Hard discount is about being in the right place at the right time. Every dog has his day, but as a new report from retail analysts Verdict reveals, that day must always draw to a close. No longer the catalyst for a consumer makeover they once appeared, hard discounters have redefined the grocery sector but may not be around to reap the rewards. Clare Harman reports:

Hard discounters took their first steps in the British grocery market during the early part of the 1990s. Received with the media attention and anticipatory hype of a film premiere (albeit a low-budget B-movie), the hard discount pioneers had timed their dramatic entrance perfectly. Britain was in the midst of a financial recession that made price the predominant concern of the supermarket shopper, and the likes of Aldi, Dansk Supermarked’s subsidiary NETTO and LIDL & Schwarz’ discount arm Lidl found it relatively easy to woo the British public.


Hard discounters operate in a distinct niche, and the stores are based on a concept pioneered by the Aldi chain when it was founded by brothers Theo and Karl Albrecht in 1948, opening its doors to the citizens of post-war, economically depressed Germany. The operating model is based around significantly lower margins. The chains focus on the development of a limited assortment of own label and tertiary brand goods, which are offered at considerably lower prices than other product equivalents in larger supermarkets, and aim to generate approximately 80% of sales from just 20% of the goods in-store. In total, only about 700-800 different lines are offered.


Little thought is given to store design or environment. Fast moving lines and the need to maintain low costs mean little or no budget for presentation. Well-advertised special offers are a core feature of the stores and are regularly rotated to involve “first come first served” purchases of food and non-food items. On top of low prices generally, consumers can also expect this certain supply of limited edition special offers.


How well did they do? Who are they?


Thorough the last decade, media attention on “Rip off Britain” slurs directed to the major multiples, as well as the problems encountered by low-cost chain and nearest hard discount rival Kwik Save should have guaranteed the success of these price-conscious, no-frills chains. It is surprising then, that the hard discounters have seemed unable to wrestle significant market share from the homegrown grocers that dominate the supermarket sector.


Eleven years after its much-vaunted entrance into the UK, Aldi claims the largest share of the grocery sector of any of the hard discounters. It also controls the largest store estate, with over 250 outlets, and the largest stores in terms of layout size. Yet even Aldi only commands 0.9% of grocery sales in the UK, dwarfed by its 20% market share in Germany. Between them, Netto and Lidl can only muster a share similar to that of Aldi.


Two other discounters, which entered the UK hot on the heels of Aldi, have since pulled out. Penny Market, which was based on the Rewe division PennyMarkt in Germany, and Carrefour’s abortive hard discounter Ed were both driven out of the UK by prohibitively tough trading conditions.


Growth is intimately linked to investment in store expansion; critical mass is imperative if low margins are to be maintained. It is impossible to progress in the limited market of hard discount retailing without the addition of new stores. Also, these stores must be appropriately situated. Originally, the hard discounters targeted the less affluent areas of Britain, the North and the Midland. Tentative steps in the Southern areas served to diminish average sales per store, according to the Verdict report. In the second half of the 1990s, only Lidl increased the size of its chain and the size of its market share, and it is planning to open between 35 and 50 new stores during the course of this year.


A hard lesson to be learnt?









“Leading chains have put up an admirable defence price-wise in the face of media attention and competition from hard discount rivals”



According to the Verdict report, the main failing of the hard discounters is that they underestimated the ability of the established grocery sector to compete effectively. Leading chains, such as Tesco and Safeway, have put up an admirable defence price-wise in the face of media attention and competition from hard discount rivals.


Prices have been cut significantly in the grocery majors, but importantly, the higher margins have preserved the opportunity for providing a continued level of customer service and product choice. Tesco, Sainsbury and the like have introduced “extra value” ranges to cater for the more price-conscious consumer who may have turned to the hard discounter in the past but can now take advantage of low prices in a more pleasant environment. They can also combine low priced staples with fresh produce, as the hard discounters commonly focus on the ambient grocery area of food retailing with a very limited range of fresh and chilled food products.


Inevitably, chains with the higher margins had more scope for innovation and adaptation. Struggling to boost product range and create a kinder environment with margins of around just 2% was a tough challenge for the hard discounters, who had first to concentrate on achieving profitability before attempting to adapt to changing market conditions. Netto, which entered the market in 1990, only scraped into the black in the 1997/8 financial year.









“Hard discounters are guilty of underestimating the wider buying motivations of the British consumer”



Admittedly, hard discount leaders Aldi and Lidl have slightly more financial clout as they both feature in the list of the world’s top 30 retailers, but Verdict believes they are also guilty of underestimating the wider buying motivations of the British consumer. The British public, according to the report, are characterised by fundamental cultural differences from its Continental Europe equivalent. They prefer choice, convenience and service to go hand in hand with good value. The hard discounters have succeeded in building a loyal and hardened fan base among consumers, but it is a very small one.


Hard discounters and other small and medium-sized retailers had high hopes that The Competition Commission would come down heavily on the major multiples following a protracted inquiry into competition in the sector which concluded last year. However, their hopes were confounded by the inquiry’s decision that the sector did, after all, represent a level playing field.


As the market changes to accommodate the developments of the sector’s big boys, and the consumers go in their droves to stores with softer environments and larger product selections, the hard discounters have little to fall back on.


Verdict Research recently published a new report, “Grocers & Supermarkets 2001,” which provides timely analysis of all the major players in the UK grocery sector, including the hard discounters. To read more information on the Verdict report, or to order a copy, please click here.