Rise of the discount supermarkets: Are the Big 4 architects of their own decline?
It’s not the best time to be an executive at any of the big four supermarkets. In July, another set of bad results saw Tesco’s CEO Philip Clarke step down. Sainsbury’s saw its second consecutive quarter of falling sales and the news for Morrisons and Asda is not much better (although Asda at least reported a small growth in sales). The gloom of the big four is in direct contrast to the fortunes of the discount supermarkets Aldi and Lidl, who have continued to see impressive growth.
More importantly, the discount supermarkets show no signs of slowing down despite improving economic conditions. It would appear that loyalty to supermarkets is dead? Is this a real threat? Can and will they adapt to head it off?
Is it a long-term threat?
The £175 billion question is how big the discounter supermakets can get. The size of the UK market makes it attractive to new entrants. Yet these aren’t small, plucky firms, as their PR would have us believe. Aldi and Lidl are among the biggest global retailers.
As well as showing their vast scale, the Grocer’s infographic on Aldi and Lidl might also give some succor to the execs at the big four. In their home country the pair account for 25% of the market. Whilst this will in part reflect differences in the German market, it might also show the limits of a model based on achieving lower operating costs via smaller ranges and smaller stores, which ultimately means less customer choice.
Who’s to blame for the decline of the supermarkets?
The supermarkets blame changing customer behaviour on the recession, citing a climate in which savings are all that counts. Yet this oversimplifies the situation. It also gives the supermarkets a convenient narrative and a ‘get out of jail’ card: the economic climate drove changes in customer buying.
What if there’s an alternative narrative? In this view, the hard discounters are merely an evolution in a consumer mindset largely created by the big four. How?
For years the supermarkets have been aggressively pushing offers. Much of their advertising, in particular from Morrisons, Tesco and Asda, has been focused on price: who is cheaper, how many items cost less at A rather than at B or C.
This has created a perception that the brands are defined solely in terms of price. If this is the case then its hardly surprising that Aldi and Lidl been so successful. If you emphasise price as the key USP then consumers adopting an even cheaper source of groceries is no surprise. It’s inevitable.
The end of brand equity?
What’s more worrying for the big four is their value as ‘brands’. The focus on pricing alone has destroyed the equity of their own brands, crushing the notion that there is a value or premium in them. Of course, this is exactly what their pricing and promotional strategies have done to so many brands: turned them into commodities solely purchased on price.
A related question has to be asked of the advertising and media agencies. Whilst Aldi’s campaigns have been genuinely clever and helped boost the Aldi’s profile, what of the creative and strategic advice to the big four? The trends are hardly a ringing endorsement of Adland’s ability to show ROI. If I were a supermarket non-exec or shareholder, I’d question the impact of advertising strategies on long-term shareholder value.
Discount supermarkets are here to stay…
The rise of the discount supermarkets isn’t really a surprise. The big four have created the bargain-hunting behemoth and seem powerless to stop its relentless march into the shopping baskets of Aldi, Lidl and others. The big four’s hope that rising household incomes will see consumers revert to old habits is woefully optimistic.
The discount supermarkets are here, and here to stay. How big they get will depend on the ability of the big four to innovate and look beyond price. It will equally depend whether consumers’ love affair with low price is a passing trend.
