The four dominant supermarkets are no more. Discounter Aldi has surpassed Wm Morrison to become the UK’s fourth-largest grocery retailer as measured by Kantar’s rolling 12-week market share data.
The development spells the end of a long period when Tesco, J Sainsbury, Asda and Morrisons dominated the UK sector with a model generally based on wide choice and large out-of-town superstores.
Most of German-owned Aldi’s market share gains have come since the financial crisis. They are in no small part down to strategic miscalculations by the top four, which chose to prioritise profitability over preserving sales volumes at a time when household incomes were under acute pressure.
But the discounter business model did not arrive in the UK in 2008, or indeed in 1990, when the first Aldi store opened in Birmingham — featuring a few hundred product lines whose three-digit stock codes had to be memorised by checkout operators.
Aldi’s market share today is very similar to that of Kwik Save, a homegrown discounter, in 1993. Kwik Save traded from a similar number of stores and its business model — high sales volumes across limited product ranges, low prices, operational simplicity — had much in common with Aldi’s. Yet its market share crumbled with startling speed and it finally collapsed in 2007.
“The market environment became a lot more complex for them in the 1990s” said Leigh Sparks, professor of retail studies at Stirling university. “They struggled with the cost and availability of sites in the south of England and they were affected by the arrival of Aldi, Lidl and Netto [a Danish discounter] in the UK.”
There were also shifts in the wider retail landscape. Tesco, which had overtaken Sainsbury’s to become UK market leader earlier in the decade, introduced its Clubcard loyalty scheme and budget own-label ranges, which narrowed the price gap with discounters. Asda was rejuvenated under Archie Norman and Allan Leighton.
A resurgent Tesco and a recovering Asda are also features of today’s grocery market and, like Kwik Save, Aldi has occasionally struggled to find sites in southern England on acceptable financial terms.
But the similarities end there. Aldi has learned how to compete in the UK. “It didn’t really work here for 15 years. It had to change its model to succeed,” said Sparks, referring to its move into UK-sourced products and premium ranges that appealed to middle-class shoppers.
And while Kwik Save was the only significant discounter in the early 1990s, Aldi has a wingman. Compatriot Lidl has also expanded in the UK and in recent months has grown market share at an even faster pace. Taken together, Aldi and Lidl are now second only to Tesco in terms of market share.
The cost of living crisis has provided a boost to discounters as household budgets are squeezed. Average spend per transaction at Aldi, Lidl and Iceland increased by about 10 per cent in the year to September 14, according to figures from Fable Data, which tracks anonymised credit card transactions. By contrast, spending at the biggest grocers by sales has fallen by 3 per cent over the period. This has led to the transaction gap — the per basket spending difference between discounters and large supermarkets — hitting lows since April.
Aldi and Lidl are part of very large privately owned companies that operate in multiple countries and can take a long-term view on the costs of expansion. Kwik Save, by contrast, was a listed company and its share price reacted in predictable fashion to the rapid erosion of its market position.
In 1998 it agreed to merge with Somerfield, another small player, in a transaction widely regarded as an act of desperation on both sides. It is hard to imagine a similar fate befalling either Aldi or Lidl.