* Big British grocers pledge 2.4 bln stg of price cuts
* Morrisons sees "paradigm shift" in grocery market
* Discounters 8 pct share of market forecast to double
* Big four's profit margins set to fall
By James Davey
LONDON, April 8 Britain's major supermarkets are
cutting prices but will struggle to stop Aldi and Lidl eating
their profits as the German discounters look to double their
share of the 170-billion pound ($282 billion) grocery market in
the next three years.
Market leader Tesco, Wal-Mart owned Asda
and Morrisons have together pledged to make price cuts
worth 2.4 billion pounds though analysts question whether they
can compete on those terms with the discounters, whose no-frills
focus on value won affluent new shoppers in the recession and
look set to win more in the fragile recovery.
Sainsbury's, the other member of Britain's big
four, has proved to be more resilient to the discounters and has
sounded less alarmed by what Morrisons has called a "paradigm
shift" in grocery retailing. However, even it will not be immune
from broader industry price cuts should they transpire.
As a result, investors will need to get used to shrinking
profit margins, especially as food producers and suppliers seem
better able than before to defend their own charges and prevent
themselves ending up losers in a price war.
In February, Tesco effectively abandoned its target for an
operating margin in the British market of 5.2 percent, the
highest in the industry. "The margin will be what the margin
will be," it said.
With Tesco, Asda and Sainsbury's all operating price
matching schemes - guaranteeing not to charge more than rivals
for the same product - the scope for contagion is high.
Some analysts question, however, whether waging a price war
alone can hold off the rise of the German bargain grocers.
"It's rather like British Airways trying to compete with
Ryanair on price," said Ed Garner, director at market researcher
Kantar Worldpanel. He reckons a move to slash prices from the
big four could reduce profit margins and damage balance sheets
but not significantly increase sales.
Forecasting Aldi and Lidl could
double their market share, Garner said: "The low-cost element of
the low price is so engrained into Aldi and Lidl culture it's
quite difficult to emulate that with a different supply chain."
Asda started cutting prices last year, saying it would spend
1 billion pounds over five years, but is yet to see a turnaround
in its sales performance.
In February, Tesco said it would spend 200 million pounds on
lower prices for basic products and a similar amount on a fuel
savings scheme for holders of loyalty cards. Last month,
Morrisons said it would invest 1 billion pounds in holding down
prices over the next three years.
The big four are also working harder to extol what they have
and what the discounters do not, be it more brands, more choice,
general merchandise, online shopping, fuel, retail services such
as banking and insurance, smarter stores and more staff.
However, Bruno Monteyne, an analyst at Bernstein Research,
reckons both Tesco and Morrisons are still struggling to
differentiate their offerings, meaning they lose customers both
to the discounters and to upmarket grocers Waitrose and
Marks & Spencer.
Although Aldi and Lidl still have a fairly small combined
share of the British grocery market at 8.0 percent, according to
the latest Kantar data on Tuesday, they are seeing growth of
35.3 percent and 17.2 percent respectively, while their bigger
rivals struggle to eke out any growth at all.
Shore Capital analyst Clive Black said the big four were
dealing with a customer revolt: "People have basically said 'I
don't want your promotions, don't trust your price matching and
more to the point, I am going to try something else'."
Sally Young, a personal trainer, from Dorking near London,
is typical of those switching. "My cleaner told me Lidl was very
good," she said. Young tried it, liked the prices for staple
goods, such as bread, milk, butter, cheese, salad and fruit and
found the quality "generally good". She is now a regular.
Lidl, which opened in 1973 to challenge the older Aldi
brand, launched in Britain in 1994 and now trades from about 600
stores in the country. It plans up to 20 openings in 2014 and 20
to 40 a year after that. It is owned by Germany's third-richest
man, Dieter Schwarz, son of the founder.
Aldi opened its first British store in 1990 and now trades
from 514 stores there. Controlled by Germany's richest man, Karl
Albrecht, it has an ongoing plan to open 55 new shops a year.
Both chains have thrived by offering low prices in one of
Europe's richest countries, appealing to instincts for thrift.
They keep prices down by selling mostly own brand items, bought
in bulk and piled high, sometimes still on warehouse pallets.
Staff are few and there are no loyalty schemes.
Their international reach has given them considerably buying
power, helping them keep down costs.
Together they enjoy market shares of 33 percent in Germany,
24 percent in Austria and 18 percent in Ireland and Belgium -
much higher than the 12 percent discounters peaked at in Britain
in the 1990s when home-grown budget chains were significant.
"It's not since the late 1950s and the advent of the
supermarket have we seen this sort of change in the market,"
Morrisons Chief Executive Dalton Philips said last month, as he
issued a hefty profit warning.
"This is not cyclical; there's been a fundamental shift in
how consumers view discounters. If we don't address it we will
continue to lose more. You can see their growth in Europe."
Some, like Sainsbury's Chief Executive Justin King, believe
Philips exaggerates the threat because Morrisons is particularly
vulnerable to the discounters, given its late entry into
fast-growing convenience and online areas. But there is no doubt
they are now a major force in the British grocery trade.
More than half of Britain's shoppers now visit discounters
and are increasingly using them in the same way they would a
traditional supermarket to do a full shop rather than a top-up.
More and more middle-class customers are coming through
discounters' doors. Lidl for example says the proportion of its
customers from the more affluent "ABC1" and "AB" demographics
now stands at 51 percent and 24 percent respectively.
According to data from market researcher Nielsen, Aldi's
average basket size of almost 17 items is now more than
Sainsbury's and on a par with Morrisons, despite it carrying
significantly fewer product lines - about 1,350 versus
30,000-40,000 at the big four.
"People want to, rather than need to, shop at Aldi," the
Ruhr-based company said of its British operations.
While the discounters enjoy a price gap versus the big four
- for example Aldi typically sells 2.5 kg of potatoes for 1.89
pounds versus 2.00 pounds at Tesco and Asda - the gap between
the perception of discounter quality and that of the traditional
grocers is closing, according to research group Millward Brown.
That has been helped by the discounters broadening their
fresh produce ranges, sourcing more British produce and their
promotion of more high-quality products. Quirky television ads
have also helped.
Aldi's Easter product range includes whole quails, whole
stuffed pheasant and a four-bird roast, while Lidl's includes
Aegean sea bass fillets and three-fish roast.
Sainsbury's King, who will leave the grocer after 10 years
at the helm in July, appears the most relaxed of the traditional
market leaders to the discounters' threat, reflecting the firm's
outperformance of its three big rivals in recent years.
He insists he is not complacent but says discounters are
simply not a new phenomenon: "Overall it's part of the cut and
thrust of the market," he said. "It was ever thus."
($1 = 0.6028 British Pounds)
(Additional reporting by Neil Maidment and Emma Thomasson;
Editing by Alastair Macdonald)