Are German discounters heading up an invasion?

Kyran Fitzgerald asks will many small Irish retailers and suppliers be forced out.

The German discounters are on the march.

Will they carve out a large slice of the Irish grocery pie, putting real pressure on the other grocers and on Ireland’s increasingly hard pressed suppliers, while inaugurating a new era of hard price competition in the grocery trade ? And are they merely the forerunner of an even larger invasion by the huge US based retailer, Wal Mart ?

In less than five years Aldi and Lidl, have taken around 5% of the Irish grocery market. Between them, they have already opened forty six stores, with Lidl leading the way with thirty six outlets.

Aldi has announced that it is looking at up to ninety sites around the country.

It will not open at all these locations. Indeed, a senior executive in one of the country’s leading supermarket groups insists, privately, that such an announcement is an attempt to garner some badly needed publicity rather than a real statement of expansionist intent.

There is some evidence that buyers are responding well to the Aldi and Lidl product offer and that the discounters are appealing beyond lower income groups to a much wider span of customer.

Elaine Mahon, director of Mahon Retail Research, commissioned a survey based on interviews with around two hundred people in the Letterkenny, Co Donegal area.

Ms Mahon told a conference organised by the publication, Shelf Life, last week, that price has now emerged as a key consideration among shoppers.

In previous surveys, price has ranked behind product quality.

So is the economic downturn pushing consumers in the direction of greater price consciousness. Only time will tell.

What is clear is that the discounters are beginning to attract a loyal following.

True, Ms Mahon’s survey indicates that while Aldi and Lidl between them are the first store of choice for 8.5% of the survey participants, well behind Dunnes Stores on 27.5%, Tesco on 25% and Superquinn at 23%, they are emerging as a major force when it comes to top up shopping.

Toiletries, detergents and other household goods, & alcohol, are selling particularly well.

Of big concern to Irish suppliers is the fact that the discounter chains are much more likely to source goods and services overseas.

Whereas just over 20% of the total Irish food retail spend - worth 8.4 billion in 2002 - goes on imports, it is estimated that imports account for 80% of the discounter grocery spend, according to Ciaran FitzGerald of IBEC’s Food & Drink Federation.

A big shift to discounters may produce benefits, in the short run, in the form of lower prices, but the employment effects look set to be negative.

Mr FitzGerald warns that “if the discount model takes off, you could be talking about 20,000 redundancies in food manufacturing.”

The discounters’ presence in the market will serve to increase the pressure on domestic manufacturers, already faced with rising input costs, as rival retailers respond to the challenge of the discounters by cutting their own costs.

According to Ms Mahon, the best estimate is that the discounters are drawing business equally from other retailers rather than hitting any one group ( such as Dunnes Stores ) disproportionately.

Groups like Aldi and Lidl employ small numbers in their stores and their staff are non unionised. There is evidence that as a result corners are being cut when it comes to product rotation and customer service.

However, good product selection, particularly in areas such as household goods and alcohol mean that they have captured a repeat trade.

As they typically operate out of stores around 15,000 square feet in size, they have actually benefited from the cap on store size introduced by the Government, in the late 1990s as they have been able to occupy a gap in the market currently not filled by the leading supermarket groups.

The ban on below cost selling, in force over the past decade in Ireland, has also helped the German discount chains which operate from lower cost bases.

Recent bad news on inflation has encouraged senior Government Ministers such as Mary Harney to suggest that if planning restrictions were moved, major retailers such as Ikea would be attracted into this country.

It is argued that Ikea will only move in if it is allowed to build stores of around 300,000 square feet in scale. The Enterprise, Trade & Employment Minister appears to have bought into the arguments of the Competition Authority and its Chairman, John Fingleton, who strongly favours the removal of the planning restrictions which he regards as an obstacle to open competition.

But the smaller grocery interests operating through RGDATA are putting up strong resistance to the changes and they are likely to be backed by environmentalists and by many planning officials, concerned that strategic motorway routes will be colonised by mega store developments, spilling yet more traffic onto increasingly clogged arteries.

However, a decision to sweep away the planning cap could well pave the way for the entry of Wal Mart, the largest retail group in the world.

Wal Mart took over Britain's second largest grocery retailer, Asda, a couple of years back. Asda has adopted an aggressive price cutting strategy.

Discounters may appear ideally suited to the needs of the poor, but this may not be entirely true.

Michael Caraher, Reader in Food & Health Policy with London City University, has studied the location patterns of discount supermarkets in West London. It seems that they do not locate close to areas of deprivation, but rather are typically situated between high income and low income areas. The stores tend to cater for the needs of bulk shoppers who are largely middle or upper class.