Netto has thrown in the towel, leaving Aldi and Lidl as the UK’s only true limited assortment discounters. What’s the future for them, asks Peter Cripps

Talk about a rollercoaster ride. Two years ago, in the grip of recession, the discounters were on a high as shell-shocked consumers flocked to Aldi, Lidl and Netto.

But after the big four mounted an aggressive fightback outdiscounting the discounters with new ranges and round-pound deals, amid a blizzard of brand-sponsored promotions the full extent of the damage inflicted was brought home earlier this month when, following a bumper 2008, Aldi posted a pre-tax loss of £54.2m in the year to December 2009.

This week it emerged that Lidl's operating profits fell 38% to £50,000 in the year to February, The Grocer can reveal. In the meantime, Netto has effectively thrown in the towel, with its UK operations switching to Asda ownership.

So, is there a way back for the limited assortment discounters? Or is the competition too tough?

It would be foolish to write off Aldi and Lidl on the back of one poor year, argues Netto MD Charles Kay, who is still in charge of the UK business until it is sold. "They are in it for the long term. The UK could yet be very profitable for them. Aldi has made a loss in some countries before, but I've never seen Aldi pull out of a country."

Despite the hammering they've taken, data from consultants Glenigan based on planning applications posted with local authorities shows new store programmes continuing: after claiming to open almost 50 stores in 2009, Aldi has started nine construction projects in 2010 so far, while Lidl has started eight.

Indeed Aldi planning applications have already exceeded last year's figure with its accounts revealing £56.8m of new share capital was pumped into the company in 2009, presumably from the German parent company a sure sign of its commitment to future growth in the UK. And while Lidl's accounts, recently lodged with Companies House, don't reveal any capital injections, it has put in a further 14 planning applications since.

But new stores are not the only factor in the equation, and Edward Garner, communications director at Kantar Worldpanel, believes the appeal of Aldi and Lidl will remain strictly limited.

"At the height of the recession in 2008, it was chic to shop at Aldi," he says. "But it's not just about price, as the growth of Waitrose shows. Aldi has not done a good enough job of convincing people of its quality."

The limited range 1,000 SKUs in Aldi and 1,500 in Lidl means shoppers tend to use them for top-up shopping only rather than full-basket shops, according to Him!

Even the low-price proposition can fail to resonate. Aldi had no answer to the big four's discounter-style fightback because its prices were already discounted and it felt that offering price cuts would water down its discounter image. It has now coined the phrase 'never-ending discounts', and Kay believes promotions are not necessary: "Look at B&M," he adds.

However, Lidl and Netto have arguably struggled less than Aldi because they were prepared to hold their noses and promote, particularly on mainstream brands.

The other big thorn in the side of the discounters has been the collapse of non-food sales, which used to account for about a quarter of their sales.

The shifting assortment of themed items on the 'special buy' tables in Aldi and Lidl traditionally acted as a footfall-driver. However, recession saw sales of 'discretionary items' fall off a cliff. In 2009 Foley even started selling food items on the tables because the non-food wasn't shifting.

With 6% market share a long way off their 7.2% peak in December 2003, when Kwik Save was in full swing Garner would be "surprised if they grow beyond 7%. After all, if people didn't switch to the discounters in 2009, when will they switch?"

But Aldi and Lidl are not far off gaining the critical mass they need for long-term success, says Kay and the more stores they accrue, the better. "Discounters do best when they have lots of stores close by one another. There is lots of scope for them to grow."