Executive Summary

Aldi and Lidl have brought major disruption to the UK grocery market — and they could be on course to add another £9 billion of combined sales over the next five years. In this report, we review five measures major UK grocery retailers have taken to fight Aldi and Lidl, and how successful each has been.

• Nondiscount grocery retailers have made radical cost-cuts, shedding thousands of staff at head offices and in stores. Generally, the visible impact to shoppers seems to have been minimal. However, an apparent slippage in store standards at Sainsbury’s as a result of job cuts risks its differentiated positioning.
• Range reductions have let Tesco channel higher volumes through each line. Its range resets have coincided with a recovery in its top line and a return to total volume growth, confirming that shoppers have not been deterred by slimmed-down ranges.
• Tesco’s new, discounter-type private labels look to be a success, although they may encourage some trading down at the retailer. Tesco’s launch of the Jack’s discount chain is a bold move, but we think the chain’s proposition could limit its appeal to shoppers.
• Diversification away from core grocery retailing has been successful, creating new revenue streams and giving retailers access to higher-margin or faster-growing markets. The wholesale grocery model, such as that adopted by Morrisons, looks particularly successful.
• There are doubts over whether Sainsbury’s and Asda can complete a merger successfully. The Competition and Markets Authority (CMA) has indicated it would require a substantial number of store disposals or even one of the Sainsbury’s or Asda brands, which could undermine the economics of the merger.