The post-Brexit fall of the British currency was expected to encourage grocery retailers to increase prices for goods. However, their strategy went in a different direction, with big players opting instead to continue dropping prices as they fought to stay afloat in the 'supermarket war'.
For many years, the Big Four in the UK's grocery world has been Asda, Tesco, Morrisons, and Sainsbury’s, whose strategy is to give little to no chance to new players to enter the market. However, recently, the tables have turned in favor of the smaller chains - the German Lidl and Aldi are growing.
‘Supermarket war' is no exaggeration. Over the years, big chains have enjoyed an oligopoly by using the game theory model as their main strategy. They essentially created a limited competition, in which the entire grocery market is shared among a small number of players. Using the 'game model' encourages the competitive spirit and 'aggressive market policy' by continuously driving price clashes, victories/losses in marketing campaigns, the level of expansion, and other performance indicators.
Up until 2012, the process of market saturation by the Big Four was unstoppable, with grocery giants enjoying 75% market share. 4 years later, shares of these grocers are in a constant state of turbulence, and retailers struggle to get it right with their balance sheets. With the appearance of Aldi and Lidl, the Big Four lost almost 3% market share, according to Statista, so, as would be expected, it is now no longer the case that people discuss ’the best performing’ supermarket chain, but instead the 'least worst performing' among these. Meanwhile, Aldi and Lidl grew sales by 11.6% and 9.5% respectively over the summer alone. Their strategy was to become a mainstream option for customers while being comfortable with 94% of their audience still shopping in at least one of the Big Four chains. By dumping prices without the pressure of being dominant, they can rightfully enjoy watching bigger chains struggle while slowly but confidently capturing their market share.
To neutralize this threat, the Big Four had no other choice but to fight back by also going low on prices. While they can afford this to a degree, it has meant that they have had to review their strategy towards less profitable shops to manage their balance sheets. Thus, back in January, Tesco announced their plans to opt-out of 24-hour shopping, explaining it as a willingness to be more efficient, but it's also an effective measure to tackle the wobbles in balance sheets that have been reported in the last couple of years and minimize unnecessary costs.
One of the main advantages of the discounters is the fact that low prices are integrated from the very beginning, so their initial business model doesn't suffer from having to adopt such approach or having to lower the prices more. On the other hand, though, Lidl and Aldi don't have a big property portfolio in the UK to accelerate their growth. Currently, the only option is to build in 'gaps' created by the Big Four - less attractive and convenient locations, which is a risky affair, although it is still an expansion.
The storm is yet to come, though. The survival and further growth of the grocery chains will depend on the UK's post-Brexit adaptation. At the moment, there is more or less a balance in the supply network between the UK and the EU, but with the appearance of the new regulations, it is likely that there will be unpleasant surprise for at least one of the players in 'the supermarket war.'