France and UK are ripe markets for discounters

France and the UK present golden opportunities for discounter penetration and expansion, according to a new report from Verdict Research.

In its study, The Future of European Discounters 2008, Verdict claims new consumer spending patterns will open the door for discounters in European retailing as shoppers cut back on non-essential spend and become more discerning in their food shopping behaviour.

Verdict says discount retailers such as Aldi and Lidl will become a more significant force, particularly in France and the UK, where they are less established compared with Germany, Scandinavia and Benelux.

France is a prime market for discount expansion because regulations regarding retail space will be relaxed in January 2009, says Verdict.

The threshold for planning regulation exemptions has been raised from 300sq m to 1,000sq m with the specific aim to attract more discount retailers from across the Rhine to combat price inflation and boost purchasing power. 300sq m is too small a size to run a discounter profitably.

The UK represents another golden opportunity for discounters, adds Verdict. Judged against a European benchmark, relatively low store per capita figures in the UK show immense potential for the format, as UK figures still lag other EU countries.

“Now is the time for the likes of Aldi and Lidl to pounce in the UK,” says Daniel Lucht, European retail analyst at Verdict research and co-author of the report.

“As these players widen their store portfolio and the discounter network as a whole they will further drive sales through the channel. A denser discounter store network in the UK will make shopping at the discounters more common and socially acceptable. Past experience suggests that once a discounter opens in their catchment consumers will give it a try.”

German market

In Germany the battle for market share in the discount sector is stepping up a gear, reports Verdict.

Tengelmann’s disposal of its soft discount operation, Plus, has resulted in a serious challenge to Lidl, especially as the retailer has only recently repositioned its offer towards the softer edge.

With Plus’s store estate broken up due to competition issues and reinforcing the discount operations of the leading grocers, Edeka and Rewe, Lidl’s clear number two position in the market is now under acute threat, says Verdict.

The research company claims this will probably mean that Lidl’s owner, Schwarz, will have to focus on domestic issues and scale back its ambitious international expansion plans for the time being.

Daniel Lucht, author of the report, said: “The discounters now need to build on their success, they must raise as much finance as possible to aggressively drive expansion into markets where they are underrepresented. A possible solution is sale and lease back deals on the store network in their domestic and more mature markets.”

Verdict suggests Aldi and Lidl may also raise cash by utilising some of the private wealth of their respective wealthy owners, the Albrecht brothers or the Schwarz family.

Future development

Verdict Research urges discounters to continue their efforts to innovate and to further update the store model and their product ranges.

Lidl is trialing a new convenience format in London and has opened an updated store in Frankfurt, it says.

However, researchers say store model innovation involves a difficult balancing act for discounters, as the model is built on simplicity, a relentless focus on driving down costs and a limited, high turnover range.

“As quality perceptions improve, discounters have the chance to convert middle class shoppers to loyal customers and range reviews will play a key role,” said Lucht.

“The obvious range addition is organics with consumers across the EU perceiving it as higher quality than standard produce. While the introduction of organic private label ranges has progressed massively in other markets already, with Aldi being the biggest organic grocer in Germany, the UK lags on this aspect.”

Discount differentiation

The two leading discounters are adopting contrasting approaches to capitalise on market opportunities, says Verdict.

Whereas Lidl is positioning itself as a soft discounter, ramping up the percentage of fmcg brands in its portfolio – a successful move in terms of top-line sales growth – Aldi looks likely to consequently go down the hard discounter route, focusing exclusively on own label products, where margins are higher.

Simon Chinn, co-author of the report said: “It is not only the credit crunch that drives discounter growth. Proactive range reviews, private label relaunches, alterations of the offer and a generally updated propositions on part of the discounters are helping to win new customers. Not least aggressive new discount store openings are making a significant contribution to driving sales growth.”