Over the Christmas period, an incredible two-thirds of British shoppers visited Aldi or Lidl. This resulted in the discounters capturing their highest ever Christmas market share of 12.8%, and a year-on-year sales growth rate of 10.4% and 9.4% respectively.  In contrast, the big four British grocers are revealing less than exciting Christmas results, highlighting the continuing shift in consumers’ shopping behaviour.

Everyday luxury at a lower price, reduced consumer spending and political uncertainty causing low consumer confidence has been a winning combination for the discounters. This is further compounded by a lack of product innovation, competitive pricing or differentiated service from the big four. As an example, Lidl’s Deluxe luxury food range was cited as one of the key factors of the discounter’s success, with sales growing 33% this Christmas. The British middleclass are being lured away from the big four, thanks in part, to these luxury ranges and getting more bang for their buck.

Christmas Results

The 2018 Christmas period saw flat results from the big four and triumphing discounters paving the way for a thrilling 2019 which is bound to entirely change the UK grocery industry.

Sainsbury’s total sales decreased 0.4% in the last quarter (which included the crucial Christmas period). According to Sainsbury’s chief executive, Mike Coupe, this was mainly due to shoppers’ cautious spending and low promotional advertising during black Friday for Argos. Overall for Sainsbury’s and Argos the second half of 2018 wasn’t easy. Sainsbury’s experienced a 2.3% drop in total sales of non-food household goods, driving a high level of discounted merchandise. These unexceptional results could be concerning for a company about to undertake a very ambitious merger.

Tesco’s UK like-for-like sales in the third quarter grew by 1.9% in the six-week Christmas period (1% came from the wholesale retailer Booker). Overall, UK third quarter like-for-like sales grew 0.9%. It is a respectable result for Tesco, given that not so long ago the grocer was swimming in troubled waters after an annual loss of £6.4 bn. Tesco will celebrate its 100^th birthday this year, which will be a chance for the brand to reaffirm its position in the UK market and reassure consumers about its competitive prices.

This year’s official Tesco results failed to acknowledge the new discounter Jack’s initial months. Tesco’s move might be game changing as the new discounter matches the prices of Lidl and Aldi, but with an innovation twist, thanks to the “Shop Smart” app, which allows shoppers convenience and speed. In addition, as Jack’s belongs to the Tesco family it will benefit from economies of scale and distribution networks the discounters won’t have.

Morrisons’ overall revenue grew 3.6%; sales were up 0.6 % in store and online, the other 3% came from their wholesale activities. The increase in sales during the Christmas period has been attributed to a product-focused, rather than extravagant, Christmas advert, and targeted Christmas discounts. However, the biggest contributing factor has undoubtably been supplying products to Amazon’s grocery service, which experienced 16% growth in sales in a 3-month period. This is a positive story, however if Amazon decides to expand its product offering as part of launching Amazon Go in the UK, Morrisons could lose its competitive advantage.

Asda spent this last year recovering from a fall in profit in 2017. The retailer’s performance has been unexceptional according to market researcher Kantar, as sales only rose 0.7% in the last 12-week Christmas period. Asda has been developing its own brand products such as “English Sparkling Wine” and a “Free From” line to compete against the discounters. Asda’s Christmas results are yet to be shared by the company, but the grocer is likely to report another positive quarter. In November 2018 Asda published a 2% increase like-for-like sales, making Q3 the sixth quarter of growth for the retailer. However, next year could be a very different year for Asda, with the Sainsbury’s merger helping determine whether there is an eighth quarter of growth.

And the Winners are...

In the battle amongst British supermarkets the best performance came from Morrisons. The grocer has been able to significantly lower its prices to appeal to conscious British shoppers and sustain its profits by supplying products to Amazon’s grocery service. Morrisons was able to expand beyond discounts and diversify its offering by partnering up with Ocado and McColl’s, making it easier for the supermarket to reach more consumers. Morrisons’ vertical supply chain also put it in a favourable position in case of a no-deal Brexit and continued uncertainty.

However, the greatest winners are clearly the discounters Lidl and Aldi who managed to gain a bigger share of the UK market by understanding, and arguably driving, the core change in shoppers’ preferences. Lidl and Aldi are transparent and cheap enough to lure British shoppers away from the big four, and their private labels allow them to closely control their prices and supply chain. This is likely to be a winning combination in 2019.

Who were the Biggest Losers of 2018?

Sainsbury’s has probably had the toughest year. Its possible merger with Asda is still pending and time will tell whether this strategy will be the right one, especially given Asda’s rocky performance in 2018. But fundamentally Sainsbury’s failed to appeal to the changing tastes of Brits, with discounts and proper advertisement during Black Friday.

The benefits of its merger with Argos don’t seem to have been fully realised. They are trialling new concept stores, including Selly Oak, a combined supermarket and food court with an Oasis concession. However, the merger could have been used to implement an outstanding omnichannel shopping experience that fully integrates Argos and drives loyalty across both brands for customers, whilst maximising economies of scale.

Maybe Sainsbury’s has been focusing a bit too much on market share and underestimated the capability of other supermarkets to discount and diversify their distribution channels through different delivery methods, such as one-hour delivery and through third party online retailers.

The Year Ahead

In 2019 the big four model will have to change as discounters continue to grow and gain market share. British consumers are now more informed than ever, they are aware of each grocer’s product offering and quality and are discovering new food alternatives. Grocers therefore need to be more proactive and innovative in their prices, quality and product range in order to retain and reach new customers.

2019 is bound to be a challenging year for retail. Amazon is opening its first Amazon Go store in London, the innovative technology and customer experience will set the bar high for other grocers, and it will be interesting to see the role Morrisons and Whole Foods will play in this. Amazon’s expansion in the UK might of course be sped up with a purchase of another grocer. It will be exciting to see if the new discount chain Jack’s will bear fruit for Tesco, if the proposed Sainsbury’s Asda merger goes ahead and importantly how discounters will continue to innovate and change customer behaviour. And we haven’t even mentioned the likes of Iceland and Waitrose who are also circling the big four in the background…