Taking on the discounters

The Germans have started a revolution in the UK grocery market and caught the old supermarket guard unawares. The facts speak for themselves: Aldi and Lidl’s combined share of the market has risen to 9.9% from 6.3% (Nielsen) just two years ago, while Tesco’s market share has continued to decline from a high of 31% in 2011 (Kantar Retail). Aldi and Lidl’s sales continue to soar while the big four’s either dip or stagnate - Aldi announced a 65.2% rise in pre-tax profit for 2013 and 35.7% growth in turnover, while Lidl’s sales soared by 20% in the year to June 2014. Both have significant expansion plans. In short, they’re here to stay.

It is no secret that they are winning customers over with low prices, but that is not the only reason. “We keep prices constantly low while keeping quality consistently high, which is exactly what shoppers want,” says Aldi UK’s group managing director Roman Heini. His counterpart at Lidl, Ronny Gottschli, adds that the recession “shone a spotlight on us”, with its low-pricing strategy attracting new customers. “However, once these customers have taken their first step into our stores and experienced the combination of quality, freshness and value that we offer, they quickly become regular Lidl shoppers. We firmly believe that, as the UK economy recovers, people will continue to shop at Lidl - why would they go back to paying more for the same thing elsewhere?”

Bryan Roberts, director of insight at Kantar Retail, says it is a “common myth” that the German discounters are winning on price alone. “They also fare well because they are quick to shop and very easy to understand,” he adds. Furthermore, they have raised their game in terms of “marketing, decor, customer service, produce, meat, fish, bakery and convenience foods”. Not to mention their own-brand ranges which have won over shoppers “for whom some major brands are non-negotiable”.

I don’t see them as a threat at all. We need to change our mindset and ask who we are

Arjan Mehr, Londis Bracknell

So where does this leave independent c-store retailers? Should they mimic the German discounters’ strategy, or sharpen their own point of differences? The answer, it seems, is a bit of both - although there is certainly debate over the finer detail.

Sanjeev Vadhera, director of North East Convenience Stores, has recently seen an Aldi store open opposite the group’s flagship Nisa store in Howdon, Newcastle. But he is upbeat about the situation. “You can turn it to your advantage,” he says. “We try to feed off their customers and be better neighbours - shoppers are cherry-picking after all.” Sanjeev says the store can compete on price by “demonstrating real value” and refreshing offers on a regular three-week basis to maintain shopper interest. “It’s all about value perception,” he says. In order to maintain margins, he recommends turning to ‘grey market’ deals at wholesalers.

Raaj Chandarana of Tara’s News (Premier), High Wycombe, urges retailers not to be margin greedy and learn from the discounters where to make the profit. “Too many c-store operators want 20% margin, but that’s not realistic anymore. We are learning from our local Lidl, which goes for low margins on fresh, chilled and bakery, but high margins on ambient products such as rice and canned food,” he says.

However, Arjan Mehr of Londis Bracknell, Berkshire, takes a different approach to competing with Aldi and Lidl on price. ”I don’t see them as a threat at all. We need to change our mindset and ask who we are,” he says. “We’re not a discounter or a multiple, so we mustn’t give margins away. We shouldn’t be lowering our standards and going down the Poundland route. I’m not in a posh part of town, so if I can do it, anyone can.”

Instead, retailers need to focus on raising their standards and making their own mark. “We need to look at food to go, eat now and top-up. You look at James Brundle’s Eat 17 store in Hackney - the customers are ordinary people who like the idea of good quality, and the idea they can grab a burger. The ambience is there, too,” Arjan says. “It’s vital to have the right environment and professionalism and branding. For example, there’s very little difference in the burgers of McDonald’s and the local café, but McDonald’s have all those things.”

Roberts of Kantar Retail agrees that retailers should develop a clear vision. “The key learnings from the [German] discounters are two-fold: clarity of vision, and trying to meet the needs of the shopper rather than desperately focusing on the bottom line. Look after the shopper first and the financial benefits will follow,” he advises.

Arjan has also introduced a 3m ambient Polish range to create a point of difference - which is also a lesson learnt from the German discounters. “The reality is that it’s continental, which is exactly what Aldi and Lidl do. We need to talk about continental,” he says.

All retailers contacted by C-Store agree that Aldi and Lidl have broadened shoppers’ outlook on food, in particular own brand. Arjan says his own brand sales have benefited from their influence, while Raaj says sales of Booker’s own brand have spiked for similar reasons. “We see people accepting Euroshopper much more because of Lidl’s own label. We mention to customers how popular Lidl products are, so urge them to try ours, too,” he says. “We’ve started double-facing own label.”

Sanjeev agrees that Aldi and Lidl have changed the perceptions of own brand, and that Nisa is now playing catch-up. “We have under-indexed on own brand, but it’s an opportunity for us and now Nisa is going on that journey with Heritage,” he says. Saki Ghafoor, who runs two Nisa stores in Northumberland and Tyne & Wear, adds that the success of the two discounters’ own labels proves that shoppers are no longer brand loyal. “If Aldi and Lidl are selling foreign products it shows people aren’t worried about brand.” However, he also believes that stocking big brands can be a point of difference “as Aldi and Lidl don’t focus on them”.

Retailers have also learnt to be more ruthless with their ranges. Sid Ali, who owns four Nisa stores in Aberdeenshire, says: “Aldi and Lidl have shown that range doesn’t have to be as big as you think. You don’t need a full range, you need a functional shop - people are coming in for the offer.”

Arjan agrees about reducing range, but for different reasons. “We need to stop following planograms. Go to an absolute minimum with range; don’t worry about offending one customer who complains about a missing product. Stock in the direction of fresh and food to go, and improve presentation.”

Saki recommends honing in on alcohol, which he believes the discounters are weak on. “But you still have to have the right price point,” he adds.

Sanjeev also reminds retailers to focus on services such as Collect+ and PayPoint - another point of difference - as well as continuing to engage with their communities. Raaj agrees: “Focus on community and world-class service.”

Ultimately, retailers agree that Aldi and Lidl have shaken up the market and encouraged them to reflect on their offer, adopt a clear strategy, and stick with it. Or as Sanjeev sums up: “Focus on what you’re good at.”