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The future can still be bright for TescoAldi, Lidl and Amazon set to make the next few years even harder for Britain's biggest supermarkets, but they are still in a powerful position.
How times change. At a glitzy event at the Victoria & Albert museum on Wednesday night, guests drank champagne and enjoyed a four-course meal on behalf of Lidl.
Yes, that’s right, Lidl, the German discount retailer famed for its miserliness and privacy.
This sort of occasion is unlikely to become the norm for Lidl – it even provided guests with a receipt at the end to show that their food cost just £9.96 per head. However, it reflects the growing confidence of the brand in the UK.
The event was celebrating the launch of a new £20m advertising campaign to promote the quality of the retailer’s food.
In the words of UK boss Ronny Gottschlich, it was a signal that Lidl intends to become “more British” in its behaviour and more open about its strategy.
The advertising campaign, called Lidl Surprises, should be a hit. It features the construction of a temporary street market in East London and shows the shock on the face of visitors when they are told that the food they are enjoying is from Lidl.
Not only do the adverts play into the popularity of street food, but they are designed to destroy any lingering doubts about the quality of Lidl food and target a fundamental psyche in all consumers, the joy of finding a real bargain.
By committing to such a campaign, Lidl clearly feels bullish about its future in the UK. Sales for the retailer should grow by more than 20pc and clear £4bn this year. Over the next decade, Lidl wants to double in size to almost 1,500 stores.
However, the growing confidence of Lidl and rival Aldi is not good news for the “big four” supermarkets in the UK, Tesco, Asda, J Sainsbury and Morrisons.
This was brutally demonstrated by the profits warning from Tesco on Friday morning. Britain's biggest retailer warned that that profits will fall by a third and that it will slash its divided by 75pc.
Make no mistake, these are tumultuous times for Britain’s biggest retailers. At the current rate of growth, within five years traditional supermarkets will account for a smaller portion of grocery sales than the discounters, online shopping, and convenience stores.
It is not too much of a stretch to call this a revolution. Executives at the “big four” are watching their daily trading figures and seeing falls in like-for-like sales that are too big to be comfortable. This is what led to Tesco cutting its dividend and lowering capital expenditure for the year to save cash.
It is not just the threat of Aldi and Lidl that hangs over Tesco, but the prospect of Amazon one day selling fresh food in the UK.
Amazon is already selling canned food and basic consumer goods such as toilet paper, but in Seattle, San Francisco, Los Angeles and San Diego it is trialling a full grocery service called Amazon Fresh. Users of Amazon Fresh pay an annual subscription of $299 (£166) and receive a same-day delivery service.
Executives at Tesco and co are not so worried about the quality of Amazon’s service, but the damage the company could do to prices and margins in the sector.
Amazon, which made a loss in the last quarter of its financial year, tries to aggressively and quickly expand its market share when it enters new markets. Competitors which do not have scale risk being blown away as prices are dragged down.
Competition in the grocery industry is therefore likely to get even harder in the next few years. Gone are the days when families were wedded to their local supermarket and retailers fought for the 10pc of consumers who were prepared to switch.
Food retailing has become extraordinarily volatile as the choice for shoppers has increased. Kantar’s figures show that Sainsbury’s sales rose 0.9pc year-on-year in the four weeks to July 20, but then fell 2.2pc in the following four weeks.
However, as the market evolves, ironically some of the traditional strengths of the “big four” will become more important.
Take Tesco, for instance. In this financial year it is still expected to generate profits of more than £2bn, even after the profit warning. At a time when retailers are looking to invest heavily in new stores and formats, that is significant firepower.
Secondly, Tesco has an unrivalled network of stores and delivery vans across the country. The retailer has 3,300 stores, which cover every postcode zone in the country. It has thousands of vans capable of reaching any British street any day of the year.
These are extraordinary assets for one company to have. It means that Tesco can offer a nationwide collection points for food and non-food products, as well as home deliveries within a one-hour time slot. Amazon, which relies on external courier services to deliver products, cannot get close to matching that.
Not only that, but Clubcard provides Tesco data on the spending patterns of 38m shoppers around the world. This allows Tesco to personalise and customise its ranges within stores and online. While there may be issues with the rewards that Clubcard offers shoppers, it is helpful for designing Tesco’s strategy.
It would be foolish therefore, to expect Tesco and the “big four” to simply fall into a period of long-term decline. Tesco’s share of the fast-growing online grocery market is 45pc, far bigger than its share of spending overall.
However, with companies’ core grocery business under growing pressure from Aldi, Lidl and potentially Amazon, the future success of supermarket retailers may come from different sources.
Could Tesco, for instance, use its network to deliver other companies products? Tesco and Sainsbury’s are already launching their own banking services and current accounts using their vast database of customers.
Tesco has also developed the hudl tablet, which integrates all its services into one place, and owns Blinkbox, where users can download music and film. How many other services could Tesco offer its shoppers?
Retailers and businesses thrive by promoting their unique selling points. For the “big four” supermarkets, this may no longer be the quality and price of their food, judging by Lidl’s £20m campaign.
Instead, Tesco, Asda, Sainsbury’s and Morrisons would be wise to take advantage of the fact that they can reach every member of the British population quicker and more regularly than any other business.
Publication date: 8/29/2014
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