The foreign discounters have ploughed millions into establishing a foothold in the UK. But they now face an uphill struggle to grow or even retain their customer base in the face of a fierce supermarket price war, as Steve Hemsley and Julian Hunt report The hard discounters have a habit of misreading the British grocery market. When they first arrived from the continent in the early 1990s, amid a fanfare of publicity, Aldi, Lidl and Netto managed to completely underestimate just how strongly the big supermarkets would respond. The launch of fighting brands such as Tesco Value, Sainsbury's Economy and Asda Farm Stores was a brilliant tactic, and one that ensured the European trio were kept very much at the fringes of the British retail scene. But now even their fragile 3% share of the grocery market is under threat, because they are in danger of misreading the market all over again. EDLP, guerilla marketing, high:low pricing, WIGIGs. These are the new buzzwords among supermarketers as they employ ever more aggressive tactics to maintain sales momentum in a low growth era; tactics to which the hard discounters have made no response. And by failing to reinvent themselves in the new retail environment ­ one in which everybody has again put price at the top of their agenda ­ the discounters have allowed their only USP to be rapidly eroded by the competition. "We first saw the market becoming price-driven at the end of the eighties during an economic downturn and, looking back, it is clear the discounters did not enter the market aggressively enough with the necessary marketing or distribution back-up," says Iona Carter, retail director at Research International. "Price cutting happened again at the end of the 1990s when the big five realised they had exhausted service and quality and went back to using price as their main weapon." And one supermarket executive believes this change of tack has caught the discounters on the hop ­ again. "They have not changed strategy because they have never seen themselves as being in direct competition with us," he says, "But they are focusing on one particular segment ­ ambient packaged groceries ­ and it's the one segment that is not growing. The only real growth is coming from fresh foods, particularly anything to do with convenience and ready meals. But they are still trying to eke out a market share by focusing on this ambient stuff." This, he claims, is their Achilles' heel: "A lot of people these days will do their ambient grocery shopping as part of their fresh food shopping. They don't do separate trips. The only areas where the discounters are reasonably busy is where they have no mainstream competition." Clearly, there are still plenty of people prepared to use more than one shop to get the best deals. And that's one reason why hard discounters remain popular among their core base of shoppers within the DE social group. Their customers tend to be large families with five or more children. The typical customer is also likely to be paid weekly and manage cashflow extremely closely. Verdict Research analyst Mike Godliman says the discounters have some of the most loyal customers of all the food retailers. But he, too, believes that as the chains struggle to compete in the price war prompted by the entry of Wal-Mart, even the most loyal price conscious consumer could defect. David Stoddart, retail analyst at Investec Henderson Crosthwaite, agrees: "The discount stores will always appeal to price-conscious consumers, but there is a limited market and you must ask yourself how much money they want to throw at the UK if they cannot broaden their appeal in the current market." As Godliman explains, the hard discounters have never been able to do that. And the reason they haven't lured consumers away from other supermarkets in big numbers? Simple: price is only one of the factors that sway where British people decide to shop. "The supermarkets have taken the discounters' ground as far as price in concerned but, more importantly, they are also offering the other elements that most shoppers demand nowadays, which is quality, range and convenience," says Godliman. In other words, the hard discounters are guilty of having failed to recognise the important cultural differences between UK shoppers and their European cousins almost from the day they arrived. They are also unwilling ­ or, perhaps, unable ­ to readily adapt their trading style to suit the changing needs of this market. A classic example was their reluctance to embrace credit and debit cards, even though members of every socioeconomic group had long switched on to the idea of plastic. After years of saying "Nein", the discounters were finally forced to start accepting the cards two years ago. Another example: while Lidl and Netto have invested in sophisticated EPoS, Aldi still requires its checkout staff to remember prices, which creates delay and queues (a particular bugbear of British shoppers). All of which spells trouble for the hard discounters. There's no doubt they missed their chance to build a dominant market position in the early 1990s. The own label price fighters developed by the supermarkets back then now account for more than 4% of grocery turnover, and continue to restrict the discounters' room for manoeuvre. And today they find themselves being squeezed on all fronts by the multiples. Worse still, they could soon find themselves having to deal with a newly resurgent Kwik Save. Somerfield chief executive Alan Smith's decision to give the UK's biggest discounter a new lease of life has unsettled its rivals. They had hoped to start fishing customers from the Kwik Save pond by purchasing some of the outlets that had previously been up for sale. Such a strategy was seen by retail analysts as the best way for the hard discounters to retain market share during the current supermarket price war. If nothing else, the cherrypicking of Kwik Save's estate would have helped them acquire stores on the cheap. As Corporate Intelligence Group analyst Clive Vaughan explains: "There are still opportunities for the discounters, but their main problem is finding sites. When one becomes available, all three sometimes go for it, which pushes up the price." So they can't now buy market share. And judging by their performance in the past two years, they will not win it by taking away Kwik Save's business. Why? Because the hard discounters have failed to take full advantage of Kwik Save's troubles. IGD says that of the £187m of spending that switched away from Kwik Save in 1998/99, only £15m (8%) went to the hard discounters. Lidl made the most gains, taking more than £9m, twice that achieved by Aldi, while Netto grabbed just £2m. Netto, at least, appears to have tried to capitalise on Kwik Save's woes: its own label project has clearly been axed and it is now selling stacks of well known brands at deep discounts in its stores. But Kwik Save believes most of its lost business has been won by Asda. And it's these disgruntled shoppers that it wants to win back. Marketing director Emma Woollett says: "I do see a difference between Kwik Save and the other hard discounters in that our heritage has always been big brands which is something they have not focused on. We also offer a full range ­ not just a limited assortment ­ allowing people to do a whole shop, which is quite a difference." She says the UK market's current fixation on low prices and EDLP means the decision to rebuild Kwik Save could not have come at a better time. "Kwik Save has always been about EDLP. But there has been no focus on Kwik Save for two years so we need to re-emphasise those core parts of our heritage that actually people still have a remarkable memory for. "We are doing lots of work on defining our strategy ­ of which own label is an integral part ­ and rebuilding our brand ­ of which EDLP is an integral part." But after spending the past two years deliberately trying to poach Kwik Save's shoppers, Asda is not going to let that business slip away without putting up a fight. Any reaction ­ and there will be one ­ can only be bad news for Kwik Save in its weakened state. And there's no doubt the other discounters will get caught in the crossfire. Adding to that pressure are the high:low pricing tactics employed by Safeway and, more recently, Somerfield, which encourage bargain hunters to shop around. With their businesses built entirely around the concept of high volumes at low margins, the discounters have no way of doing anything similar. Despite the struggle to grow their market share, and the counterattacks by the majors, the three foreign owned discounters have the financial clout to continue holding their ground. Aldi and Lidl may have a small share of the UK market, but they remain two of the largest food retailers in the world with turnovers of $30bn and$13bn respectively. While it is possible the hard discounters will direct more of their funds into expanding in other European countries where Wal-Mart does not yet have a presence, such as in the South Mediterranean region, the launch costs incurred in the UK have been recouped, making it unlikely the three companies would ever withdraw from these shores. Allan Breese, retail director of Taylor Nelson Sofres Superpanel, says the discounters will not be pushed out of the UK by the current price war. But he says their commitment to the market is not as great as once thought: "In recent years the three foreign players have taken a step back and reappraised their position in the UK market. Consumer commitment to them with their limited choice is low and it is unlikely they will achieve a collective share of more than 5% of the market by the middle of the decade." Aldi, for one, accepts it faces a tough challenge to succeed in the UK. The discounter comments on its web site: "Adding a new dimension to such a mature and profitable trading environment is a challenging but not insurmountable task." But Research International's Carter says what Aldi et al are facing is far more fundamental: "We are seeing hunting behaviour by consumers which means there is no loyalty any more. Customers are demanding value and if they do not find low prices combined with quality and choice, they will go elsewhere. "If Aldi, Lidl and Netto were thinking about entering the UK now, they probably wouldn't bother." {{COVER FEATURE }}