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Discount supermarkets and their effects on the Big Four and consumers

Authored by Phil Meekin

Phil Meekin

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Approximate read time: 4 minutes

Over the last month, the UK’s supermarkets have been reporting on their quarterly figures and though it has been good news for some, it has been a struggle for the bigger names. Sainsbury’s, the most recent name to reveal their figures, are one of those currently experiencing a fall in their sales and their profits.

They have reported a second consecutive quarter of falling sales which they have blamed on falling food prices. With the exclusion of fuel, like-for-like sales fell 1.1% in the 4 months to 24th September while total sales fell by 0.4%.

However, chief executive of Sainsbury’s, Mike Coupe, was confident in the store’s strategies when he spoke to the BBC saying that it would enable them to “outperform our major peers”. In response to strong competition from German discount supermarket brands, Aldi and Lidl, Sainsbury’s have been cutting prices on their everyday products.

With Sainsbury’s £1.4bn takeover of Argos-owner Home Retail Group and the trial launch of their one-hour grocery delivery service ‘Chop Chop’; the retailer is expanding to increase their chances of sales and profit growth. After reporting two straight years of falling profits, retail analysts feel that the supermarket needs to do more to grow in a difficult and crowded market.

In comparison, Morrisons and Aldi are having a much better time of it as sales figures are on the rise and in the case of the former, profits are going up too. Morrisons who released their figures around 2 weeks ago now reported a rise in sales which saw profits rise by 13.5% to £143m for the first six months of 2016.

Like-for-like sales over quarter two rose by 2% pointing to a recovery for the fourth largest supermarket in the UK. Commenting on the results, Morrisons said it had seen no negative impact as a result of Brexit so far but; “It is too early to know how the recent referendum result could affect the British economy, but customers tell us their food shopping has not changed,”

These good figures come after the appointment of David Potts as chief executive of Morrisons in March 2015, he has been attempting to revive the retailer through price cuts and an improvement in customer service. It seems to be working as they are only one of a small number of retailers in this crowded market to have reported good figures.

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But it is the discount retailers who are still causing the biggest headache for the Big Four supermarkets (Morrisons, Asda, Sainsbury’s and Tesco). Their cheap prices which undercut other supermarkets and their rapid expansion, popping up in sites all around the country, has seen a huge growth in their popularity.

As a result, German discount supermarket Aldi reported a 12% year-on-year rise in sales for 2015 taking overall sales to £7.7bn. However, operating profits fell for the retailer by 1.8% to £255.6m, something they have attributed to a continued investment in prices.

Despite the fall in profits has not put the supermarket off from investing in itself further. After performing a listening exercise with its customers, they are planning on investing more in fresh produce, alcoholic drinks, ready meals and refurbishing 100 of their stores. This is also in conjunction with opening up 70 new stores next year as they near their aim of having 1000 stores in the UK by 2022.

Aldi has managed to double its revenue in just three years, attracting over 760,000 new customers and obtaining a 6.2% share of the UK grocery market. Competitor and fellow German supermarket Lidl currently own 4.6% of the market, giving these two discount retailers over 10% of the competitive market.

As Aldi remain committed to maintaining their position, it hints at a retailer in the supermarket price war for the long haul. They are determined to set the tempo of it too as they show no signs of slowing down in their attempt to cut costs for consumers as much as possible. So now it is up to the Big Four to show how they plan to deal with this.

Cutting costs and discount promotions have been the current tactics by those four supermarkets but as this is eating into their profit margins, it remains to be seen if this is something they can keep up for an extended period.

Whatever the outcome for the businesses themselves, consumers will remain happy as long as those prices keep falling and they can keep saving on their weekly shop.

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