On the cheap

While the big four supermarkets battle it out for market share, on the sidelines the three major discounters – Lidl, Aldi and Netto  – stake their place in the UK off-trade.

With the approach of supermarket saturation in much of Britain, the big retailers are locked in a battle for market share. Between them, Tesco, Sainbury’s, Asda and Morrisons control 75% of grocery sales in the UK, and at least that in the case of BWS off-trade sales.

It appears the only prospect of growth is to poach from each other by offering deep discounts on popular brands, often of drink. Meanwhile, way in the distance, the real deep discounters are creeping closer.

Having entered the market in 1990, the combined forces of Lidl, Aldi and Netto now have just over 6% of the UK grocery sector compared to 10% claimed by the country’s home-grown discount chain – Kwik Save at its peak. When it collapsed in 2007, former Kwik Save shoppers fled to the European discounters, which was one reason Aldi recorded 25% growth last year, four times the overall market.

Surging sales provoked a surge of features on the discounters in the national press. Reporters were dispatched to count the number of BMWs and Volvos in the stores’ car-parks, and report back on what was dubbed the “Aldirati” effect.

Were the middle classes simply topping up on basic commodities like loo rolls and potatoes, or were they filling their car boots with a much wider range of goods? Danny Gibson, Aldi’s UK wine buyer, had no doubt. When I spoke to him last September, he told me wine sales were up by a staggering 29.5% on the year before.

“Everything was flying, but that was before the crisis in October-November,” he says. “There have also been the duty increases and the fact the pound has dropped like a stone.”

Yet this poses a question – if supermarkets are said to thrive in hard times, surely the discounters can expect to do even better?  “We did very well last year, and seemed to pick up share and volume in advance of the recession. We are still seeing a little bit of growth and the competition have sharpened up their act. The focus on ‘three for ten’ has been very, very aggressive.”

The supermarkets appear to take the discount threat seriously. Tesco launched its “value” range 16 years ago, soon after the discounters first arrived. Last September it added its own “discount brands” range of 350 products, the same day that Asda slashed the price of 5,000 lines.

The big grocers have also started referring to the discounters by name on those price comparison notices dotted round stores on carefully selected lines.

The supermarkets regularly cut the price of big wine brands like Hardy’s Crest or Kumala as a way of flaunting their good value credentials and stemming migration to the discount sector.

Yet when it comes to wine at Aldi or Lidl, this approach doesn’t quite work, as Danny Gibson explains. “The fact is we don’t stock any wine brands and have no intention of doing so. If we did, what would we add as a point of difference to Tesco or Asda?”

Of course brand-owners are bound to be wary of offering discounters the chance to undercut the supermarkets. If Aldi began selling Blossom Hill Chardonnay for a penny less than Asda, the producer – Diageo – would have Asda breathing down its neck immediately.

Theoretically Gibson could source the brand through a third party, but he simply isn’t interested. Instead he talks of Aldi’s customer base and the high proportion of As and Bs who are confident enough to say, “I’m choosing this on quality and value – I don’t need to show anyone I’m right”. “Maybe, C1s and C2s need the brands to support their decision a little bit more.”

Something for everyone

Netto, with around 190 stores in the UK, takes a very different approach. “With a mix of quality own-label products and famous name brands at unbeatable prices, customers can find everything they need for their weekly shop,” declares Charles Kay, UK managing director for the Danish-owned discounter with a strong presence in Yorkshire.

There is a core range of around 50 wines including a solitary own-label New Zealand Sauvignon, while, displayed separately, there is a section for one-off deals, invariably concerning brands. “We have something for everyone with basic, tertiary and branded ranges.

We also look to deliver excellent value in the middle ranges, ie wines that in the big four supermarkets would sell at £7, we sell the same wines at under £5 a bottle.”

Asked whether producers like Pernod are happy to see their Jacob’s Creek sold for less in Netto than Tesco for example, Kay replies that: “Our suppliers never involve themselves in retail pricing, if we sell a brand cheaply, it is usually a ‘when it’s gone it’s gone’ offer.

That puts very little pressure on the rest of the market to follow suit.” Kay also sounds pretty relaxed about a potential supermarket backlash. “The multiples, sensibly, have more interest and more to gain by fighting among each other than trying to take market share from us.” Yet at some point, if Netto grows much bigger, they will be above the radar, and at that point the big supermarkets are bound to take notice.

By contrast, Lidl, which now has over 535 stores stretching from Penzance to Kirkwall and Orkney, follows the same line as Aldi. “We have started listing brands, but not for wines,” says the firm’s supply chain director Matthew Nobbs. The beer shelves are impressive and suitably British with Spitfire and Bishop’s Finger beside Stella and Grolsch. By contrast the wine aisles appear rather foreign.

Alongside modern, must-stock lines like Prosecco and New Zealand Sauvignon you will find a £2.72 Hock and a £3.99 German Pinot Grigio. There is Bardolino, but no southern Italian wines, and Chilean Pedro Ximénez, but no Argentine Malbec.

While strangest of all is a Dornfelder Halb-trocken at £3.99. One wonders how many shoppers in Lidl are aware of the Teutonic red grape, or can speak German to translate the back label.

“The quality of our own-label wines are all tested by a wine institute,” says Nobbs, and sure enough a number of bottles carry a big gold badge saying “gestetet [tested] für Lidl”, which means nothing in the UK.

The range of 61 wines are all bought centrally by the country of origin such that Lidl in Germany sources the Liebfraumilch and Lidl España sources the Rioja. This means huge economies of scale, which according to Nobbs, are passed on in lower prices for the consumer. He adds the wines chosen for Lidl UK reflect consumer demand here. Presumably that explains the Dornfelder?

Lidl is trying to catch up with market trends, and launched its Cimarosa New World range earlier this year. It has also made a tentative move into fine wines with a Chablis Grand Cru and a Châteauneuf du Pape at £9.99 displayed on angled wooden racks. While most expensive of all is the Bisininger Grand President Champagne at £18.98, bought as a one-off for this Christmas.

Aldi also goes in for special Christmas purchases, but there the similarity ends. The buying is done from the UK and frankly it shows. Gibson is fully aware of what Aldi in Germany stocks, but says “the overlap is surprisingly rare. Half their range will be German with lots of Italian and Spanish wine whose fruit and wood are just stylistically different”. Apparently the only wine stocked here that is sourced from the parent company is a South African Cabernet/Pinotage.

The Aldi core range has grown to 65 still wines, six sparkling and four fortified and has developed a strong New World flavour. From Australia there is the entry-level Badger’s Creek, the mid-level Bushman’s range of dual varietals, and a premium Bushman Estate range.

These last two are sourced through Stratford Agencies, which also supplies the French Ile la Forge wines from Domaines Paul Mas. Managing director Paul Stratford describes Aldi as a “very efficient machine” and says dealing with them as a supplier is very clean and straightforward. “We give them the best price we can, and that’s the end of the negotiation.” In other words there is not the sort of listing fee or marketing budget demanded by the supermarkets.

Gibson would rather not price promote at all, but when he discovered that over two thirds of wines are sold that way, he was forced to reconsider last year. Since then he has tried to keep the maximum discount to a pound off, convinced that any further cut would undermine Aldi’s proposition of “guaranteed low prices”. He does not do “three for ten” deals and would be quite happy if some future government banned them.

Supermarkets show strength

The supermarkets have curbed the growth of the discounters, with Aldi’s overall sales up 8.3% and Lidl’s up 6.8% in the second quarter of this year, compared to 9.5% at Morrisons and 8.1% at Asda.

In terms of the off-trade, Alex Baldini, consumer insights director at TNS, points to the supermarkets’ much higher average till spend which means they can absorb below-cost drink sales in a way the discounters cannot. “There is an element of truth in that,” says Gibson. “The supermarkets have been using alcohol as a loss leader, but while they’ve been aggressive on price, they have not in my view, kept the quality.”

And while Tesco has no intention of ceding ground to the discounters, “there’s only so much they can do”, says Gibson. “In simple terms their business model does not allow them to be as efficient.” With around 1,500 lines in a discount store, compared to over 20,000 in an average supermarket, he clearly has a point. Yet the inevitable flip side is a restricted choice.

“I’m not saying our list is perfect. I have to keep the base quite wide, and I may lose out at the top end,” Gibson concedes, though he questions whether the wines offered by his supermarket rivals are as varied as they claim. “Having six or seven brands of Australian Chardonnay – is that really more choice? I think it’s just more confusion.”

The no-frills approach of the discounters brings to mind a certain airline, which begs the question – could Aldi or Lidl become the Ryanair of the high street? Alex Bandini admits it won’t be easy, but says: “Things change. The biggest chain in the ‘80s was the Co-Op, in the ‘90s it was Sainsbury’s, now it’s Tesco. So, never say never.”

Tom Bruce-Gardyne, the drinks business, November 2009