Halting the discounters' march

By C.R. and M.S.

OVER the past year, Aldi and Lidl, two discount supermarkets from Germany, have continued their march around Europe. From Britain and Ireland to Italy and Spain, they have continued to gobble up market share from incumbent supermarket chains. In Britain, they have given the big four local chains—Asda, Morrisons, Tesco and Sainsbury's—a particularly rough time. All four have now reported falling like-for-like sales over the Christmas period. Tesco is in such as mess that its debt was downgraded to junk earlier this month by Moody’s, a ratings agency. And on January 13th, the chief executive of Morrisons, Dalton Philips, was fired for failing to turn the business around after five years at the helm. In stark contrast, sales this year at Aldi and Lidl grew by 22.6% and 15.1% respectively, according to new figures released by Kantar, a market-research firm. Half of all British households now use an Aldi or Lidl supermarket, a new record.

But supermarkets in France are starting to show that it is possible to halt the march of the low-priced interlopers. Last week, Casino announced that customer numbers and sales volumes were rising once again across all of its French store formats. And on January 16th, Carrefour, France's largest retailer and owner of the Carrefour hypermarket and Champion supermarket brands, announced that its like-for-like sales in France rose by 1.2% over the course of 2014—and, with the exception of its Italian operations, sales at its stores in all other European countries rose too.

Although these figures taken on their own look like nothing to write home about, they are particularly impressive when the economic backdrop is taken into account. Food prices are falling in France—by 0.6% in 2014, according to France's statistical bureau. As a result, the overall grocery market is now shrinking. People are not buying a lot more in response to lower prices, in part due to sluggish wage growth and also the dent in household budgets caused by higher taxes since 2012.

But unlike their counterparts in many other European countries, French grocers have managed to cut the market share of discount stores— from 15% five years ago to around 12% today. They have achieved this using three main strategies. First, French grocers were quick to cut prices, unlike British supermarkets which spent longer dithering. They also increased production of own-brand goods and simplified their product ranges and promotions. As a result, own-brand products are often significantly cheaper at mainstream stores than at the discounters, and branded goods only slightly dearer. The chains have also been building up their own discount brands (Casino’s Leader Price, for example, or Intermarché’s Netto) to combat the threat from Aldi and Lidl.

Second, France's big chains have been trying to outflank the discounters by expanding their networks of convenience stores. Shoppers increasingly prefer supermarkets and corner stores, or buying online, to trekking to an out-of-town hypermarket, as the latest figures from both Carrefour and Casino confirm. So grocers are opening more smaller stores in cities; Carrefour’s plan to buy Spanish chain Dia, with its 800 inner-city outlets, was approved by the French competition authorities in November, for example. Click-and-collect services, which permit customers to buy online and collect their orders in person, have undercut another advantage that discounters often tout: speed of transaction. Casino is one that has actively developed an online shopping business; Cnova, its online subsidiary, was floated on the stockmarket in 2014.

Third, the French chains are moving to support price cuts, while protecting margins, by ganging up on their suppliers. In September, Système U and Auchan agreed to co-operate on purchasing. The following month, Casino and Intermarché did the same. Carrefour teamed up with smaller Cora-Supermarchés Match (owned by the Louis Delhaize group) in December. Only Leclerc, of the big players, has no partner as yet.

Yet even French supermarkets are suffering from the same problem felt by grocers all over Europe: falling margins. Carrefour's fightback against the likes of Aldi and Lidl has already squeezed its margins from a peak of 6% to around just 3% today. And Casino has had to revise down its profits several times over the past year. Many analysts say the impact of the discounters, along with trends such as the shift towards more convenience and online shopping, will reduce the profit margins made by Europe's supermarket sector by at least half over the next few years. Executives hope that falling petrol prices will encourage consumer spending in other areas and boost their sales and margins. But the big question remains whether those customers lured away by Aldi and Lidl will return as easily as they left.