Wednesday, 29 January 2014

Let Them Eat Aldi

All the retailers I deal with at the moment are concerned with these days is how to stop their market share being eaten away by the discounters. And who can blame them - in the 12 weeks to January 5th, Kantar Worldpanel's data showed Aldi and Lidl had gained 1.3%pts of share compared to the same period in 2013. Combined, they're now at 7.1% market share - bigger than Co-op and with considerably less stores.

I must confess that I've become a convert myself - Aldi in particular is a great store which suits my top-up shopping ways. Their fresh food is good quality and, as a self-confessed Germanophile, I revel in the choice of imported cold meats and schnitzels. For top-up shopping, the alternatives are fighting my way round a 50,000 sq ft (or larger) superstore or a cluttered and poorly ranged c-store (independent OR multiple owner), the latter usually coming along with a price hike too. I've also mentioned previously that I rate Aldi's no-nonsense approach to their own-label products - match the brand or stock the brand if you can't - and this further boosts their appeal.

But, once you get past the basics, they aren't perfect. A bit like TK Maxx, you have to go in with a mindset that you might not get exactly what you want, but you will get something and that it will be a bargain. For example, I do a lot of stir-fries at home and Aldi sell incredibly good value straight-to-wok noodles at around 65p - none of the big four comes close to this price, and not all even bother with private label versions. I can also get soy sauce (though not the light one I prefer), good meat and veg but, I always sprinkle Chinese 5 Spices liberally over my creations and Aldi's small, confusingly mixed-case offering of herbs and spices doesn't deliver anything more exotic than chilli powder.

Discounters are full of these examples, and this is one of the problems facing the big traditional supermarkets. Shoppers who have enjoyed unprecedented access to the best ranges of food in Western Europe in some of the best looking and certainly most organised supermarkets in the world over the last decade are "down-sizing". They are happy to go into a small, cheaply-fitted store with a very edited range and checkout service that prioritises speed over niceties. Actually, on the service part, I have NEVER had a problem at the tills in an Aldi - the staff are consistently friendly, efficient and responsive to changes in queues. I certainly have not heard them moaning to each other about the unfairness of where they work, or a manager on the shopflooring wailing about his hours being cut to his team. If they roll-out self-scan, I bet the voice in the machine won't be as smug either.

Aldi and Lidl's share gains are a mix of "savvy shoppers",who are using them for their core basic shopping needs and using indies and superstores for the "nicer" things, and the poorer in society who are coming to depend on them - largely due to a well-thought out location strategy. This will particularly hurt Asda and Morrisons whose core shoppers are a very close demographic and lifestyle match to those flocking to the discounters. Morrisons probably have more about them to stem the tide, particularly as M Local expands and they move online. Asda, however, have already shot the online bolt and are cranking their one lever - price - so hard it's going to come in their hand soon. I'm hearing about more "value" bays and a policy that sounds like "Less is more" coming back to Asda - policies that lost them middle-class customers in the past and just make their stores look like larger and more expensive versions of Aldi. 

Tesco aren't out of the firing line, but they're also battling the High Street discounters. As I've mentioned previously, the High Street lobbyists always conveniently forget the huge investment Tesco have made into High Street sites, mainly through their Metro format but also with some Express stores and also as superstore anchors in town centre developments. Here, Tesco are battling with the likes of Home Bargains, B&M, Poundland, Poundworld, 99p Stores and so on. These guys are hard and fast to compete with. They trade with the industry very hard with all their focus on margin with no handcuffs of keeping shoppers happy through range choice. At best, we have price-marked packs engineered to hit a £1 price point to a set margin, at worst we have short-coded stock and grey-market imports.

Ironically, Tesco and Asda have both run trials in the past that could help them now. In 2005, Tesco setup Metro stores in Sheffield and Edgware as "discount convenience" concepts. This saw a dramatic cut in SKU count and staff and sought to address new insights from deep cover research into very low affluence households. The challenge as always when targeting these shoppers is that the tend to focus on core grocery lines which, due to their high volume status, also tend to have wafer thin margins. The "choice" lines that help create a better margin mix for retailers become far less relevant so you have to look at reducing store operational costs - less products to fill, less staff. 

The following year, with more shouting to the media, Asda launched the first 2 of a 200-strong chain of Essentials stores. These own-label stores were an unmitigated disaster with the Northampton store closing less than 6 months after opening amidst rumoured weekly turnover of less than £7000. The concept was sound in theory, but poor choice of locations and an own label offering nowhere near the strength of "Chosen by You" meant the enterprise was doomed from the start.

So perhaps the answer is already out there for the mults, possibly in the form of a new fascia that sets out a stall of a simpler "edited choice" range and a bigger emphasis on own label products. It would be a bold move, however, and you have to question whether any of the current chief execs would take the risk. Asda have the sites most suitable for this with their former Netto stores and a successful implementation could mean they wouldn't need to hide that group of stores' underperformance behind legacy stores roped into the Supermarket banner. I'm sure Tesco could do well too - stores like Edmonton Green which haven't been refitted or rebadged for over 30 years would certainly benefit from a lick of paint to stop their terminal decline. And what about Morrisons? Well, maybe Preston is a step down that very path.

Whatever the answer, the UK grocery scene looks certain to continue in an entertaining way indefinitely. We are seeing the biggest shift in shopping behaviour since the advent of self-service. These interesting times will show us who the best are at adapting.

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