PARIS/BERLIN (Reuters) - The success of French retailers in stopping the advance of discounters in the last five years shows a way out of the crisis embroiling Britain’s “big four” grocers. Their simple formula: fewer complex promotions and big price cuts across the board.
In Britain, Tesco (TSCO.L), Wal-Mart’s (WMT.N) Asda, Sainsbury (SBRY.L) and Morrison (MRW.L) are all losing shoppers to discounters Aldi [ALDIEI.UL] and Lidl [LIDUK.UL], which have grown market share to over 8 percent from 5 percent in 2012.
France, meanwhile, is the only country in Europe where discounters have seen a significant drop in market share, slipping to 11.9 percent in the second quarter of 2014 from a 2009 peak of 14.9 percent, according to Kantar Worldpanel data.
French retailers managed to turn the tide after a law change in 2008, which allowed them to freely negotiate prices with suppliers, prompting cooperative Leclerc to go on the offensive, followed in late 2011 by market leader Carrefour (CARR.PA).
The French grocers expanded their budget product lines, cut a proliferation of promotions, simplified own brand ranges and worked with suppliers to slash prices of branded goods.
The inevitable squeeze on margins was easier to stomach for the likes of Leclerc, a cooperative of independent store owners, and family-owned Auchan than for listed groups Carrefour and Casino (CASP.PA), which are under pressure to deliver short-term returns to stock market investors. But Carrefour and Casino were eventually spurred to follow suit by years of underperformance.
A basket of budget own brand goods is now about 13 percent cheaper at a French hypermarket than at a discounter, while a basket of branded goods is only 5 percent more expensive at Carrefour than at Lidl, compared with a 20 percent premium in Britain, according to data from LEK Consulting.
“British supermarkets must focus on price - they have a big gap to close. Today, a basket of similar branded goods at Tesco costs over a fifth more than it does at Carrefour,” said Jonathan Simmons, LEK Consulting partner.
While Aldi and Lidl are planning dozens of new openings in Britain, discounters closed about 150 stores in France in 2013. Lidl has slowed its expansion in France and Spanish discounter Dia (DIDA.MC) is exiting the country, selling its loss-making Dia France unit to Carrefour in June.
The decline of the discounters was also driven by a big roll-out of convenience stores by the major French chains as well as their investment in new pick-up points for collection of online orders, moves also already afoot in Britain.
It took time for price cuts to translate into improved performance for Carrefour, with hypermarket sales only returning to growth in the third quarter of 2013, while at Casino, which started cutting prices at the end of 2012, Geant hypermarket sales were back to growth in the first quarter of 2014.
And it’s been painful too. French grocery operating margins fell to around 3.8 percent in the last 12 months, down from an average of 4.9 percent in the last five years.
Moody’s predicts operating margins of the UK “big four” will fall to an average of 2.5 percent over the next 12-18 months -- around half their historical average -- from around 3 percent now, as Aldi and Lidl approach 10 percent market share.
But the French have mitigated the pain by forcing some of it onto suppliers. Seeking to match the global buying might of Aldi and Lidl, Casino announced a deal this month with Intermarche, a chain of independent stores, to jointly negotiate better prices with suppliers. Auchan and Systeme U, France’s fifth and sixth biggest grocers, have also agreed a purchasing alliance.
According to research institute IRI, prices of French “fast- moving” consumer goods fell 1.7 percent year on year in August, and Leclerc sees no let up in the pressure.
“We are in a deflationary trend that is going to last,” CEO Michel-Edouard Leclerc told Reuters in a recent interview.
By taking the fight to discounters on price, the mid-market stores have put them in something of a dilemma.
Lidl has responded in France by moving upmarket, sprucing up stores, introducing fresh bread and other products and brands, a strategy it has also adopted in its home market of Germany.
German shoppers, who in 2008 spent 45 percent of their grocery money at Aldi, Lidl and other discount chains, have shifted to mainstream supermarkets as the economy has picked up. The market share of the discounters slipped to 43.4 percent in the first five months of 2014, according to research firm GfK.
But discounters risk losing their cost advantage as they seek to match supermarkets on range and store appearance.
”This is a difficult exercise as they cannot entirely ditch the codes of the discount sector. They must widen their product offerings while offering attractive prices,” said Frederic Valette, head of Retail Insights at Kantar Worldpanel.
Editing by Mark Potter