Supermarkets vie for control of corner shops

Aldi and Lidl have made convenience stores the latest battleground, reports Hannah Boland

In the well-heeled south London suburb of Balham, shoppers could argue that there’s too much choice when it comes to groceries. Turn one way out of the Underground station and locals will find a Tesco Express. In the other direction lies Waitrose and Sainsbury’s. All three are within a few minutes’ walk of each other.

Yet Aldi has never shied away from competition. The German discounter found a site close to Balham station – a one-minute walk away – for the first of its smaller convenience-style Local stores, which it opened in 2019.

“If you put stores closer to where people are, then they will use it,” says Paul Foley, the former UK and Ireland boss of Aldi and managing partner of Foley Retail. “Yes, there are already enough convenience stores in the country. But of course, it’s still perfectly possible to displace weaker players with a stronger one.”

The Aldi Local is emblematic of a new battleground in the fight between Britain’s supermarkets and the German discounters. After opening a string of larger locations to compete with homegrown megastores, Aldi and Lidl are now coming for the corner shop.

Earlier this month, Aldi said it would double the number of its stores within the M25 from its current 60. It is on the hunt for locations that could be used for Aldi Locals, which are about a quarter of the size of its standard supermarkets.

Ben Shotter, the grocer’s regional managing director, says there are still “many areas, particularly in the capital and within the M25, that don’t have access to an Aldi”.

Lidl, too, has said it is aiming to “take on the established supermarket convenience offering”, despite recently scaling back its ambitious expansion plans and instead focusing on improving its warehouses. That may be good news for bargain-hunting shoppers who don’t live near a branch of either grocer, but it is another headache for British supermarkets that have been forced into a costly price war by their German rivals.

Industry experts say a shift towards smaller, city centre shops was inevitable. Aldi already has more than 990 stores across the UK, while Lidl has more than 950. That is comparable to Tesco, Britain’s largest supermarket, which has just over 1,000 larger stores.

‘There are already enough convenience branches but you can still displace weaker ones with a stronger player’

‘Planning objections from rivals are only likely to slow the march. Urban shoppers are the next frontier’

The vast majority of Aldi and Lidl locations are in retail parks and suburbs. However, Tesco long ago shifted focus towards opening smaller, urban Express stores to catch commuters on their way home.

The discounters were bound to want to compete, says Shore Capital analyst Clive Black. He says: “Aldi and Lidl are maturing at quite a pace. Both of them are probably somewhere like 85pc through their British development plan. London was always going to be the last frontier for Aldi and Lidl.”

Aldi has already leapfrogged Morrisons to become Britain’s fourth largest grocer and Lidl is not far behind. However, the gap between Aldi and the top three – Asda, Sainsbury’s and Tesco – is still large. Cracking big cities will be key to continuing the rapid ascent.

Urban expansion comes with its own unique challenges, however.

“London is not just going to be more expensive from a real estate point of view, but also labour costs and logistics costs,” says Black.

Part of Aldi and Lidl’s recent success has been their ability to keep prices low, which is helping them win new customers during the cost of living squeeze. Smaller, more expensive stores could challenge this model.

A former Aldi director says: “Such stores often mean less space so you have to fill it more often and that means it’s more expensive to run.”

Higher costs filter through to prices. Shoppers at convenience stores spend hundreds of pounds more a year than those visiting larger stores, according to a study from Which?. Some items are selling for as much as 20pc more in convenience shops.

Discounters will be aiming to find sites where they can operate as closely as possible as to how they function in their larger stores to keep costs low.

Another former Aldi director believes executives will also be “considering how they can use so-called walk-out technology”. This type of sensor-based tech was rolled out across Amazon Go stores and allows shoppers to leave without paying. What customers pick up and put down is captured by cameras and sensors, with customers billed later through details held by Amazon on file.

While this sort of technology is costly to install upfront, in the long run it could allow stores to avoid hiring staff to work on the tills.

“If you can get that model to work, you probably reduce your costs and you can keep prices lower for customers,” says the former director.

Aldi and Lidl can stomach heavy investment into walk-out technology more easily than listed rivals beholden to shareholders. Even Amazon recently announced it was pausing the rollout of its checkout-free stores.

“The kindest way you could put it is that they are taking a very long-term, multi-generational view of the UK market,” says Black. “Let’s say the build costs are high and they pay high wages. The reality is they just accept very poor returns on their investment.”

If Aldi or Lidl can master the trick of keeping prices low in smaller stores, that would be good news for shoppers.

Already, the German discounters are helping to drive down many prices with their aggressive approach. Both Tesco and Sainsbury’s have put in place Aldi price match guarantees on certain items to stop people switching.

Equalising prices across larger and smaller shops should theoretically be achievable. After all, the goods are the same price. Ged Futter, a former buyer for Asda, says companies selling to Aldi will simply be supplying warehouses, and then “it gets split out by them”.

However, if the discounters do crack it, that will force British supermarkets into another costly round of investment to ensure they compete. Perhaps fearing yet more competition, and pressure on their profits, established players are doing their best to stymie the advance of Aldi and Lidl.

Aldi had 40 stores being held up by planning objections from rival supermarkets with branches nearby, according to analysis by The Grocer in December. Since 2020, Lidl has faced at least 87 objections from competitors, mostly Tesco, it found. “They’re looking at is compromised options now,” says one former Aldi director.

Ultimately, this form of resistance is only likely to slow, rather than halt, the march of Aldi and Lidl. If Aldi’s Balham store is anything to go by, discounters will not be shying away from their rivals with new store openings. Urban shoppers are the next frontier.

Soon, there may be a grocer on every corner.