Page last updated at 13:45 GMT, Thursday, 20 November 2008

Pinch helps discount supermarkets

By Marianne Lueck
BBC Money Programme

Aldi and Lidl signs
Aldi and Lidl have launched an aggressive UK store expansion

Shoppers are increasingly turning to budget supermarkets in the search for food bargains.

German discount giants Aldi and Lidl have seen sales surge as many of us feel the economic pinch.

In the past three months alone, sales have gone up by 18% and the discounters now have a combined 6.2% market share.

Aldi has big expansion plans and is aiming to open 1,500 stores in the next 10 years. It already has 382.

Lidl has 498 stores.

Aldi claims to be 20% to 30% cheaper than other supermarkets, and both Aldi and Lidl say their business model allows them to sell produce cheaply.

Limited range

One reason for their lower costs is the limited variety of products they stock.

The stores stock only about 1,000 lines compared with approximately 30,000 stocked by the other big supermarkets.

This keeps down costs as they have to pay for only one product in each category.

Vegetables on display
The discount supermarkets limit their range of fresh food

Paul Foley, managing director of Aldi, says: "I just sell one. That's my offer. If you want the choice of seven or eight you've got to be prepared to pay for it, you've got to build a much bigger store, you've got to light it, heat it and maintain it."

Some experts think this is a clever move as research shows shoppers buy only about 500 or 600 different products.

Basic store layout

The second reason that enables discount stores to offer cheap prices is their basic store layout.

These conditions are absolutely ideal for Aldi and Lidl because people are worried about how much they're spending and they're going to get more so in the future
Richard Perks, Mintel

They have inexpensive signage, no frills design and, most crucially, their products are taken straight from the warehouse on to the shop floor.

Lidl's Martin Bailie explains: "We want to pass savings on from supplier to our customers. So we transport it in a pallet line and sell it in a pallet line, passing on the savings to our customers."

The discount stores also keep prices down by stocking their own product ranges, which look similar to branded versions but are cheaper.

And Aldi and Lidl sell an ever-changing array of non-food items; anything from scuba diving suits to a trumpet or toilet.

Theses offers change every 10 days, and they are an attempt to keep the store and stock interesting, without building up excessive stock.

German powerhouse

The food discounters may be relatively new to many in the UK, but Aldi and Lidl are big European companies.

Aldi store
Aldi is one of Germany's largest supermarket chains

Experts believe they shouldn't be underestimated as they are very powerful retailers in Germany.

Mike Dawson, a journalist from Frankfurt, says: "People think of them as small operations and very peripheral but that's not the case. You are talking about a 48bn euro animal."

Aldi was started by brothers Karl and Theo Albrecht in Essen, Germany in 1953.

Their concept was simple: no advertising, no fresh produce and on a small scale.

This efficient model worked, and during the 1960s and 1970s their budget supermarkets expanded all over Germany. Today there are more than 4,000 stores.

Lidl copied the idea and set up shop in 1973, and now has more than 3,000 stores.

Then the discounters set their sights on global expansion including the UK. Aldi opened its doors in Birmingham, in the early 1990s.

Premium foods

The discounters don't just sell basic foods.

Customers can snap up a cut-price lobster for £4.99, pheasant, quails, crab or even a three-bird roast for under £10.

Selling more premium foods is a way of attracting a wider range of shoppers.

It seems to be working, as 50% of Aldi's shoppers are now white collar (ABC1 in the marketing jargon), and 55% of all households have now shopped in a food discounter at some stage.

Food critic Joanna Blythman thinks it is a clever move.

"They actually have things that are quite aspirational. That gives people the feeling 'do you know it's quite sophisticated'."

Big stores fight back

With the discounters growing in popularity, the big supermarkets are keen to hang on to their customer base.

Trolley with tesco bag
Tesco is discounting some lines to compete with Aldi and Lidl.

Tesco, for example, has launched its own discount range of products.

Aware that people now have less money to spend, Tesco's commercial director Richard Brasher says: "I think what you have to be is a bit more chameleon-like. As the economy changes and as customers' needs change, you have to make sure that you evolve with them."

Retail experts reckon the battle between the discounters and mainstream supermarkets is going to continue as long as people are worried about money.

"These conditions are absolutely ideal for Aldi and Lidl because people are worried about how much they're spending and they're going to get more so in the future," says Richard Perks of Mintel.

Taste test

So what does the food taste like?

Money Programme presenter Gregg Wallace wanted to find out how it compared to the more expensive food that rivals sell.

He asked chef Andrew Turner to cook two identical Christmas lunches using budget ingredients and more expensive items.

There was a £30 price difference between the two meals.

We asked a panel of five teachers to taste the two dishes and the results were interesting.

None of the panel thought the discount dish tasted "£30 cheaper" and two of them preferred the budget meal.

As long as shoppers are feeling the pinch, it seems the German discounters are here to stay.

The Money Programme on Food Fight: the Discount Boom, is broadcast on BBC 2 at 1900 on 20 November 2008

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