British consumers continue discount supermarket push

Posted by James Ferre on 31st December 2008

As the financial crisis continues to bite, cash-strapped British consumers are turning to discount supermarkets such as German giant Aldi to cut the surge in the cost of living, industry analysts say.

Britons, widely-known for their devoted predilection for big-selling supermarkets such as Waitrose and Sainsbury’s, have begun looking elsewhere due to the rising increase in food costs. And with the festive season just around the corner, discounters are moving upscale, introducing organic, value-added products, Rabobank reports.

Brisk business
For fast-growing Aldi, business has never been brisker. Tesco, on the other hand, has been thrown into a fierce battle with discounters. Third-quarter sales at the Aldi saw a 22% rise while Tesco’s stalled to 3.5%. Lidl, another low-price supermarket chain, also recorded a 10% jump during the same quarter. In terms of market share, however, Tesco still has a major advantage, with the two biggest discount supermarkets yet to reach a combined 10% market share.

Tesco seeks strategy shift
Tesco is trying to shut the door on the German deep discounters by launching a new campaign dubbed “Britain’s biggest discounter”. The supermarket giant has responded to the needs of the UK consumer by developing 350 new value, discounted products which are packaged under the Tesco private label. Tesco believes that value will remain the consumer’s top priority for a number of years and is banking on this to be the case with their heavy focus on lower priced products. In addition, to get buyers through its doors, Tesco prices for a defined staples basket have been lowered by 4%, while Asda has gone even bolder with a 7% reduction. There have been suggestions that such moves have merely passed the pressure onto their suppliers.

Food processors facing tougher times
As consumer sentiment is weakening and disposable incomes are trending south, food price inflation is expected to ease in the coming months. That limits food processors’ chances of passing on their higher costs, according to Rabobank, although, if commodity prices keep falling, margins can expand by simply maintaining current price levels. Moreover, food processors are facing a tough round of 2009 price negotiations, as the retailers are asking processors to fund their lower-price initiatives. The poor state of the economy may cause pressure on retail volumes, too.

With less money to spend on food, Sebastiaan Schreijen and Processed Food and Retail team colleague Sapna Naik believe consumers will increasingly trade down.

This down-trading and the surge in private labels may provide opportunities for food processors as well. “Even dehydrated soup products are flourishing at the moment,” Mr Schreijen noted.

Foodservice trends
Foodservice sales have taken a dip due to a number of factors including the economic downturn, omnipresent job losses in the financial sector and a decline in tourism. Although the out of home market is under pressure, it is less consolidated and forms a buffer for suppliers against the rising concentration in food retail, Rabobank concluded.