The face of the UK grocery market is changing. Until 2013, the ‘Big 4′ supermarkets (Tesco, Asda, Sainsbury’s & Morrisons) held a combined share of 76.7% and appeared set to increase their grasp on British consumers’ wallets by expanding non-food offerings. Somewhat unexpectedly however, the tide seems to be turning and the ‘Big 4’ is today losing an estimated £3 billion annually. The beneficiaries? Discount stores.

Discount stores’ promise is simple; at a time when household budgets are constantly squeezed, why not pay less for the same quality food? It sounds too good to be true, but sales growth of 36% and 23% for Aldi and Lidl in 2014, respectively, suggests consumers are starting to believe it. And it’s easy to understand why shopping habits are changing; a recent study by The Grocer magazine found a basket of 33 items to be 16% cheaper at Aldi than Asda, 20% less than Tesco and a substantial 40% cheaper than Waitrose.

So how can Aldi & Lidl do it, when the supermarket giants’ mammoth economies of scale should put them in position to offer consumers the best price?

1. Minimising costs

Every product retailers stock creates a cost to display, store back-up inventory and additional labour. Whilst the average supermarket holds 30,000 SKUs (items) at any one time, the likes of Aldi & Lidl manage to hold a fraction of that (1,000) by focusing on staple items such as basic foods and cheap household goods. Furthermore, whilst supermarket offers numerous sizes and brands within each product category to provide choice, discount stores generally limit to a maximum of two options for any product, meaning they rely on a smaller number of suppliers who in turn cut costs by focusing on producing fewer products.

Other cost-cutting initiatives include; efficient store design by displaying certain items in the delivery crates in which they arrive to store, and refusing to offer home delivery. The growing popularity of grocery home delivery is a concern to the ‘Big 4’, as the average online shop costs supermarkets an extra £15-20 to fulfil extra activities traditionally undertaken by consumers, such as putting food into a basket and transporting home – yet only a minor proportion is recuperated through a ‘delivery charge’ to consumers.

2. Generic brands

Aldi in particular is very clear in its message of high-quality own-label brands at low prices through the highly successful “Like brands. Only cheaper” campaign. By selling predominantly generic brands, the retailer avoids paying a premium to well-known brand manufacturers and can pass these savings onto consumers. In addition, Aldi & Lidl replicate the packaging of market-leading brands to provide familiarity, which instils confidence without deceiving buyers that they are buying a well-known brand.

Even so, discount retailers still manage to stock some big-name brands without bearing the same cost as supermarkets. Just like fixed-price retailer Poundland, Aldi undertakes “special buy” programmes in which end-of-life branded goods are bought at cut-price as it’s an opportunity for vendors to shift excess stock quickly.

3. Transforming brand perceptions

To impose themselves on the supermarket industry, Aldi and Lidl have acknowledged the need to lure middle class shoppers into their stores. In turn, retail research company, Verdict, has calculated that 18.6% of Aldi’s regular customers now come from the AB socioeconomic group – a rise of 5.7% since 2012. This demonstrates how the recession has shifted UK shopping patterns, with more people willing to shop around for a bargain and a growing ‘reverse snobbery’ culture of wanting to pick high quality products up for a bargain price, instead of middle classes being ashamed to shop at budget supermarkets.

Importantly for discount stores, claims of high quality for less are now beginning to win critical acclaim. In 2013, Aldi’s own-label chocolates, yoghurts, bacon and biscuits gained more awards from The Grocer than any other supermarket and a £12.99 champagne from Aldi beat a £130 bottle of Veuve Clicquot in blind taste tests at the 2013 International Wine Challenge.

 

The UK grocery industry is entering a new era and the future is uncertain. The development of online grocery shopping could become a pivotal issue as continued growth and pressure on discount retailers to offer the service, in order to compete head-on with supermarkets, may negatively impact Aldi and Lidl’s business models. In truth however, it is arguable that discount stores will never replace supermarkets as the destination for a weekly shop, but instead continue to thrive on sales of ‘staple’ products as consumers shop around for offers.

Either way, what has become clear is the genuine impact that discount retailers are now having on the ‘Big 4’, with Tesco’s expansions plans for 60 supermarket projects on hold despite planning permission. Aldi & Lidl understand their customers’ willingness to compromise on choice if offered high quality and low prices in return; and the ‘Big 4’ must take note. For supermarkets, constant price wars can no longer raise them above the competition which means the emergence of other forms of differentiation is becoming ever-more crucial. Let’s wait and see their response.