Today Tesco posted a 6% fall in profits, with like for like sales down 1.4%. This is the second year running that they have declined. They are not the only major UK supermarket to be struggling. According to the BBC “Recent industry figures showed the UK’s “big four” supermarkets – Tesco, Morrisons, Asda and Sainsbury’s – all lost market share in the first 11 weeks of this year to rival discount stores, as well as upmarket rivals Waitrose and Marks & Spencer.”
Ever keen to look for an external cause the finger has been pointed at the continental upstarts that have dared to open in the UK in recent years. Disparagingly referred to as “discounter’s”, these retailers, most notably Aldi, Lidl and Netto offer a no frills experience that undercuts our established incumbents.
In an edition of Question Time (the BBC’s political panel show) this subject came up and the left wing representative used the opportunity to make the point that the current economic problems had created an underclass so deprived that they have no choice but to turn to these discounters.
I don’t doubt that many people have found money a little tight and this may have tempted them to try the discounters but the success of these challengers is not entirely due to poverty.
When on holiday in Europe we often take a villa and do some self catering. If we find an Aldi we consider ourselves lucky. The range is good, prices keen and quality excellent. Yet I hadn’t tried an Aldi in the UK. I related shopping at Aldi here with ‘being poor’ and no one wants to be poor, or seen to be poor. Indeed the view that you have to be part of a deprived underclass to shop at the discounters was prevalent. However my daughter’s dance lessons cause us to drive past an Aldi almost every day. And I don’t mind admitting that saving a few pounds is also important. Hesitantly at first, apologetically even, my wife went in and bought a few things. No one in the family complained, there were even compliments about some of the produce. She returned and tried more. Now I often shop there, in fact I popped in last night.
Increasingly I find that once I admit to shopping at Aldi others ‘fess up too. We cheerfully compare prices and smugly feel better about ourselves. The economy may have helped but there seems to be a growing number of people who can feel comfortable without the security of the ‘big 4’ supermarkets and the brands they sell. Admittedly Aldi is a brand itself, appealing to value conscious consumers who don’t care about or can’t afford to care about labels. Mine isn’t the only Mercedes in the car park either.
The problem facing the ‘Big 4’ is not just that discounters are cheaper than them, there is no longer any stigma attached to using them. Furthermore the ‘Big 4’ got big by appealing to a broad range of shoppers. In the internet world of endless choice that translates as blandness. If you want a bargain go to a discounter and if you want the best go to Waitrose. Tesco and others sit uncomfortably in the middle with no real identity. The CEO of Tesco, Philip Clarke, stumbled over this point when challenged by John Humphrey’s on this morning’s Today show:
‘Fill in this blank,’ said Humphrys. ‘I go to Waitrose for quality, I go to Aldi for value. I go to Tesco for… ?’ At which point Clarke made some comment about Parma Ham. Having said that no one could beat discounters on price he then outlined a ‘strategy’ which was to cut some prices and carry out some store makeovers.
We’ve read a lot about the way the big Supermarkets use their purchasing power to beat suppliers into offering unsustainable prices and pay low wages on zero hours contracts. Surely this means that no one could beat their prices? Well it isn’t hard to understand. The discounters are all about value, amongst other things they don’t take credit cards (which charge a commission), the tills are designed to be very fast (to reduce the number of staff) and the displays are simply adequate as is the service. But the real difference is that in Europe work on a much smaller margin than is normal in the UK. That’s right, they make less profit. In % terms less than half than that of the UK based behemoths. In the UK they can make more profit and still undercut the competition.
Ever wondered why so many European utility companies rushed to buy up our national assets in the form of energy and water companies? Again they are used to making much smaller margins on the continent than is normal here. They didn’t have to cut prices as no one rocked the boat and led on price. A nice cosy, profitable few years followed. Hopefully we’ll start to see a real challenger brand in this space too.
The big question is what happens when the economy improves? Will we all revert back to our comfortable known supermarkets and brands? I think that as a family we’ll continue shopping in Aldi and so will many others because the produce is good. Not for everything, but for a lot. The reality is that once you break free of the tyranny of big supermarkets you won’t want to go back, you can even start to look at other labels you can drop once you become comfortable with your own unbranded identity.