Pressure on household incomes in Ireland has been exacerbated by persistently high grocery inflation this year. As a result, price positioning has become absolutely key for retailers operating in what is a highly competitive market, Katy Askew suggests.

Last week, reports surfaced in Ireland that German discount retailer Aldi is launching legal action against local rival Dunnes Stores over the use of its name and prices in advertising.

According to The Irish Times, Aldi is bringing a case before Ireland’s High Court alleging Dunnes infringed upon its trademark through adverts comparing the two chains’ prices. Aldi is expected to allege Dunnes is not making like-for-like comparisons.

Aldi won a similar battle against Tesco last year, when the groups reached a settlement that saw Tesco pay EUR150,000 (US$205,910) to the St Vincent de Paul charity. Tesco also agreed not to make price comparisons between products with completely different ingredients or to compare wines that originate from different countries.

While Aldi has declined to comment on the reports on Dunnes, the news demonstrates just how tough it is at the value end of the Irish grocery market.

Aldi is prepared to defend its low-price image to the hilt because being perceived as offering the lowest prices in the market has been absolutely critical to its success in driving sales growth.

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According to the latest figures from Kantar Worldpanel, in the 12 weeks to 11 November, Aldi sales rose by 19.4% and the group was able to grow its share Ireland’s grocery market to 6.2%.

That was is the first time that Aldi’s growth has slipped lower than 20% since April 2012. The significance of such consistent top line expansion cannot be overlooked.

Some of this growth has been fuelled by new store openings. However, the supermarket is also winning market share from its rivals through its no-frills approach to retailing and a reputation for offering the lowest prices around.

Irish consumers are under pressure. The unemployment rate has eased from the elevated levels seen last year when unemployment reached a high of 14.7%. However, it remains persistently high at 12.5% and many people do not feel secure in their jobs.

Grocery inflation is also an issue for Irish households and has been running at around 4% in the country this year. According to the most recent figures from Ireland’s Central Statistics Office, in the 12 weeks to the beginning of November, food inflation stood at 2.9%. That meant food inflation was around 30 times the total inflation rate for goods and services, which stood at 0.1% in the period.

Shoppers are responding by tightening their belts, seeking out value and buying less. Tight pantry management has become key, putting pressure on sales volumes.

In this environment, Aldi has benefited from its low price positioning. Moreover, the group is also viewed as offering “good value”.

As Shore Capital analyst Clive Black noted in recently: “We sense that one of the key drivers of the deep discounters’ popularity in the UK and Ireland is that they offer better value than entry price lines of the majors because the specifications are higher, closer to mainstream private-label brands.”

Tesco, the market leader in Ireland, has been one of the greatest casualties of the Irish shopper’s quest for value. The company has witnessed its market share erode this year and, in its most recent financial update issued last week, the UK supermarket said sales fell 8% in its third quarter to 23 November. Over EUR400m has been wiped off Tesco’s Irish sales since the beginning of the year. Given that food inflation stands at around 4%, Tesco’s volumes are likely to have seen an even steeper decline.

In contrast, Dunnes, Tesco’s nearest rival, has been able to grow its market share, which rose to 23.6% in early November. However, it seems this growth may have come at a price. The company has adopted a heavily-promotional stance and reportedly invested in vouchers and coupons designed to retain customers.

Dunnes, it would seem, is placing increasing focus on targeted promotional activity and the company is actively recruiting for someone to head up its Valueclub loyalty programme.

Some of this investment can be funded through cost-cutting initiatives. According to The Irish Independent, Dunnes is seeking a “limited” number of voluntary redundancies at both its head office and at store level. However, much of the additional promotional spend is likely to be coming out of the group’s profit margin.

Competition is intensifying as retailers vie to position themselves at the value-end of the market.

In October, Tesco launched its Price Promise in Ireland. Interestingly, the market leader decided to single out the discounters. The Promise compares the overall cost of over 1,000 comparable groceries within a basket in Tesco against products from Aldi or Lidl. Likewise, Dunnes’ move to target Aldi in its advertising suggests the more mainstream multiples are attempting to stem the tide of the discounters’ march.

Whether these efforts are successful will be determined by Irish shoppers who will vote with their feet. Aldi’s legal challenge to Dunnes’ move sends a clear signal the the discounter does not plan to have its ambitions scuppered without a fight.