How Aldi and Lidl bag middle-class shoppers

German grocers’ market share has risen with inflation, but the big four are fighting back, report Matt Oliver and Laura Onita

Parked outside an Aldi supermarket in the salubrious Croydon suburb of Selsdon, shoppers are busy loading bags of groceries into the back of their BMWS, Audis and Range Rovers.

Inside, the produce on offer yesterday included packs of British asparagus, rhubarb, Jersey royal new potatoes and tomatoes on the vine – each for just 70p.

Sarah, 45, has driven over from her home in nearby Sanderstead to stock up for a school fete.

“The prices are terrific,” she says. “I don’t do my weekly shop here, I use Ocado for that. But I do come to Aldi now and then as well.”

She is precisely the kind of middleclass shopper that Aldi and fellow German discounter Lidl are hoping to attract more of as the cost of living crisis eats into millions of household budgets.

With inflation at its highest level for four decades and an increase of £700 to the energy price cap, many families are already beginning to feel the pinch.

Economists say the pain will only grow more acute this winter, when the Bank of England has predicted inflation will peak at 10pc and the energy price cap is expected to rise again.

While this squeeze will undoubtedly hit poorer households, it will also deliver a shock to Middle England.

Clive Black, a retail analyst at Shore Capital, says this will likely cause more middle-class shoppers to flirt with the discounters as they search for ways to trim outgoings.

“A lot of people, including relatively affluent households, will probably try Aldi and Lidl in this present climate due to the real worries about essential costs going up,” he says.

“They might not need to. These are people with money in the bank, they might not have a mortgage, they might be on a final salary pension – but they’re still worried. They’re cautious, they’re prudent and hence they’re on the lookout now for value.”

The boss of a discount chain puts it even more bluntly: “If you’re going to be squeezed, you’re going to turn to discounters rather than go to a mid-market, full-price retailer.

“History tells us that whether it was the last global financial crisis, whether it was the surprise after Brexit and the fall in the value of the pound, in all of those macro environments, discounters tend to thrive.”

There are signs this may already be happening. As inflation has gathered pace, Aldi and Lidl’s share of the grocery market has grown.

At the end of 2021, the pair together accounted for 14pc of the pie, according to data from Kantar, while the “big four” supermarkets – Tesco, Sainsbury’s, Asda and Morrisons – commanded 67.9pc.

By April – as annual inflation hit a four-decade high – the discounters’ share had increased to 15.4pc while their rivals had dipped to 65.9pc.

This marks something of a bounceback for Aldi and Lidl, which did not enjoy the same boom as other supermarkets during the coronavirus pandemic.

While the big four took advantage of lockdown restrictions to massively increase deliveries of online shopping, the discounters were left stuck in first gear – owing to their lack of an equivalent internet offering as well as smaller shops, which some virusconscious shoppers found a turn-off.

With the pandemic now largely in the rear mirror, however, analysts say the discounters will once again be fighting on more favourable territory.

If the last financial crisis is anything to go by, they should have a fair wind.

In the wake of the great recession, Aldi and Lidl enjoyed a bonanza.

At that time, these grocers more than tripled their market share by undercutting the big four dramatically on prices, and earned mainstream status – becoming Britain’s fifth and sixth largest grocers.

They also made major inroads into the valuable “AB” demographic of shoppers, defined as either upper middle class (A) or middle class (B).

Today, around 87pc of this group – typically people employed in “higher or intermediate managerial, administrative or professional” roles – shop at a discounter grocer at least once a month, according to market research firm Mintel.

Piers Butel, at Mintel, says many are currently “top-up shoppers” who come to Aldi and Lidl for certain items such as wines or spirits. As consumer confidence in the economy worsens, however, this presents an opportunity to persuade them to visit more often and add more items to their baskets.

“Aldi and Lidl have historically done well when financial uncertainty is high. There are a lot of people who already are or potentially could be discount shoppers,” Butel notes.

The discounters may also be helped by the rise of the “promiscuous shopper”, says Mike Watkins, at Nielsen UK, which tracks grocery sales. This theory holds that shoppers are more and more conscious of price – and less likely to stay loyal to their usual haunts if bargains can be had elsewhere.

He adds: “People are shopping around. They are shopping at different retailers, not just the discounters. They are going from retailer A to retailer B to retailer C.

“I’m of the view that over the next three to six months, all of us, irrespective of affluence, will need to trim our budgets accordingly.”

Yet despite the bonanza Aldi and Lidl enjoyed after the last financial crisis, most experts do not expect it to be so easy this time. Wary of having their lunch eaten a second time, the big four have taken aggressive steps to narrow the price gap.

A decade ago, some products such as lettuce were nearly twice as expensive at the traditional grocers.

Yet now, Tesco matches Aldi on price for hundreds of items, including popular brands, while Sainsbury’s offers a similar guarantee for 150 fresh products as well as other dry and frozen goods at bigger stores.

Asda recently announced it would spend £73m on cutting or freezing prices for 100 products and Morrisons pledged lower price tags for 500 items, including eggs, cereal, and chicken.

Some products are still more expensive. A tube of Pringles crisps, for instance, costs £1.65 at most of the big four supermarkets, whereas a similar Aldi product called Snackrite costs just 99p.

But on most entry-level basics such as milk, bread and eggs, the difference is now effectively “zilch”, says Black. Across an entire trolley of goods, the gap rises to about 7pc-9pc.

Fraser Mckevitt, at Kantar, says: “Compared to the last financial crisis, you could make an argument that there was a little bit of complacency against the discounters at that point. I don’t think there is any complacency now among mainstream retailers.”

Keeping prices low in the face of rampant inflation will come at a cost, however, with the big four facing questions over how they can absorb cost rises passed on by suppliers without dumping them straight on to customers.

Asda and Morrisons lack the purchasing power of Aldi and Lidl, as well as Tesco, so their pledges to provide value will leave them with less financial wriggle room elsewhere.

In particular, with both supermarkets now saddled with higher debts after private equity takeovers, credit ratings agency Moody’s warned recently that the current price war will constrain their ability to pay off borrowings.

The road will not be so easy for Aldi and Lidl this time, either. As they battle to grow market share and lure more middle-class shoppers to the fold, the discounters will no longer be fighting on price alone. A Mintel survey found that only 48pc of shoppers believed they could get everything they needed from the German duo, due to their shops typically having much smaller ranges than traditional supermarkets.

Yet when AB shoppers can find what they need, 67pc say the premium ranges at the discounters are as good as their equivalents at the big four.

Butel says this opens up a “prime opportunity” for Aldi and Lidl to steal more market share again.

“I don’t think we’re going to get a repeat of the sort of shock that happened after the financial crisis,” he adds. “They have already taken most of the low hanging fruit and margins are already incredibly thin. But I would be very surprised if the cost of living crisis doesn’t see the discounters do well.”

‘Relatively affluent households will probably try Aldi and Lidl in this climate. They might not need to but they’re still worried’

‘Over the next three to six months, all of us, irrespective of affluence, will need to trim our budgets accordingly’