Trolley wars

THERE has never been anything particularly distinguished about Kilburn High Road in north-west London. Now, though, there is a frisson of anticipation about the place, if only among aficionados of Britain’s retailing industry. For this is where the future of the groceries market may be decided, and with it the future composition of the country’s high streets.

The cause of the excitement is the new Aldi supermarket, which opened last year. The German-owned “hard discounter”, which specialises in selling a smaller range of foods at far lower prices than traditional British supermarkets, first started operating in Britain in 1990. For a time it gained market share only slowly, barely troubling the big established outfits such as Tesco (the market leader), Asda (owned by Walmart, an American retailer), Sainsbury’s, Morrisons and Waitrose. That is now changing, however, as Aldi, together with Lidl, another German discounter, gobbles up market share. Aldi’s grew from 3% at the beginning of last year to 5% today, almost equal to Waitrose. Tesco’s share, by contrast, has declined by about 2% over the past couple of years. Sainsbury’s sales were down about 3% in the three months to the end of September, their third consecutive quarterly fall.

Aldi’s recent success has rattled the big retailers, and can largely be explained by the appeal of cheaper food in the aftermath of a recession. But the Kilburn store has them more worried still, as it represents a frontal assault on their traditional strengths in the market-place. Until now Aldi confined itself mainly to the poorer north and the Midlands; its supermarkets were placed on the cheaper edge of towns and cities. The Kilburn store, however, is smack in the middle of a fairly prosperous London high street, taking on the traditional supermarkets in their own more lucrative back yard. The Kilburn Aldi looks much more like a Tesco or a Sainsbury’s than its traditional stores, which are more spartan. It also stocks more products. As Bryan Roberts, an analyst at Kantar Retail, argues, Aldi “are diluting their model to win in the British market”.

If the new Kilburn formula works for Aldi, there will be many more stores opening in wealthier London and the south-east. At a time when most other chains are reducing the number of new stores, Aldi could open as many as 54 this year and another 60 or so next year, taking the total to about 600. Online shopping is growing, but the great majority of grocery sales are still from shops, big and small.

Aldi’s surge is the more remarkable because it has been achieved in the worst trading conditions for decades. Figures out this week from the British Retail Consortium showed that total retail sales for September were down by 0.8% on the same month last year, the biggest drop since 2008. The fall in grocery sales over the past three months was 1.7%. Figures from the Office for National Statistics (ONS) in August revealed the first fall in spending by the British shopper year-on-year since records began 25 years ago. The ONS also reported the first annual fall in food prices, by 0.1%, since 2004. This might be partly driven by the increase in the number of shoppers at Aldi and Lidl and the two companies driving prices down elsewhere. Unsurprisingly, given this context, the traditional supermarkets have been reporting falling sales and profits. Tesco has compounded its woes with the recent overstating, by £250m, of its already dismal profits; three more of its executives were suspended this week over the affair, taking the total number to eight. Aldi, by contrast, recently reported a rise in pre-tax profits of 65% last year and a 36% rise in turnover.

But the established supermarkets are not taking the German insurgency lying down. They are fighting back with price cuts; the consumer has rarely had it so good. Morrisons has introduced a “Match and More” loyalty scheme, promising to pay the difference (in vouchers) on a basket of groceries if it is cheaper in Aldi or elsewhere. Morrisons is also learning the virtue of simplicity from Aldi, slashing the number of products in its stores from a bewildering 29,000 to a slightly less befuddling 23,000. Sainsbury’s is meanwhile reviving a discount brand called Netto to confront Aldi in its northern bastions. The first of 15 such stores is due to open in Leeds soon. The supermarket wars are likely only to intensify. Eventually they could lead to casualties.