Brexit proving good news for discounters

Fresh produce is simply displayed in its shipping boxes at Lidl, a Germany-based discount grocery chain, in the Tooting Broadway neighbourhood of London.

At the vast Sainsbury’s grocery store in south London’s Tooting Broadway neighbourhood, a basket of milk, eggs, bread, cornflakes and butter will cost shoppers £4 and 70 pence, or about $6.15. A short walk away at Aldi and Lidl — two German discount grocery stores — those same items amount to £3.92.

Those small differences in price are having a major impact on grocery shopping in Britain.

The vote last year to leave the European Union, known as Brexit, damaged confidence in the economy, and the pound has since fallen more than 10% against the dollar. That, in turn, has made imports more expensive, driving up the prices of staples like bananas and sugar.

The Bank of England said on Thursday that it expected inflation to accelerate. Wages, too, have started to drop, pushing many people to increasingly look for savings.

Opting for cheaper grocery stores like Aldi and Lidl is one such option, and the two retailers are taking advantage.

Britain’s supermarket sector is ruthlessly competitive. Major retailers like Morrisons, Sainsbury’s, Tesco and Wal-Mart’s Asda all jostle for market share by offering loyalty schemes, online shopping, home delivery and special offers (Amazon, by comparison, is a relative minnow in the grocery sector).

Long dismissed in Britain as shops targeting only lower-income discount-hunters, Aldi and Lidl have steadily made progress and, since Brexit, their growth in market share has accelerated.

Spending at the two stores grew by double digits in the 12 weeks to mid-July, according to Kantar Worldpanel, a research group, outpacing not only the wider industry but every other major supermarket.

Together, they now account for more than 12% of the country’s spending on groceries, up from just 4% a decade ago.

“When I was growing up, there used to be a bit of a stigma around shopping at discount stores at my school,” said Christina Carr, who works at a bank in Newcastle. If you shopped at one, “you’d be classed as a poor family, and the kids would be horrible.”

When Carr, 28, moved out of her grandparents’ home, she found herself thinking much harder about her finances. She and her partner spent £60 on groceries every week, which looked increasingly unaffordable.

In November, she relented, switching from Asda and Sainsbury’s to Aldi and Lidl. “The difference in price, it’s really significant.”

Aldi and Lidl, both of which are privately held, made their first ventures into Britain in the 1990s, focusing on price. They targeted suburban areas and had spartan interiors.

But they initially made few inroads in a market where supermarkets can carry class connotations. Upmarket grocery stores add as much as 10% to real estate values.

That started to change when the financial crisis hit. Britain’s economy went into recession and unemployment rose above 8%. Pay slumped in the years after the crisis, and though it has recovered somewhat, average wages are still lower in real terms than they were before the crisis.

A post-Brexit world has added to the popularity of “the discounters,” as the two retailers are collectively known. Inflation was 2.6% year-over-year in June, higher than the Bank of England’s target, and the central bank says it could rise to 3% in the autumn.

Official figures show disposable income has fallen. Rising grocery prices, in particular, mean the average household could spend £133 more this year on its annual grocery bill compared with the previous 12 months, according to Kantar Worldpanel.

“UK households are quite sensitive to pressure on disposable income,” said Edouard Aubin, an analyst at Morgan Stanley. “That is why they are switching to cheaper alternatives.”

Aldi and Lidl push their low-price messages relentlessly, both in advertising campaigns and in stores. The two retailers stock significantly fewer products — typically only a tenth as many as competitors — with a greater focus on items sold under their own lower-cost brands. Many goods are placed on shelves still in the crates or boxes in which they were delivered.

At the Lidl in Tooting, stacks of vegetable boxes run down the middle of the store, while bright orange signs overhead advertise price cuts. The store’s glass exterior is emblazoned with heart-shaped Union Jack flags and the words “Fresh British.”

Visitors to the Aldi across the road, meanwhile, have to keep on the move to avoid staff members hurriedly restocking shelves or rushing to open cashier stalls.

They currently have nearly 1,400 outlets between them, and their sales have risen faster than those of rivals. Three in every five British households have shopped at either Aldi or Lidl, and the demographics of their customers are now similar to that of the broader population, according to Aubin at Morgan Stanley.

“Although they’re small in the UK, they’re massive businesses in their own right,” said James Walton, chief economist at IGD, which carries out research on the food and grocery industries. “They have great scale when considered globally, and they’re only buying a fairly limited range of products.”

As their customer base has expanded, the stores have expanded their offerings, adding seasonal product lines that include luxury goods like lobster or magnums of prosecco.

Lidl, for example, is selling inflatable pool toys, avocado oil and Iberico ham.

The shift toward “the discounters” is not just a short-term issue for Britain’s supermarket sector. Younger shoppers are increasingly willing to try supermarket-brand items, which are no longer seen as lower-quality knockoffs, a trend that could be accentuated if the economy takes a turn for the worse again.

“You’re paying for the name at other supermarkets,” said Lucy Deacon, a 27-year-old who was shopping at the Aldi in Tooting.

Deacon, who works in a local betting shop, said she would focus her shopping even further on discount supermarkets if Britain saw another downturn.

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