They are grabbing market share gains as they wow shoppers with quality and value, but does their financial model restrict further growth, asks James Halliwell


If it was a surprise that the discounters had a wobble in the depths of economic gloom last year, it's an even greater one that amid record promotional activity by the supermarkets this year, they have bounced back.

Hard discounters Aldi and Lidl left the supermarkets for dust growth-wise in the 12 weeks ending 17 April 2011, with year-on-year sales increases of 15% and 14.7% taking their market shares to a record 3.3% and 2.6% respectively [Kantar Worldpanel], a performance described by Kantar as "stellar". The frozen discounters weren't far behind, Farmfoods posting an 11.2% uplift and Iceland a 5.9%.

Clearly, the sector has benefited from the even deeper economic gloom the country finds itself in this year. But as the findings of a comprehensive study by Him! reveal, there are other factors at play.

Paradoxically, while low prices remain the most important of these, it is not as important to shoppers as it was last year, according to the survey of 1,750 Aldi, Lidl, Iceland and Farmfoods shoppers. Of those polled in the Discounter Tracking Programme, 66% said they were primarily interested in cheap prices compared with 69% last year.

Tellingly, one of the metrics that saw a sharp jump in importance was value for money, which was cited as key by 34% of shoppers ­versus 25% last year.

The distinction between a product that is cheap and one that offers value for money is subtle but significant and reflects how effectively the discounters have integrated the quality and price message. Their success also underscores how ineffectual attempts by the likes of Tesco to take them on with their own discounter ranges focused on price rather than quality have been.

Approval ratings for the quality offered by the discounters, on the other hand, have gone up across the board, with Farmfoods leading the pack, an impressive 51% of shoppers describing the quality of its products as "10/10 outstanding".

A whopping 63% of Farmfoods shoppers also rated it outstanding for value for money, again the highest approval rating.

Quality and value for money are becoming increasingly important to consumers, agrees Malcolm Walker, CEO of Iceland, which was voted as outstanding on quality and value for money by 38% and 48% of its shoppers respectively.

"Iceland is driving significant growth in frozen food by focusing on great quality products," he says. "We offer genuine innovation, outstanding convenience and brilliant value compared with chilled."

The retailer launched more than 130 new products in the last month alone, he adds. But while the results of the research show that every aspect of the customer experience is improving, it also indicates that discounters could be growing faster if they offered a wider range. Some 54% of respondents use a pay-as-you-go mobile and 30% smoke, yet none of the stores covered in the survey sell mobile top-ups or cigarettes. "They are missing a huge opportunity," says Him! director Tom Fender.

Perhaps more worryingly, only 8% of shoppers use the discounters for a full weekly shop. "Discounters carry about 1,500 lines, and UK consumers are used to much fuller ranges," says Fender. "Shoppers say a wider range would encourage them to buy more of their weekly groceries at discounters."

There are risks involved, says Kantar communications director, Edward Garner. "If they expand their ranges, it starts to muck up the model, because once you start adding products, you start to become like anybody else. As Paul Foley, the former UK and Ireland MD of Aldi said, if you are selling pasta sauce, sell the one everyone wants to buy. Adding the other 29 just adds cost."

Fortunately for the discounters, despite broadening their ranges, they're clearly selling the one ­everyone wants to buy.


Leafleting ‘presses right buttons’ for discounters

The research reveals that the most powerful marketing device employed by the discounters is leafleting, with 29% of shoppers saying that a leaflet - whether in store or through the letter box - would encourage them to visit a store.

Only 8% say they are influenced by TV and national press ads, which the supermarkets are currently spending record amounts on.

"Leaflets are far more effective at driving footfall and till transactions than above-the-line campaigns" says Gemma Lovelock, UK MD of retail specialists TLC Marketing Worldwide. "A leaflet offering discounted products at the local store is always going to press the right buttons."

Read more
Farmfoods ‘taking shoppers across the board’ (30 April 2011)
Discount duo seize biggest-ever slice of the market (27 April 2011)