Last Friday, Germany’s Lidl, one of the dreaded ‘discounters’ causing the big three supermarkets so much pain, unveiled plans for a £220m expansion in the UK.
The multi-million pound expansion plan will see the company open 20 more stores within the UK by the end of the year, taking its total number of stores to 620.
The expansion will create 2,500 jobs, great news for the UK economy. However, these expansion plans come at a bad time for Morrisons (LSE: MRW), Sainsbury’s (LSE: SBRY) and Tesco (LSE: TSCO).
Global domination
Just like Tesco several years ago, Lidl now has its sights set on global domination. Lidl’s owner Schwarz Group is set to become western Europe’s biggest grocery retailer by 2018 (the group is forecast to overtake French group Carrefour and Tesco by generating sales of £65bn by 2018).
Together with faster-growing rival discounter Aldi, Lidl controls about 8% of the UK grocery market. This market share is only expected to increase as the company pushes forward with plans for growth.
Indeed, in addition to the 20-store plan for this year, Lidl intends to eventually operate 1,500 stores across the UK, more than doubling its current footprint. As a quick comparison, Morrisons has less than 600 stores currently in operation.
Trying to compete
The question is, what are the big three doing to compete with the rapidly expanding Lidl, and will it be enough?
Well, Tesco and Morrisons are relying on drastic price cuts to compete. Morrisons has unveiled a £1bn plan to slash prices. Described as the company’s “big bazooka”, by management, Morrisons is set to slash the prices of some everyday essential items by as much as 17%.
Meanwhile, Sainsbury’s is trying to beat the discounters at their own game by bringing Dutch discount chain, Netto back to the UK.
Sainsbury’s has inked a £13m joint venture deal with the discounter, which will see five new Netto stores opened by the end of this year. In total, the venture is targeting 15 new stores across the north of England, a region where Sainsbury’s is underrepresented.
Lacklustre
On the other hand, Tesco has only earmarked £200m for price cuts. Still, the firm is also revamping its stores, boosting its bank offering and improving club card benefits in an attempt to win back customers.
Unfortunately, Tesco’s lacklustre response to the rise of the discounters has agitated some investors. Indeed, many institutional investors are now calling for the heads of Tesco’s management team.
Sadly, these demands have already claimed the head of finance director Laurie McIlwee. He announced his exit after being attacked for promising to stick to unrealistic high margins, rather than cutting prices to challenge the discounters.
No signs of change
Based on sales data released today, it would appear that the big three are struggling to restore customer numbers, even after aggressive discounting.
According to sales data for 12 weeks ended June 22, Tesco saw its market share fall to 28.9% in the period, from 30.3% and Morrisons market share fell to 10.9%, from 11.76% a year earlier. On the other hand, Sainsbury’s market share to 16.7% from 16.6% during the period.
