UBS says the threat to the big supermarkets from discounters is “past its peak” but this does not seem to have stopped J Sainsbury PLC (LON:SBRY) from following market leader Tesco with a pledge to match Aldi’s prices.
The UK’s big four supermarkets have been battling the German ‘limited assortment discounters ‘LADs’ for customers since 1990 when Aldi opened its first store in Birmingham, with Lidl joining in 1994.
Their growing presence as a disruptor in the UK food retail market came to a peak in the 2010s when the Big Four’s price cutting led to a long period of grocery price deflation.
But “two things stood out for us,” said UBS after Lidl published its first-ever public annual report for its GB operations: the LAD’s profitability was “surprisingly low and its gearing stretched”.
With a profit margin well below Aldi’s and other Big Four retailers and gearing almost ten times Aldi’s the analysts said: “The latest information from Lidl reinforces our view that the discounters are challenged in the UK and that they will likely focus on repairing their profitability and cash flows.”
Research by the Swiss bank also points to “increasing cannibalisation” for Aldi and Lidl and high and increasing toe-stepping with the Big Four.
“We believe this shows we have reached discounter maturity in the UK.
“Further, online and trip consolidation work against a discounter’s offer, which has helped Aldi/Lidl lose share since the beginning of the pandemic.”
A key point for the analysts from recent discussions about online grocery is that “addressing online comprehensively would be costly and operationally challenging for a discounter”.
It is against such a background that Sainsbury’s has joined its larger rival Tesco in trying to press home its recent online advantage with an Aldi price-match scheme.
The UK’s second largest supermarket group has promised to slash cut shop prices for on 250 items to match those on Aldi shelves and chiller cabinets, including meat, chicken, fresh fruit and vegetables and dairy.
This is the first of the strategic tweaks from new chief executive Simon Roberts, which he alluded to in November as part of a plan to “drive an inflection in underlying profit momentum”.
“We are making great progress delivering our Food First plan and I’m determined that in these tough times, we do even more to help our customers save money. Our new commitment to match Aldi prices on hundreds of our most popular products will mean our customers can be confident that they are getting the quality they expect from Sainsbury’s at great prices,” he said.