said it was about saving money, 47% wanted to reduce food waste to save money, and 47% were determined to stick to a budget.

So maybe the lemming rush to slash prices is indeed the right answer.

And yet.....

We hear that premium food ranges are growing faster than value ranges. Tesco’s Finest range is growing by 12%, and Sainsbury’s Taste the Difference by 9%. (Worldpanel/NFU conference)

Waitrose, not known for being cheap, is showing year on year growth and now has 5% of the total market, its highest ever share.

Sales of organic produce have returned to growth, up 2.8%.(Soil Association). Organic milk is enjoying a mini boom, up 9% in value and 7% in litres. (Dairycodatum).

RSPCA Freedom Food higher welfare products have been bought by 52% of shoppers.

So what are we to conclude?

First, the price issue cannot be ducked. Not only are consumers committed to finding low prices, they have, in their phones, tablets and computes an easy way of checking that they are indeed buying a particular item at the lowest price. However, with all the grocers selling products at the same price, it is becoming less of a reason to choose one store over another.

However, people are prepared to spend on what they value – that hard to define combination of what benefits a product offers and a feeling in the consumers mind that these benefits are worth paying for.

Knowing what the consumer wants and providing it effectively remains at the heart of a successful business strategy.

A Look at Lidl - The "Other" Discount Store

Despite running more stores than fellow discounter Aldi, (nearly 600 versus Aldi’s 400)  Lidl remain smaller in market share, and have not managed to achieve Aldi rates of growth. In the last quarter Aldi’s market share was 3.6% and its sales grew 30% year on year. Lidl’s share was 3%, and it grew by 9%.

Why might there be this disparity in performance? I visited the Lidl store in Penicuik in the Scottish borders to find clues.

Both Aldi and Lidl sell products at prices far lower than available in mainstream supermarkets.( The dark chocolate pictured sells at 79p versus the branded equvalent at £1.85p).   Lidl follows many of the practices embraced by Aldi, designed to make the cost of operating the stores very low, and passing the benefits of the low cost base on to shoppers. Both sell a small range of products under brand names that few have heard of, many of which are imported. The small range means smaller stores which are cheaper to run. Products are displayed in their outer cases as opposed to being unpacked and placed on the shelf, saving staff costs. Costs are also saved by having fewer checkouts, and employing super fast till checkout operators. Both stores encourage those with alot of shopping to pack away from the till, again speeding up the process.

Lidl differs from Aldi in that it offers more big name brands and it is difficult to judge whether this deviation from the standard discount model results in increased sales by attracting shoppers who like to buy known brands or whether the added cost means that prices are possibly not quite as low as Aldi.

Lidl’s fresh food offer seems more attractive than Aldi’s. Many breads are baked on the premises, and attractively displayed in wicker baskets. Most of the meat on offer was produced in Scotland, well displayed in stand alone  chiller cabinets, and accompanied by an explanation of Lidl’s animal welfare standards. Some ham was imported but British product was available. Certainly the Scottish produced pork chops purchased at the Penicuik store were excellent.

The fruit and vegetables looked fresh enough, but do not display a sell by date (another cost saving action employed by both discounters as once a sell by date is reached product has to be sold at a heavy discount.) It was therefore disappointing that my Jersey Royal potatoes, albeit  costing 18p per kilo less that Sainsburys, had turned green by the day after purchase.

Overall though, the combination of availability of major brands and generally good quality fresh food made the  shopping experience in Lidl Penicuik  more like that in a major supermarket than does Aldi  and the company embraces more consumer trends like attention to animal welfare and supporting local produce.

So why would Lidl be growing more slowly than Aldi?

One answer could be that Aldi are opening more stores than Lidl.

It could be that prices are not as sharp, or product quality in general not as good. Aldi seems to do particularly well when it comes to food awards.

My guess is that Lidl’s marketing is not as good as Aldi’s.  Aldi generates more publicity in the papers than Lidl - it is always Aldi that journalists write about when doing a feature on discount stores.  And Aldi has promoted and advertised its products more heavily.

This could be why Lidl have embarked on two advertising campaigns, one talking about the quality of its fresh food, the other highlighting packaged products that consumers rate as highly as major brands, but which cost considerably less.

If Lidl wants to grow faster it needs to make sure its activities are squeaky clean.

Lidl, like Aldi, was caught up in the horsemeat scandal. There has been a recent allegation that Lidl only pays UK tax of around £12,000 on a business with a £3 billion turnover. Lidl of course claims that it complies completely with UK tax laws. Whilst unlikely to have impacted on sales growth to date, such an allegation will do little to enhance the company’s reputation. 

Which is unfortunate as it seems to have much to offer its customers, particularly in difficult economic times.

Renewed Growth of Discount Grocers Prompts Return Visit to Aldi

Discount grocers sales are booming again, with growth levels not seen since the recession of 2008. Aldi is up 21% in the last three months and Lidl not far behind at plus 16%. Their combined market share has reached an all time high of 6.1%. Kantar Worldpanel who monitor this data, say that unlike 2008, the growth is coming mostly from existing customers buying more, rather than new shoppers.
So I went back to Aldi after an absence of three years to look again at what it is that generates such customer loyalty.

Well, the main attraction remains rock bottom prices. At Aldi you can buy a kilo of British beef mince for £2.40 ( at least £4 everywhere else unless very high fat content), a kilo of Jersey Royals for 49p (Tesco’s best price for new potatoes is 69p), and nectarines for less than 18p each compared with 25p at Tesco.

Packaged goods prices are low too, certainly in comparison to the leading brands, with coffee at £1.69p for 100g compared with Nescafe at £2.40p, and jaffa cakes at just over 3p each versus McVities at 8p. Interestingly their jaffa cakes contained 11% orange juice compared with 8% for McVities.

Aldi seems to have improved the feel of shopping in its stores. There are nods to food trends with free range chicken and eggs on sale, and they stock alot of British food. The store was clean and bright and the staff cheerful and helpful.

Aldi’s pursuit of low prices has downsides. Fresh food has to be carefully selected – the strawberries were mouldy today and there was no date code on the potatoes. It stocks few brands you will have heard of, and the range remains limited to essentials.  Quality is not always great. The jaffa cakes were entirely acceptable, but the coffee tasteless.

There are irritations too. It is annoying to have to find a £1 coin to unlock the trolley, but the system ensures no one has to be paid to fetch trolleys back to the store. There are no baskets for doing a small shop, because that would require additional investment. There is no bag packing at the till because that would slow the cashier down. Instead the system requires the shopper to unload the trolley at one end of the belt, fling everything back into the trolley at the other end, and move to a different area to pack.

But having said all that, regular shoppers will have adapted to the system. They will know which products deliver the quality they want and which do not. We know that many people are budgeting more tightly than before, and thinking carefully about how much they spend and where.

Aldi seems to be offering what its loyal shoppers want.

Discount Supermarket Growth Slows - Is It All Over for ALDI et al?

Discount supermarkets like Aldi and Lidl are making headlines again, but this time for sales slowing rather than growing.

Editor of The Grocer, Adam Neyland wrote a piece a couple of weeks ago entitled “Is the discount boom over?” This was followed a few days later by figures from market research company TNS Worldpanel, which showed that in the 12 weeks to June 14th Sainsbury and Morrison grew faster than Aldi and Lidl, with Asda growing at about the same rate. Actual figures were +6.5% for the total grocery market, Morrisons +9.3%, Sainsbury +8.9%, Aldi +8.7%, Lidl +7.5%, and Asda 8.2%. It’s a marked change. In the previous months the discounters were growing at anything up to 3 times the rate of their main stream competitors.

Why the change?

As Neyland points out some slowdown in growth was inevitable as competitors fought back with price promotions, million £ advertising budgets, and a focus on the quality and value of their fresh food. Which is a lesson to all of us to never underestimate the competition, particularly in UK grocery.

I think there is more to it.

It is interesting to reflect on what caused the discounter boom in the first place. Of course some of it was due to consumers on a strict budget searching for value as food prices rocketed. Much responsibility though must be laid at the door of the media. Not a day went by without headlines about the middle classes turning to Aldi, that it was now more chic to be seen with an Aldi bag than a Waitrose one, and that discount car parks were full of Range Rovers and Mercedes. No wonder many read the hype, worried about missing out, and nipped along to see what all the fuss was about. The monetary value of all that media coverage must have run into millions.

The big question is, of those who made the visit, how many tried, were disappointed and never came back versus how many changed their shopping habits and returned every week. Market research company Him! (yes, new to me too, but they are a genuine outfit despite the odd name), does regular research with discount shoppers. They say that shoppers are less satisfied with discounters this year than they were in 2008. Also that recent shoppers, and more upmarket shoppers expected more from the stores and were disappointed by what they found when they got there.

There is a lesson here too, which is that a business cannot be built on people buying just the once, rather, long term growth will come from having a solid base of loyal fans who buy again and again.

So what of the future?

Discounters have many devoted customers, but it is not a way of shopping that appeals to all. If it were, the market share for all three discounters would be far higher than its current 5.9%, which compares with a share of 11.6% for Morrisons, 16.1% for Sainsbury, 16.8% for Asda, and 30.8% for Tesco.

Adam Neyland rightly concluded that discounters will not go away. Largely privately owned so without shareholder pressure for fast returns, they have cash and big ambitions. Aldi is committed to opening a store a week until they have 1500 in total. It also recently won best supermarket award from Which?, the consumer organisation. Lidl is supporting consumer trends with the addition of Fairtrade products, and a commitment to sourcing British beef, chicken and pork.

Whether they will make a major breakthrough is questionable. Already some research by Him! shows the numbers shopping at discounters dropping from 15% to 13% of the population, which compares with 79% visiting a mainstream supermarket. And if you look at shares held by all discounters, it has not moved much from the days when Kwiksave was operating. Indeed Edward Garner of TNS has consistently argued that the growth seen in discounters is merely a mopping up of market share held by the now defunct Kwiksave.

The future for discounters is likely to be one where the total sector will hold its market share, and within that there will be winners and losers with Aldi consolidating its position as the main player.

A Shopping Trip to ALDI

To ALDI, and a look at what all the excitement is about. Latest figures from research company Taylor Nelson Sofres say that discount stores in general and ALDI in particular are growing sales at a great rate as cash strapped shoppers flock to take advantage of their low prices.

German owned ALDI is the biggest of the discounters with a market share of 2.9%, which compares with 31% for Tesco, 17% for ASDA, 16% for Sainsbury, and 11% for Morrisons. Whilst relatively small their sales have grown by 19.5% in the 12 weeks to July 13th, compared with a total grocery market growth of 7.3%. ALDI says its success is due to always selling at very low prices, something they are able to do, according to their UK head of buying Tony Baines, because "we have a low cost base, and take lower profit margins" (than the major multiples).

So what is it like shopping there?

Immediately you can see why their cost base is low. Trolleys are chained, and have to be purchased, with money refunded when they are returned. So no extra staff are required to collect them up. The aisles are narrow, all the better to pack more in to a limited space, saving on building and maintainance costs Products are left in their outer boxes on shelves, not taken out of the box and displayed individually, so again fewer staff are needed. There are far fewer checkouts, so far fewer staff are required to man them. Yet you don't queue for long. They whip you through very fast. First, because you are not allowed to hold things up by packing at the checkout, instead, you unload your products on to the belt, they are scanned, and you put them straight back into the trolley. Second because the belts are about twice as long as conventional belts, so there's no waiting to unload the trolley. And finally, although I have no evidence for this, the staff could be paid on the speed of scanning the goods, which went through the checkout like lightening.

What about the products?

ALDI stocks just 11 well known brands. The rest of their goods have got brand names, but ones few will have heard of. So ALDI is not paying typical national brand prices for their packaged products. Most of the fresh produce is sold under a little known name, the meat and chicken for example is called "Ashfield" . In just a few instances, ALDI puts its own name on fresh produce, something they want to do more of apparently to create a better quality image.

The range of goods on offer is very limited, which means less cash tied up in stock. But the basics are there.

What about price and quality?

Prices varied. 500kg of British beef mince was £2.29p compared with £2.25p at Tesco and £2.20p at ASDA. But sirloin steak, also British, was £14.68p per kilo compared with £15.47p at the big chains, strawberries were £1.69p compared with £1.99p, and new potatoes, on special offer, were 69p per kilo compared with £1.38p.

Taste wise, the strawberries, mince, steak, and tomatoes were as good as any other supermarket's, the potatoes better than a recent Sainsbury purchase.

Will ALDI become the new face of grocery shopping? It certainly offers good value on some products, which, for those on a very strict budget, could be most welcome. However, the limited range, lack of brands to which many are very loyal, and the feeling that, whether grappling with the chained trolleys to being hustled through the checkout, it is an even bleaker shopping experience than at other supermarkets, makes me think that many will shop there once but not go back. Added to this the big supermarkets have started major price wars which will make them more competitive with ALDI and its fellow discounters, at least some of the time. Discount shopping won't go away, but its probably not going to dramatically change the UK shopping world.