By Saabira Chaudhuri
LONDON--Janet Wadsworth abandoned U.K. grocery giant Tesco PLC
for discounter Aldi after the German chain opened a store near her
home in the English village of St. Bees three years ago.
"It used to be that people might have been embarrassed to be
seen at Aldi," says the 51-year-old teacher. "But I think that's
gone."
Ms. Wadsworth is part of a new wave of British shoppers chasing
bargains with little regard to where they find them. The
shift--driven here in large part by two, newly aggressive German
discounters, Aldi and its archrival Lidl--has shaken the U.K.'s
$274 billion grocery industry to its core.
The traditional U.K. grocer "had huge margins," says David
Herro, a fund manager at Chicago-based investment firm Harris
Associates, which, until recently, was a large Tesco shareholder.
In the current environment, "It's like exposing your neck to the
discounters, like to a vampire," he says.
Indeed, as the discount-driven German duo expanded offerings,
they have stolen away market share from the country's traditional
players. Those grocers, in turn, have seen their stock prices
plummet, triggering executive ousters, layoffs and billion-dollar
write downs.
Such turmoil here is reminiscent of some of the same industry
headwinds hitting grocers elsewhere--particularly in the U.S. With
discounters on one end, and upscale grocery chains on the other,
opposing forces are pressuring profits. The result has been forced
consolidation, and, in some cases, more desperate measures.
On Monday, Tesco, the U.K.'s largest retailer, said it had
agreed to sell its South Korea business for $6.1 billion in cash--a
retrenchment that comes after the grocer has also quit Japan and
the U.S. and been forced to strike a joint venture for its Chinese
operations as it works to stem the slide in market share back
home.
"Our business has not been as competitive in recent years as we
would like it to be," acknowledged Tesco Chief Executive Dave Lewis
on an April conference call.
Andy Clarke, CEO of Wal-Mart Stores Inc.'s Asda, Britain's
second-largest grocery chain, has been more blunt, calling the
goings-on "the worst storm in retail history."
Storm spreads to U.S.
Similar challenges are washing up on U.S. shores. A&P,
America's first traditional supermarket chain, with roots dating
back to 1859, said in July that it would close or sell its
remaining stores as part of its bankruptcy filing. The moves come
after years of it being squeezed by an array of new competitors,
such as Whole Foods Stores Inc. on the high-end to cheaper
alternatives like Wal-Mart and Aldi.
Seeking scale in the U.S. and Europe, Dutch grocery giant Royal
Ahold NV and Belgian rival Delhaize Group agreed in June to merge
in a deal that will create a $29 billion titan--combining American
chains like Food Lion and Stop & Shop.
The $1 trillion U.S. grocery market remains largely regional and
fragmented, despite a wave of consolidation in recent years. That
insulates it somewhat from the sort of carnage ravaging the U.K.
market. Here, the country's four biggest grocers are national
chains that butt heads everywhere, and on everything from online
deliveries to supplier relationships.
But now, the two scrappy German discounters that have wreaked
the most havoc in Britain are ratcheting up their U.S.
ambitions.
In June, Aldi's U.S. operation said it would pour about $3
billion into opening new stores, including across the large
southern California market. It plans to operate 2,000 stores by the
end of 2018, up from the 1,400 it runs now across 32 states.
Kroger, by comparison, operates about 2,600 stores in 34
states.
A day after Aldi's U.S. announcement, Lidl--owned by Germany's
Schwarz Group, Europe's largest retailer--fired back, outlining its
own plans to enter the market, likely by 2018.
Analysts and others say the moves threaten to pressure discount
chains like Wal-Mart and Supervalu Inc.'s Save-A-Lot, but could
also further shake up the wider U.S. market.
"They're on everybody's radar in the U.S. today," says Craig
Rosenblum, partner at retail consultancy Willard Bishop, of Aldi
and Lidl, adding: "Everybody knows how successful they are in
Europe."
Long looked down upon in class-conscious Britain, no-frills Aldi
and Lidl gained traction only after the recession here. At the
time, the country's biggest grocers kept jacking up prices, even as
unemployment jumped and customers tightened their purse
strings.
"At a time of slow to declining volumes, they attempted to raise
prices and widen margins," says Andy Higginson, chairman of No. 4
British chain Morrison and a former board member at market leader
Tesco. "Customers recognized this and voted with their feet."
Aldi and Lidl acted swiftly, ramping up advertising and
expanding their product lines to include more fresh produce and
baked goods. The two chains together now command 9.7% of the
British market as of August 16, according to Kantar, up from 5.9%
three years prior. Even their competitors acknowledge the creeping
threat.
"I believe the discounters will get to 15% of the U.K. grocery
market by 2022," said Sainsbury CEO Mike Coupe at a meeting with
journalists in May. Aldi and Lidl, he said, are "formidable
competitors."
The chains have kept prices low by prioritizing speedy store
deliveries, efficiency and high turnover at the expense of breadth
of offerings and customer service. As part of that push, Aldi and
Lidl take daily deliveries of a slim range of mainly private-label
products, often with the look and feel of popular, branded
items.
"By not offering this huge variety we've made the offering and
our range efficient." says Lidl's marketing director, Arnd
Pickhardt. "We provide just a handful of different mineral waters,
about seven, compared with other supermarkets that have a whole
aisle full of space" for waters, he says. The stores' smaller
footprint also saves on costs.
Some products are sold directly off the delivery pallets, while
others arrive in boxes with open fronts, allowing the staff to
quickly move them in bulk onto store shelves without being unpacked
from the boxes. Lidl drives its trucks through the night to avoid
traffic and save fuel.
Both grocers charge for bags, which customers take to packing
areas that help keep the register areas moving. Aldi and Lidl
cashiers also do double duty, stocking shelves when things are
slow.
"We can operate at a far lower margin because of our
efficiency," says David Hills, Aldi's U.K. group buying director.
"Everyone in our shops needs to do every job from mopping to check
outs."
Shoppers have been willing to go with the program in return for
better prices. Nick James, a 27-year-old urban planner in London,
used to frequent Sainsbury's until he wandered into a Lidl to buy a
croissant about 18 months ago.
Lidl has "funny European brands," he allows, and the stores
aren't "quite as plush or neatly presented" as those at Tesco or
Sainsbury, which competes with Asda for the market's No. 2
position.
He says he also finds it "really frustrating" when he can't find
anyone at the cash registers to check out. Still, he has switched
to shopping almost entirely at Lidl because "the quality is just
the same, but the prices are more affordable."
U.K. grocers adjust
The Germans' success is proving calamitous for Britain's
traditional grocers. In the past year, shares of Tesco, Sainsbury
and Morrison have fallen more than 13% on average, amid profit
warnings, billions in property write-downs, and canceled or slashed
dividends. They have axed jobs and closed or shelved plans to open
stores. Two of the three have recently ousted their chief
executives.
Yet the results have been a boon for consumers. A loaf of whole
wheat bread here now costs an average of 98 pence ($1.50), down 15%
from a year ago, according to the Office of National Statistics.
Shopping has also never been so convenient, with the big grocers
expanding their click-and-collect services--allowing customers to
order online and pick up from stores, gas stations or other
locations.
Morrison has cut prices on 1,665 products by an average of 16%
since the start of last year. Wal-Mart's Asda, meanwhile, earlier
this year plowed nearly GBP300 million ($458 million) into reducing
the prices of 2,500 basic items; Sainsbury dedicated GBP150 million
to fund lower prices.
Tesco had weathered the recession of the early 1990s better than
rivals by introducing lines with bare-bones packaging that appealed
to cash-strapped shoppers. It rolled out a pioneering loyalty
card--now copied the world over--that tracked shoppers' habits.
Memorable TV ads featured a dedicated but hapless Tesco buyer,
played by Dudley Moore.
"In that period, Tesco did a good job of understanding the
changing environment and readjusting its overall competitive
offer," says Terry Leahy, who took over as chief executive in 1997.
Over the next 14 years, he transformed the chain into a global
retail powerhouse, competing on the world stage with Wal-Mart and
France's Carrefour SA.
Then the latest recession hit Britain in 2008 amid the global
economic crisis. Unemployment jumped, leaving increasingly panicky
customers hunting for bargains. But grocers raised prices--passing
along higher commodity costs to defend margins. Grocery inflation
peaked at 9.3% year-over-year in October 2008, according to
Kantar.
"They had such a strong grip on the market that obviously they
felt they could do it," says Bruno Monteyne, a Sanford C. Bernstein
analyst who worked as a Tesco executive for 10 years. Margins at
Tesco, Sainsbury and Morrison rose steadily through the downturn,
to an average of 8.1% in 2010, from 5.8% in 2005, according to
Bernstein.
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