Tesco and Sainsbury's have only just realised that Aldi and Lidl are unstoppable

Graham Ruddick
Telegraph UK
The “big four” supermarkets focused on defending themselves from each other and took their eye off Aldi and Lidl
According to Warren Buffett, it takes 20 years to build a reputation. If that is the case, then Tesco – the company in which Buffett is one of the biggest investors – has a major problem.
The German discounters Aldi and Lidl arrived in the UK in 1990 and 1994 respectively. But after two decades of highs and lows, they have finally built a proposition that resonates with UK consumers, and they are reshaping how we shop.
YouGov revealed this week that the British public has a new favourite brand. Aldi has overtaken John Lewis, the BBC iPlayer and Samsung to top the charts.
The BrandIndex measures the positive and negative sentiments generated across media and word of mouth. YouGov’s Brand Index also saw Lidl enter into the top 10 for the first time, at number four. The other grocery retailers in the top 10 were Waitrose, at five, at Sainsbury’s, at 10.
Given that Aldi presently represents less than 5pc of spending on groceries in the UK, this is a remarkable achievement.
It shows the intrigue surrounding the brand, and highlights the potential for Aldi to grow sales.
Tesco, Asda, Sainsbury’s and Morrisons have allowed the interest in Aldi and Lidl to develop as families have looked for ways to battle declining household incomes. Now there might not be anything they can do to stop even more shoppers exploring the discounters
There has been publicity this week about Lidl attempting to attract more affluent customers by introducing fine wines into London stores.
But those who shop regularly at Lidl know it already caters for a broad range of customers thanks to its award-wining champagne and, at Christmas, serrano ham and lobster.
This has been at the heart of Aldi and Lidl’s rapid growth since 2010 – they have broadened their product range and destroyed perceptions that their food is low quality by investing in distinctive marketing and new products.
At Aldi, for example, Matthew Barnes and Roman Heini, who became managing directors in 2010, have expanded the number of products the company sells from 800 to almost 1,500 and introduced the premium “Specially selected” range.
This move was the result of wide-ranging review into customer perceptions when they took over, which found that shoppers wanted Aldi to become “more British”. Its fresh meat, milk and eggs are all now sourced from Britain.
The phrase “discount retailer” does not accurately reflect Aldi and Lidl. Indeed, many City analysts are already referring to the businesses as “limited assortment discounters”.
This is because the secret to their business model is based on the fact they sell fewer products than a typical Tesco. While Aldi sells 1,500, a Tesco supermarket can sell 40,000.
This limited range is connecting with shoppers. Ronny Gottschlich, the UK boss of Lidl, has put it succinctly. “If you [and another customer] don’t know each other, would you like to pay for his choice of a different type of water? If you go to another retailer that has got 20 different types of water, someone has got to pay for that space, someone has got to pay for that rent.”
The realisation that Aldi and Lidl offer limited choice – not limited quality – has sent shoppers flocking through the doors.
For Gottschlich, this has attracted the so-called “Maidstone Mum”, a mother from the A or B socioeconomic group who previously would have been embarrassed to be seen in a Lidl store.
Worryingly for the traditional supermarkets, visitors to Aldi and Lidl like what they see. Anecdotally, for example, Telegraph readers say they appreciate the consistent pricing, the simple store layouts and the quality of fresh food.
Some of the stripped-backed characteristics of the store, such as the lack of a loyalty card or customers packing their own bags away from the till in order to speed up the paying process, are not proving a barrier.
Aldi and Lidl sales are growing because of spending by these new customers, but also because existing customers are spending more. Aldi’s most recent results showed its average basket size has grown close to £19, just behind Sainsbury’s and Morrisons.
The parent companies of Aldi and Lidl, Aldi Sud and Schwarz Group, are two of the biggest retailers on the continent.
This means that they can use their scale and geographical reach to source goods across the continent.
This buying power, combined with the limited range of the stores, makes Aldi and Lidl powerful rivals to the “big four”.
They are private companies operating a different business model to the listed Tesco, Sainsbury’s and Morrison. Aldi and Lidl are prepared to reinvest their profits into new stores and products, while pressing their margins further down by cutting prices. However, Tesco, Sainsbury’s and Morrisons have dividends to pay and shareholders to please
This is why the momentum behind Aldi and Lidl will be difficult to stop. The discounters now find them themselves in a virtuous circle where rising revenues lead to investment into better stores, food and marketing, which in turn boosts revenues further.
The “big four” allowed the discounters to sneak into this position by not offering enough help to hard-pressed consumers.
With like-for-like sales declining in hypermarkets and online revenues growing, the “big four” sought to protect their bottom line and their margins. They focused on defending themselves from each other – by introducing price-match schemes, for example – and took their eye off the progress Aldi and Lidl were making within their businesses.
The established grocery retailers still have powerful unique selling points to offer shoppers, including their choice, British heritage and convenience. But, with the exception of Sainsbury’s and Waitrose, they have been unable to get this message across to shoppers. Many City analysts – such as David McCarty, at HSBC, and Bruno Monteyne, at Bernstein – believe that Tesco has still not done enough to close the gap with discounters despite the start of a price war.
In France, it has taken a radical back-to-basics overhaul by chief executive Georges Plassat to get Carrefour back on track, including deep price cuts and store revamps.
Carrefour – which rivals Tesco for the position of the world’s second biggest retailer – this week reported an increase in like-for-like sales in France and out-of-town hypermarkets.
The retailer has endured similar challenges to Tesco in the UK, but is about two years further down the turnaround cycle.
Aldi and Lidl, buoyed by growing sales at existing stores, plan to double their store numbers in the UK over the next decade. They are not going away.
In the UK, the most recent industry forecast from retail trade body IGD predicts that sales for the discounters will almost double sales to £10.8bn within five years. This would mean the discounters account for £1.05 in every £10 spent on groceries by 2019.
But perhaps the clearest evidence that the momentum behind discount retailing is unstoppable was provided by Sainsbury’s. The company is to relaunch Netto as its own discount chain. If you can’t beat them, join them.