The rise of discount supermarkets – a report

1. Introduction

The purpose of this report is to critically analyse the following statement:
“Hard-up sections of the population have long realised that British supermarkets are expensive. They have been peeling off to the likes of Aldi for some time, reckoning, quite correctly, that they can pick up much the same goods at a significantly lower price. Now the affluent classes are joining the mêlée. Visit a hard-discounter these days and it is almost as common to see people loading up their Volvo as it is to see those carrying their brimming bags to the bus stop”.
(Joanna Blythman, 2006)
In order to do achieve this, the report has includes the following parts:

2. Overview of Consumer Trends

Keynote (2006)1 commissioned a survey in April 2006 among 1001 adults in order to ascertain what factors are most important to them when making the decision of where to purchase their groceries from. Table 1 details the answers that the respondents gave:
The most important factor when choosing where to shop was a wide range of choice which nearly 85% stated when asked. The second most important factor amongst those asked was low prices. This explains the rise in popularity of discount supermarkets even though such supermarkets often do not provide the customer with a wide range of choice. However, many consumers will invariably forfeit a wide range of item on offer if it means they are to make significant savings on their weekly shop.
Keynote (2003) highlighted a number of consumer trends in the UK supermarket industry. One of these was a renewed interested in customer loyalty cards, although this is in spite of reports that price and convenience are the most important factors to consumers. This is reassuring news for the hard-discounters since their no frills approach to grocery retailing usually overlooks loyalty cards in favour of more competitive prices. Besides, it can be argued that this is a more successful way of retaining customer loyalty than offering them points which they can eventually use to save money on purchases at a later date

3. Evidence of Consumers Increasing Interest in Discounting

Keynote (2006)² reports that the value of the discount grocery retailing sector has experienced growth since 2001 after having stalled in the late 1990s. Table 2 and Figure 1 show the rise in more detail.
An increase in the number of store openings plus adaptation of the business model of hard-discounters to boost their appeal to UK shoppers are reasons attributed to this growth.
Hogarth-Scott & Rice (1994) reported that the typical demographic that visits hard-discounting stores such as Aldi, Lidl and Netto are older and more ‘down-market’ customers with a larger proportion of single-person households shopping at such stores. However, a lot has changed since 1994 as has been suggested by Blythman (2006) at the top of the report. Blythman (2006) reports that discount chains are the fastest growing sector of the grocery market with a staggering 86 per cent sales increase and by 2010 it is predicted that they will hold 10 per cent of the UK’s food shopping spend.
Simpson & Carey (2007) detail that in a recent survey carried out by Which?, stores such as Lidl and Aldi score better in customer satisfaction than the likes of Tesco, Boots and WH Smiths. This is clear evidence that the no-frills, low price approach is becoming ever popular in the UK. Part of this trend can be attributed to the fact that consumers are realising that the brands stocked by the discounters are largely comparable in quality to the popular brands in major stores.

4. the response of Existing Retailers

The reaction of the major supermarkets to the discounters in the 1970s and 1980s was largely to ignore them (Hogarth-Scott & Rice, 1994). But due to the steady growth detailed in section 3, these companies have had little choice but to react in order to protect their market share. They have done this in a number of different ways. Anon (2007) reported that Tesco is to cut the price of 600 of its own-brand items by as much as 30%. This is a significant announcement since the price cuts are permanent. This seems to be a direct reaction by Tesco to the growth and expansions of the hard discounters in 2006 (Aldi in particular), and these price cuts should give Tesco more ammunition in which to compete with these
Kumar (2006) suggests that marketing theory provides existing retailers with three options to choose from with regard to combating the rise of hard discounting retailers: attack, coexist uneasily or become low cost players themselves. The success of attacking through the initiation of price wars is debatable since slashing prices usually lowers profits for all players in the market without driving the low cost entrants out of the business. If price wars prove unsuccessful, coexistence is another option. Here the main players try to differentiate their products from the competitors. This can take the form of positioning the products as higher quality or providing a shopping ‘experience’ for example. The final option open to existing businesses is to become low-cost players themselves. This transformation is unlikely however for the main players because it will mean acquiring capabilities that are different from the company’s existing competencies and will require a re-positioning of the brand in the mind of the consumers; one which has been built up over a number of years and would be hard to transform in a short period of time.

5. Examples of Current Practice

Keynote (2006)² reports that grocery discounters have started to position themselves as a more upmarket proposition because they have found that their basic no-frills approach has not attracted as many customers that they expected and that they enjoy in other parts of Europe. For example, both Aldi and Netto have started to offer repackaged private-label products and a wider range of fresh produce, in a bid to win business from the existing grocery market. A good example of this comes from Aldi’s most recent advertising campaign which uses the slogan ‘Spend a little, live a lot’ where the message to the consumer is no longer solely based on low price, but quality also. However, although discounters are attempting to reposition themselves, the distinction between them and the conventional retailers remains evident.
With regard to what the conventional supermarkets are currently doing, it seems that the big players are starting to reduce their prices on a more wholesale level as described but Anon (2007) which details the massive price cuts Tesco is making across its range. De Charnatony & McDonald (1998) describe how supermarkets reacted by relaunching low-price products such as Tesco’s ‘Blue & White’ and Sainsbury’s ‘Economy’ ranges, but since consumer’s perception of the quality of hard discounters’ products is improving, it seems the conventional supermarkets are realising that price cuts need to be across a wider range of lines rather than just one range of basics.

6. Conclusion

There is certainly plenty of evidence which supports Blythman’s (2006) statement at the top of the report that the hard-discounters are starting to have a wider appeal in the UK today. When the main discount supermarkets such as Aldi, Lidl and Netto first arrived in the UK in the early 1990s, their drab interiors and lack of re-assuring brand name products meant that they were hardly welcomed with open arms. The customer base of such supermarkets to begin with was mainly made up of single person households, those on low income and the elderly. All groups which would probably consider low prices to be top of their priority list when choosing which supermarket to do their weekly grocery shop at.
Hard discounters have been established in the UK for near-on 20 years now, and are starting to gain more of a grip on the sector (although are never likely to enjoy a market share as large as in other European countries such as Germany). Recent years have started to see a change in the positioning of their brands. Low price was once the sole selling point of such companies, but recent advertising campaigns, particularly from Aldi, are starting to put more emphasis on the quality of the items they offer. They have done so in order to attract more affluent consumers who may not have considered shopping at such stores since they might have assumed that low price equaled low quality.
Existing retailers finally seem to be considering the hard discounters as a very real threat after having ignored them in the initial stages. News of massive price cuts by supermarket giants such as Tesco are testament to the strides that low price retailers such as Aldi, Lidl and Netto are making in the sector. Suddenly consumers are realising that although the discounters don’t offer many well known brand names or as many product lines as ‘the big four’, quality is largely comparable to anything they have to offer. As soon as this message gets through to consumers (which it is starting to now­), the discounters will start to take customers away from the main players in what is a largely saturated market. Low prices will always be high on consumers’ agendas when deciding where to shop and the more the discounters can reassure consumers of the quality of their products, the more of a threat they will become to conventional supermarkets.