Day of the discounter: when will the UK reach peak Aldi and Lidl?

More than 300 people queued outside Aldi’s 1,000th UK shop before it opened on Thursday — their determination to be the the first through the doors of the discounter in the affluent town of Woking in Surrey testament to the chain’s popularity.

The German group overtook Morrisons last year to become the UK’s fourth-biggest grocer by market share according to Kantar as sales boomed during the cost of living squeeze. Today £1 in every £10 spent on groceries is at Aldi, and the retailer has plans to open another 500 shops. 

It was also a noteworthy week for rival Lidl, another German group which opened its largest ever warehouse in Luton in Bedfordshire. The facility, which cost £300mn, will support its growth ambitions despite some reports earlier this year saying it was slowing down.

But after two decades of aggressive expansion carrying them to controlling a joint 17.9 per cent of the total UK grocery market, some believe the two chains are reaching saturation point, even if the ongoing cost of living crisis is providing a boost.

Analysts point to how they rely on a single selling point — that they are cheaper than rivals, or perceived to be — have more limited online operations than rivals and are in competition for good bricks and mortar locations.

“Obviously there are fewer available sites now, and most of those sites are also attractive to quite a few of the other operators,” said Ben Green at Atrato, adviser to the real estate investment trust Supermarket Income REIT. “Interestingly, quite often Aldi might end up competing with Marks and Spencer for a site.” 

Green believes their market share will settle at about 20 per cent. “It’s quite hard for them to grow because they have one customer proposition: quality value,” he said.

“I do think we have gone through peak Aldi and Lidl despite their rhetoric,” added Clive Black at Shore Capital. He described Aldi’s plan for a further 500 stores as “aspirational . . . a totemic statement to say ‘we’re not going away’.”

Not everyone is as bearish. Bryan Roberts, global insight leader at grocery analytics group IGD, said rival supermarkets have long held a view that Aldi and Lidl are likely to reach between 25 per cent and 30 per cent market share — the size of Tesco, and their ambition should not be underestimated.

“The potential they have has really been unlocked by the fact that they are a lot less kind of dogmatic about their real estate requirements,” he said.

The pair used to favour rectangular sites, near busy junctions or close to incumbents, but they are now opening slightly larger stores in more retail parks.

Despite being more flexible in how they build their store estate, Aldi and Lidl have not deviated from the hyper-efficient business model that has contributed to their success since they set up shop in the UK in the 1990s.

Their outlets are significantly smaller than traditional supermarkets and they have a limited number of ranges — about 2,000 compared with Tesco’s tens of thousands — as well as fewer staff. Shelves are specifically designed to fit cardboard boxes stuffed with produce, which makes restocking more efficient than placing items one by one on the shelf. To combat high energy bills, they have been installing large so-called chiller doors on most fridges. 

Lower operational costs and selling largely own-label products — 90 per cent in Aldi’s case — means they can beat incumbents on price as they have the scale necessary to negotiate better deals with suppliers. Aldi charges 22.6p per 100g of Heinz-branded baked beans, while its own cost 11p.

The two German discounters made serious inroads during the last recession when it became culturally acceptable to be seen in an Aldi or Lidl. A so-called “claret offensive” at Lidl, selling a premium range of Bordeaux wine, lobsters for £5, and their eclectic middle aisles of lifestyle, household and DIY bargains puts them on the radar of more discerning buyers. They responded by opening hundreds more stores, often in more affluent locations. 

The cost of living squeeze has once again put the wind in their sails as an increasing number of shoppers is doing a fuller shop at the discounters.

Aldi is growing sales at the fastest pace among supermarkets, with an increase of 21 per cent in August from a year earlier, according to Kantar data, while Lidl’s rose by almost 20 per cent in the same period. Sales at upmarket rival Waitrose rose by 4.4 per cent, at Tesco and Sainsbury’s by 9.5 per cent and 9.3 per cent respectively.

However, more affluent shoppers are generally expected to trade up again as soon as consumer confidence improves, a trend observed during previous downturns.

Further growth is also likely to lead to more competition between Aldi and Lidl as well as with their own stores. Giles Hurley, Aldi UK and Ireland chief executive, is conscious of this but ultimately unfazed. “My hope would be we will cannibalise ourselves in some areas . . . because we’ve got stores that are overtrading,” he told the Financial Times.

Being private also allows Aldi and Lidl to keep prying eyes at bay and not to be held to ransom by shareholders if they do not meet their sales or profit forecasts. 

Hurley considers this “an absolutely tremendous strength of our business”. “It means we can make very long-term decisions, even when the road is bumpy.”

Its UK operating profit fell 79 per cent to £60mn in 2021 on sales of £13.6bn, its last published results, and its operating margin was 0.4 per cent compared with Tesco’s adjusted operating margin of 4.6 per cent that same year. 

Lidl’s earnings before interest and tax were up 80 per cent to £79mn for the year to February 2022 on sales of £7.8bn.

Aldi previously aimed to have 1,200 stores by 2025, but it has revised its target and wants to open 1,500 over the long term. Hurley said that although the new openings no longer have a deadline, he is confident he would find sites — although he admitted London, a key area of growth, is proving more problematic.

It has also taken longer to hit the 1,000th store opening mark than originally predicted: in 2018, Hurley said the grocer would “smash” its target of 1,000 stores by 2022. 

Lidl has opened almost 20 stores this year and is not far off from Aldi’s milestone in Surrey, with an estate of more than 960. Its target, shared in 2021, is 1,100 sites by the end of 2025. Its parent company in Germany injected more than £400mn in the UK chain this year, according to recent filings at Companies House. 

Ryan McDonnell, chief executive of Lidl UK, said there was “no limit on our expansion plans and we see the potential for hundreds of new stores across Great Britain”. 

He added: “We’re more committed than ever to ensuring that every single household has access to a Lidl store as we continue to grow and invest in our infrastructure.” 

“They’ve been talking about 1,000 stores for ages,” a supermarket executive said. “If you’re saying that your run rate is roughly 20 a year, that’s 25 years for the next 500 stores.”