The cutting edge

WITH prices on more than 8,000 of its product lines already regularly reviewed, it's fair to wonder whether Tesco's decision to add a further 2,000 low-margin items to its price-checking scheme will amount to much more than a hill of beans.

The UK's biggest retailer, which accounts for nearly one-third of all grocery spending, created a flurry of publicity last week when it said it would begin matching prices on more than 2,000 products sold at hardcore discount chains Aldi and Lidl. Many took the announcement as a sign that Tesco is growing concerned about the increasing popularity of competitors offering rock-bottom prices.

Tesco did nothing to play down this view, noting in its press release that the company was "focusing on the growing discount retail sector in a bid to ensure that customers do not have to compromise on quality or service to enjoy the lowest prices".

The latest figures available from TNS Worldpanel, which regularly reviews the grocery market, found that both Aldi and Lidl delivered growth ahead of the market during the 12 weeks to December 30. While total UK grocery tills were 4.9% higher than the same period a year ago, Aldi's share rose by 8.1%, while Lidl was 6.5% higher.

However, their total market shares are still tiny compared with the 31.5% that TNS assigned to Tesco for that period. Aldi's was a mere 2.7%, while Lidl came in at 2.3%.

Andrew Wade, retail analyst with Seymour Pierce, said he believed Tesco's move to price-check products against the German-owned discount chains was "playing on the perceptions" of the public.

"They are probably not trying to win over the Lidl or Aldi shopper," he said. "It is more about the perception of having low prices and offering good value."

Wade said he did not think the move would have any impact on Tesco's bottom line, which in the last full financial year amounted to pre-tax profits of £2.65bn on revenues of £42.64bn. This included sales of everything from food, clothing and home furnishings to electrical goods, books and insurance across its global network of more than 3,000 stores.

By comparison, the decision to price-check against Aldi and Lidl in the UK is a drop in the bucket. "A lot of discounters are selling different kinds of products than the main supermarkets," Wade said. "They are not selling Heinz Beans or Kellogg's Cornflakes, so you can't price match on those lines."

Others, however, are not so quick to dismiss the rise of the hardcore discounters. "There is no doubt that Lidl is growing and will continue to grow," said one analyst who asked not to be named. "I think the threat is real."

Ed Garner, director of research at TNS Worldpanel, takes a more measured view of the situation. He said although Aldi and Lidl were outpacing the market, much of this could be attributed to the "mopping up" of former customers of Kwik Save, the discount chain that had some 1,500 outlets across the UK before its financial collapse in mid-2007.

"If you add up all the discounters in this country, including operations like Denmark's Netto, they are still less than 6% of the market," Garner said, adding that this was more or less where the sector stood a year ago. "Pretty much, they are going nowhere."

However, he added that although Aldi and Lidl are relatively small in the UK, both are part of large international operations with substantial financial backing.

"Because of their size and their range of operations, Tesco operate across fronts, so they cannot be a niche operator," Garner said. "Probably what they are doing is looking ahead, and they want to make sure the hard discounters don't get a foothold.

"If they did nothing, and just decided to ignore the discounters, that would allow them to build a bridgehead."

Aldi opened its first UK store in 1990, and now has more than 300 shops across the UK. Like Lidl, which entered the UK in 1994 and has more than 380 stores here, its business model relies on keeping costs to a bare minimum and passing these savings on to customers.

For both of the German-owned chains, this has meant offering a limited range of popular food items, most of which are own-label products. A typical Aldi store – which includes about 7,500 shops around the world – carries between 700 and 800 food lines. By contrast, a typical grocery store has roughly 25,000.

Both also focus on locating their stores in areas where property prices are cheaper. Together with the relatively small size of building needed to house their limited lines of products, this keeps overheads down. Other common features include utilitarian interiors, low staffing levels and charges for carrier bags.

All of this created a popular view within the UK that both chains catered exclusively to society's lowest earners with a cheap and cheerful offering. Neither was regarded for the quality of food on offer, but more recent anecdotal evidence suggests these perceptions may be changing.

Tales of 'foodies' dipping into Lidl for cheap edibles have been on the rise. This perhaps helps to explain why the company deviated from its tried-and-tested model to open a store in the posh Mapperley Park area of Nottingham, a sure sign that at least a minority of middle-class shoppers no longer turn up their noses at the glaring yellow and blue hoardings.

Aldi has been more active in attempts to reshape its image. UK advertising for the company now consistently underlines the quality of the food, with reference to award-winning products. These efforts will have been boosted by recent gongs for Aldi's brioche, beef Wellington and pizza from the industry's Quality Food awards.

Tesco has countered by opening a mock store in a secret location that is stocked with its own products as well as lines from Aldi and Lidl. In addition to comparing price, shoppers are also asked to assess the quality of the products on offer.

It might not add up to launching an all-out attack on the deep discounters, but there seems little doubt that market conditions will boost these smaller rivals in the coming months.

Although analysts at Dresdner Kleinwort expect Tesco to report a robust performance when it gives its Christmas trading update on January 15, they have also warned that a tougher consumer outlook will make it "relatively challenging" to deliver increased margins on UK sales in the coming months. They also cautioned about a tempering in earnings momentum.

"Although we expect a resilient performance in this update, we also foresee a more cautious outlook, given the precarious UK consumer position, and a tougher competitive environment in UK food retail from January," Dresdner Kleinwort told investors this month.