For so long the big established supermarket chains have held an oligopoly over the food retailing sector. As years have passed, heavy discounting chains have eaten away at the share, grabbing their piece of the pie. Aldi and Lidl have reached a record combined market share of 8.6% of all shopping done at major supermarket chains. As a result, the “Big Four” – Tesco, Asda, Sainsbury’s and Morrisons – have seen their control diminish with the profitability in the UK supermarket sector reducing drastically.

This invasion into the market is not only here to stay; but expand further. The discounters plan to implement new strategies over the course of 2015 to establish a stronger foothold in the market. The sector has now been opened so wide that Netto, a Danish company, is returning to the UK after a four year absence, smelling the blood. Interestingly, the chain is being partnered by Sainsbury’s – if you can’t beat ‘em, join ‘em.

Paul Foley, the former managing director of Aldi, claims that “The golden age of food retail profits by big, successful businesses is over and discounters are the disrupters.” Analysts state that these discounters are likely to consume around 20% of the total market share – uh oh.

The impact can be measured by reference to how hard Morrisons has been hit; a reported 6.3% fall in sales in the three months to November and a fall in half year profits of just over 30%.

The big supermarkets need to make big moves. Asda is heading up a major campaign, aiming to create 35,000 new jobs in the UK and almost double its number of stores by 2022. It has conceded that the rise of discount supermarkets is unstoppable. Quick adaption is crucial in the face of a deterioration of their share.

There are several factors that have contributed to the situation, the most protruding being the change in customer behaviour. Hitherto, the focus was centred on convenience, with geographical location being an overbearing reason, closely followed by store branding. Following the recession, the appeal for the masses was, and remains for many, fixed on price alone.

Furthermore, grocery shopping has been revolutionised itself. The modern shopper has access to countless apps and website deals whereby prices are compared and the best deal highlighted. The competitive market is forcing chains to cut corners wherever possible as a means of attracting their customers. Discounting has always been a feature of food retailing, but as it becomes one of the sole focuses, these discounting chains which centre their business on the strategy are in prime position. Don’t hate the player, hate the game.

The supermarket price war has forced the grocery market into deflation. The latest figures from the Office for National Statistics state food prices have fallen by 1.7%. The value of UK grocery sales fell for the first time in two decades in November.

The established chains don’t see the matter as all doom and gloom. Not all discounting chains will survive in the market and one safety net, so to speak, is the ability of these chains to offer such high discounts centres on their narrow product range – acclaimed as being roughly 10% of the product range of a superstore. Customers seeking more choice will, for the foreseeable future, have to look elsewhere.

Mark Price, the managing director of Waitrose, has declared the importance of branding in this unpredictable time. Being clear to the customers about what the store stands for is essential. Try to branch too wide with an unclear message, and the customers could walk away to these discounting stores whose message could not be clearer.

If only the solution was as simple as plucking £250 million out of the sky to deal with all their problems. Fixed your accounts yet, Tesco?

 

By Dre Efthymiou