Warning Signs From the U.K. Grocery Scene

Given a lengthier experience with grocery e-commerce and competition from Aldi and Lidl, the British grocery market is now in a tough retail climate that provides some important pointers as to where the U.S. grocery market is heading.

The British grocery market is still dominated by the big four chains: Asda (Walmart), Morrisons, Sainsbury’s and Tesco. However, flat sales, declining profits and recent senior level retirements and resignations all indicate that the competitive stresses among the market leaders are increasing.

Asda and Sainsbury’s recently tried to merge (a partial exit strategy for Walmart), but this was prevented by the U.K. government’s Competition and Markets Authority. The merger was aimed at improving profits by reducing costs—and Sainsbury’s now still aims to cut $625 million in costs by closing 55 stores and opening 110 new units, the majority of which are convenience stores.

Tesco—the market leader—is losing its highly regarded chief executive, Dave Lewis, to retirement, with successor Ken Murphy coming aboard from U.S.-based Walgreens Boots Alliance. Key strategies for maintaining profitability have included shutting down most overseas markets (except Poland and Thailand) and acquiring convenience-store wholesaler Booker in order to achieve additional scale economies and efficiencies, as well as experimenting with a discount format, Jack’s, which was designed to be Tesco’s answer to Aldi and Lidl.

Wholesaling has also been an important strategy for Morrisons, together with its close ties with Amazon U.K., which is not yet on the radar in terms of grocery market share. Despite sales-building efforts, including extensive digital investments, none of the U.K.’s big four is managing to increase sales, and the overall grocery market is flat. Even online retail sales growth is down to only 3.3% (2018-2019) vs. the previous five-year average of 9.6%.

The much-heralded Ocado—Kroger Co.’s U.S. high-tech customer fulfillment center partner—has achieved 11.4% year-over-year growth in its latest fiscal quarter and is said to be “Britain’s fastest-growing grocer.” But its U.K. market share is only 1.4%, and it is now in the process of switching its U.K. business relationship from Morrisons to Marks & Spencer.

In contrast to Ocado’s limited performance, Tesco dominates the U.K. online grocery market with a 30% share, as it has for a long time. However, it reportedly continues to struggle to achieve adequate online profitability despite serving dense markets in which brick-and-mortar stores are less convenient alternatives than those in the U.S.

Besides heavy IT costs, the key problem for U.K. grocery retailers is, of course, the continued rapid growth of Aldi and Lidl, not to mention Iceland’s Food Warehouse operation and the various pound (dollar store) chains.

Combined, Aldi and Lidl now account for about 14% of all U.K. grocery sales as of August 2019, and are growing rapidly based on their clear price advantage over the big four chains (see accompanying chart). According to Kantar U.K., Aldi’s sales are running 11.1% over those in 2018, and Lidl is up 8.5%. Aldi now operates about 825 stores in the U.K. and is planning to open another 100 locations over the next two years, while Lidl’s current store count is 770.

Reduced selling prices based on the efficiency of the discounters are the main reason Britain’s grocery market is now not growing. The tail is clearly wagging the dog, and this impact is now extending all the way up to the quality and service operators such as Booth’s, Marks & Spencer, Waitrose and Whole Foods.

Although, for the short-term, America’s supermarket chains have more opportunities to “buy” sales and profit growth by acquiring independents and established regional operators, they need to prepare for the longer term price and margin impacts of the rapidly growing numbers of discounters such as Aldi, BJ’s, Costco, Dollar General and Lidl. As such, U.S. retailers therefore need to be careful about spending wildly on potentially unprofitable online investments. As always, profitable investments for the future requires retailers to carefully evaluate and choose wisely; hoping for a favorable outcome would be the worst strategy of all.

David Rogers is president of Northbrook, Ill.-based DSR Marketing Systems Inc.