Key battle grounds

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The price war has gone nuclear. Morrisons dropped the bomb in March, issuing the mother of all profit warnings as it slashed prices in an attempt to avert losing any more ground to its rivals.

Sacrificing margins to facilitate price cuts soon became the name of the game for the rest of the big four. Further profit warnings, price cuts, price match pledges, loyalty scheme rethinks and staff overhauls have ensued as discounters Aldi and Lidl have continued their assault on the superpowers of grocery.

The supermarkets were vulnerable long before the discounters’ latest offensive, characterised by big rises in ad spend and range extensions, ever began. Profits in big box retail are under mounting pressure from shopper migration online, where margins are notoriously slim or non-existent, and to convenience.

That’s not all. As retailers go to war with each other, scientists, lobbyists, politicians and the media have rounded on the industry in a war on sugar. At the same time rising duty and burdensome regulation on the sale of tobacco, continuing unease about salt and fat content, and supply chain security following the horsemeat scandal in 2013 have all taken their toll.

In short, it’s been carnage. But the next 130 pages - our biggest ever Top Products Survey, extended to cover 101 categories and £106.4bn worth of products - are more than just a bodycount. Yes, there are casualties, but heroes have also emerged. Who are they? And how are the hostilities (and other behavioural factors) changing the way Britain shops, the products we buy and how much we pay for them?

On the retail side, the giants have taken the heaviest losses. The Top Products Survey shows value sales in core grocery (not including the discounters, which are not covered by Nielsen’s Scantrack service) over the following 101 category reports have remained flat, but the total is flattered by duty rises on tobacco and alcohol. It’s volumes that are crucial here: they’ve fallen 2.5%.

Aldi and Lidl, up 21.4% and 23.3% [Nielsen total till roll 12 w/e 8 November] account for much of the decline in the traditional grocers. As the big four fight harder to avoid losing more volume share, prices are being slashed, adding to the deflation. Food inflation fell from 2.7% in October 2013 to just 0.1% in a year.


This is about more than mere price tags, says Nielsen head of business & shopper insight Mike Watkins. “It’s a price war but it’s actually very sophisticated,” he says. “People think of this simply as deepening price cuts to unsustainable levels. But that volumes are falling in the supermarkets isn’t necessarily just down to the fact products are cheaper in the discounters.”

  Tesco Asda Sainsbury’s MorrisonsCo-op  Aldi Lidl Waitrose M&S Iceland
 Market Share (%)  28.0  16.3  16.1  10.9  5.6  5.5  4.5  4.2  3.0  2.1
 Sales Growth (%)  -4.2  -0.8  -1.8  -3.0  0.0  21.4  23.3  6.9  1.8  -1.6

Range extensions and improvements to store layout, not just low prices and store openings, have been central to the discounters’ growth. As has communicating these changes: we revealed earlier this year how Aldi and Lidl upped annual spend on TV and press ads by almost 50%. That both now vastly overspend on ads, relative to their share of grocery, shows they feel they have much to shout about.


brands v own label

“They’re attracting new and higher spending shoppers,” adds Watkins. “It’s being driven by how ranges are being developed and extended. Many shoppers are now finding they can now do a full weekly shop in Aldi or Lidl. That wasn’t the case a few years ago.”

Particularly in packaged groceries such as canned food, bread, tea and coffee, fallout from rise of the discounters has been evident for some time. In some cases the decline accelerated this year. For example, Warburtons, Hovis and Kingsmill have been hit with losses worth £109.9m as bread sales in the supermarkets nosedived. And it’s not just brands: bread has seen the greatest absolute decline in own label this year, with sales down £113.5m, or 7.5%.

Lidl’s rollout of in-store bakeries across its estate has left its mark on bread, as has the ongoing expansion of the retailer’s premium Deluxe range on the wider market. But the greatest damage to the supermarkets has been in fresh produce, as both Aldi and Lidl have dramatically increased their chilled and fresh ranges. “Fresh food is the new battleground,” says Watkins.

A particularly bloody one at that. The supermarkets have lost a staggering £397.8m in veg sales as fruit & veg sales in the discounters has surged 32.1% (as a result share of own label in Aldi has gone from 85% to 87%; in Lidl from 66% to 68%).Fresh milk has lost £89.2m as supermarket prices crept down closer to Aldi’s 95p/two-litre price point. The value of meat and poultry has also plummeted in the supers as sales soared in the discounters (see left).

Fresh is the battleground

The scale of the price cuts in fresh are astonishing. Iceberg lettuce, broccoli and cabbage (as well as some store cupboard items) prices were slashed to just 50p an item by Asda as part of a £50m top line investment in March. In some shape or form, rivals soon followed. That the cuts were as deep as 50% shows just how much of a killing the supermarkets were making on fresh food previously.

The huge full-year price falls revealed in our analysis (cucumber is down 12.9%; broccoli 14.6%; lettuce 17%) reflect more than the supermarkets’ swingeing cuts, however. Production costs have eased following good harvests, aiding price deflation. Potatoes, for example, have seen the greatest decline of any product in 2014, with value down £148.9m (12.6%); a good harvest after the disastrous crop and rampant inflation of 2013 are as much to thank here as any price war.

Milling wheat prices have fallen by about 15% over the year thanks to favourable weather, easing some of the burden on manufacturers, says Lorraine Hudson, market analyst at Mintec. dairy producers have also seen costs fall. “Excellent pasture conditions, combined with higher dairy prices at the beginning of the year, falling feed costs and the approaching removal of milk quotas in April 2015 have led to milk production increasing in 2014,” says Hudson. “This has caused the price of most dairy products to fall.”

Not everyone’s been so lucky. Olive oil brands Filippo Berio and Napolina have seen sales drop as both have been forced to pass on cost increases resulting from poor olive harvests. The timing couldn’t have been worse. As Aldi and Lidl increasingly attract more well-heeled shoppers, their sales of olive oil are up 25% and 40% respectively, says Berio MD for the UK Walter Zanre. With 750ml of extra virgin olive oil selling for £1.50 in Aldi, less than a third of the price of Berio or Napolina in the big four, brands like this are under growing pressure to lower prices.

The heroes of 2014

five biggest risers

Sovereign Blue ▲ £289.8 (415.3%) With George Osborne squeezing smokers ever harder, cheap trumps all in tobacco. This is certainly that: Sov Blues are 34p a cig, versus a market average of 37p

Pepsi ▲ £33.7m (9.5%) Pepsi has defied a flat carbonates market and trumped Coke by focusing on sugar-free Max. Viral ads, price marked packs and a 600ml format have hit the right notes with the brand’s young, male target drinker

Russian Standard ▲ £32.3m (48.6%) Owner Roustam Tariko wants to make Russian Standard bigger than Smirnoff in three years. He’s got a long way to go (Smirnoff Red is worth £387.3m; Standard is £98.7m), but a focus on price and prime spots in store is driving growth

Clementines ▲ £31.1m (14.5%) Mandarins (down 51.5%) and oranges’ (down 11.7%) loss has been clementines’ gain, thanks to improvements in quality through varietal development and growing demand for easy-to-peel fruit

Kinder Surprise ▲ £19.7m (61.2%) New pink and blue eggs, containing toys such as cars and dolls may have taken the surprise out of Kinder (and laid Fererro open to claims of gender conditioning) but they’ve certainly paid off in terms of growth


The body count…

Potatoes ▼ £148.9m (12.6%) Ouch. Spuds’ decline partly reflects the discounters growth in fresh. Better yields after the disastrous 2012 crop have also eased prices. Volume is down 8.9%

Lambert & Butler ▼ £142.5m (10.6%) Once king of the value cigs, L&B continues to suffer as cheaper rivals and rolling tobacco advance. Just look at Soverign Blue’s march (p50) for source of some of the pain for Lambert

Warburtons ▼ £53.7m (9.4%) With standard white loaves continuing to decline, Warbies has taken the biggest hit in the bread market. The company is looking to recover with a range of premium NPD in 2015

Huggies ▼ £33.1m (97.8%) Huggies nappies began its retreat from the UK in 2012. This is the last we’ll see of the once £80m+ brand. In nappies at least: Huggies is still present in other babycare areas

Innocent ▼ £27.6m (12.3%) An end to the fierce promotional warfare between Innocent and Tropicana has hit both brands’ top lines hard. Despite the losses, a move to higher prices is improving profitability

“It’s trendy to be thrifty,” says Zanre. “The discounters are appealing more and more to upmarket people. Both Lidl and Aldi are running upmarket ad campaigns and chasing people with money. The category is also suffering from a more general decline in value related to tightened consumer spending because wage inflation has not kept pace with price inflation.”

It’s not just oil, of course. While the discounters still undertrade in personal care, they’re growing at a blistering rate. Pound stores and online are also stealing sales from the grocers. “We’ve seen a dynamic shift in the retail environment over the past year,” says Peter Embleton, personal care category expert at Unilever. “Like the majority of categories, personal care has been impacted by this, with more sales going through discounters and online, whilst the grocers’ share is being squeezed. The recessionary period has brought out the savvy shopper in all of us, and is here to stay.”

Other factors are hitting Britain’s Top Products just as hard. The supermarkets have sold £69.4m less fruit juice in the past year as the sugar content has come under fire. Juice drinks for babies, admittedly a much smaller market, have been hit even harder, suffering a 22.4% decline (the greatest percentage fall of the year) after an NHS report advised parents against giving fruit juice to babies.

Surprisingly, some categories (such as carbonates and sugar confectionery) have so far managed to dodge the bullets in the war on sugar. And some the most sugary products of all, sports and energy drinks, are in strong growth.

Diet fizz

Other brands and categories are benefiting from the renewed focus on health. Pepsi has achieved the greatest absolute value gain outside tobacco this year, at £33.7m. Strong viral marketing aimed at Max’s target group of young, male drinkers - and the fact the brand is on average 31.3% cheaper than Coke - are significant factors, but more so is the brand’s relative strength in the sugar debate.

Pepsi stole a march on Coke in introducing younger drinkers to the ‘Maximum Taste; No Sugar’ concept with the launch of Pepsi Max back in 1993. Admittedly, Coke had been first to market with a sugar-free cola with Diet Coke in 1982, but that’s aimed at an older, female market. It wasn’t until 2005 that Coke launched Zero to go head to head with Max, which now accounts for the lion’s share of Pepsi sales and is worth roughly twice as much as Zero. Coke, on the other hand, finds itself in a precarious position, with most of its £1.2bn sales coming from the original, calorie-packed version. Little wonder mid-calorie variant Coke Life arrived this autumn.

That bottled water is in strong growth and fruit volumes are up despite the fall in value are also due to growing health consciousness. Clementines, the strongest-growing fruit of the year, also reflect growing demand for more convenient products (a trend that’s also benefited brands such as Ginsters and Pepsi) to thank for their volume rise of nearly 20%.

“Mandarins appear to be losing popularity every year as they are notoriously difficult to peel, unlike clementines which are a genuine easy peeler,” Steve Rudge, head of procurement at fresh produce supplier Reynolds. “In addition, through varietal development, the quality of clementines has improved significantly and some of the selected clementine varieties really do offer a superior eating experience.


For all the talk of health, Brits are still knocking back more booze at home. And in spite of plentiful plaudits about the quality of discounter ranges, we’re buying more of it at the supermarkets. Premium brands are in particularly strong growth. “Retailers who offer premium brands are creating a point of difference that’s clearly being welcomed by shoppers,” says Adam Boita, head of marketing at Pernod Ricard UK, pointing to the spirits sector’s growth of £117.1m, the greatest non-tobacco absolute category value gain of the year.

“In any category where you have a clear leader, profitability will become an issue and retailers will require challenger brands”

In whisky, The Glenlivet and Jack Daniel’s stand out. In vodka, Grey Goose, the most expensive spirit sold in supermarkets, with an average price of £52.95 a litre is flying. Diageo points to the 49.9% growth of its super premium vodka offering Cîroc as further proof of increasingly premium tastes. Gin drinkers are also prepared to pay more, says Diageo off-trade sales director Guy Dodwell: “Tanqueray has grown at 23.2%; gin consumers have become increasingly interested in exploring the premium gin end of the market.”

Posh isn’t the only way to go. Some of the strongest growth in spirits has come from value brands prepared to invest in deals. Russian Standard, which sells for almost £1/litre less than Smirnoff, has enjoyed the greatest value gain in booze, up £32.3m. Famous Grouse, Whyte & Mackay and Green Mark, which this year lowered its abv to help the multiples “compete with the discounters”, are also doing well.

“In any category where you have a clear leader like Diageo, profitability can become an issue and retailers will require challenger brands,” says Nick Reed, sales director at Essential Drinks, which supplies own label gin and vodka to most of the multiples, as well as a range of premium gins and standard gin Greenall’s.

Some retailers increasingly use featured space deals on upper-tier own-label spirits to drum home a point of difference. “For the past 18 months Sainsbury’s has been actively promoting own label,” says Reed, pointing to its regular £13/750ml deal on IWSC gold medal winner Taste the Difference Blackfriar’s Gin, undercutting brands. “They’ve moved away from Diageo brands and switched to cheaper brands and own label.”

Own label has made the greatest gain in wine, sparkling wine and Champagne, while wine brands, such as Jacob’s Creek and JP Chenet, have been some of the biggest casualties. Increasingly sophisticated own label ranges such as Tesco Finest, Sainsbury’s Taste the Difference and Asda Extra Special are mopping up lost sales.

The strength of the discounters in sparkling wine and Champagne is inspiring growth in own label, as is the relative weakness of brands in this sector. “It’s coming from Prosecco and, with the absence of a clear brand leader within Prosecco, the growth is primarily being driven through the multiple channel in own label,” says Damian Clarke, MD of Cava brand Freixenet, which has suffered a calamitous 27% volume decline. “Prosecco is the preferred choice by both consumers and retailers.”

Cheap indulgence

The surge in Prosecco sales on deal, up from 65% a year ago, is in contrast to the rest of grocery, where promotions have remained more or less constant at around 35% of sales, and demonstrates how the war is increasingly being fought around indulgence.

Tesco’s £8 deal on a bottle of Champagne earlier this month - in a bid to get people through the door this Christmas - confirms that indulgence is as appealing as price itself in the value equation.

Similarly, deals on lager during the World Cup helped put the sector back in volume growth for the first time in three years. It’s perhaps no surprise that Budweiser, the official beer of the World Cup, enjoyed the greatest growth, a reflection of intense deals during the summer. Foster’s, Stella and Kronenbourg also achieved value and volume gains as a result of strong promotions paired with marketing investment. But no one’s quite in the mood to party.

“In a World Cup year during one of the most competitive retail landscapes we’ve ever known, the average price per litre for total lager was down 1%,” says Martin Porter, off trade MD at Heineken UK. “This decrease in price is a trend many other categories are experiencing as the battle for growth in grocery continues.”

And with Aldi and Lidl continuing to win that fight, suppliers across the board are in discussions and trying to tailor their offerings to suit them. Brands can only afford to ignore, or be ignored by them for so long. “It’s not a case of if we go into the discounters,” says a senior source at one of Britain’s big four brewers. “But when. And how.”  Is branded beer the next battlefront?