TH E RI SE AN D RI SE OF TH E D I SCOUN TERS I N U.K. FOOD RETAI LI N G DAVID KILBURN , BOURNEMOUTH UNIVERSITY Discount food shops are the fastest growing part of the U.K. retailing sector. From only two discount chains at the end of the 1980's the number has now i ncr eased to 14. A l l ar e expand i ng r api d l y and pose a ser i ous chal l enge to the U .K .'s est abl i shed f ood r et ai l er s. Consider the following table to see the extent of this rise in both the number of d i scount st or es and gr ow i ng sal es f i gur es. Stores Annual sales (£m) D ec D ec D ec D ec 1992 1997 1992 1997 ------------------------------------------------------------------------------------------------------------ Kwik Save 780 950 2,560 3,840 Aldi 63 240 287 1,260 Solo 47 47 170 210 Netto 45 220 168 950 Shoprite 35 210 111 800 Food Giant 20 40 350 770 Pioneer 11 35 110 400 Discount Giant 7 20 64 200 D ales 4 34 77 750 Ed 1 80 4 370 ------------------------------------------------------------------------------------------------------------ Total 1,013 1,876 3,901 9,550 ------------------------------------------------------------------------------------------------------------ Both the establ i shed food r etai l er s and the Ci ty hav e been sur pr i sed by the r api d rise of the discounters. In the 1980's, although many had tried and failed the only successful d i scount chai ns of any si ze i n the U .K . mar k et w er e K w i k Sav e and Argyll's Lo- Cost. But in 1990 their effective monopoly w as broken by the arrival of Ger many 's A l d i and Denmar k 's N etto. I n the same y ear , Shopr i te, an I sl e-of -Man based company run by sons of one of the found er s of K w i k Sav e, l aunched i nto the und er d ev el oped Scotti sh mar k et. L ater , sev er al of the l ar ge gr ocery chains hit on the idea of converting older, und er per f or mi ng super st or es i nt o d i scount out l et s, spaw ni ng Gat ew ay 's Food Giant and Solo, Co-op's Pi oneer and A sd a's Dal es f or mat . In recent months, the discount chains have accelerated their expansion plans: • In January, Carrefour, the French retail giant, opened its first Ed (an acronym for Europa Discount) store in Maidstone, Kent. • Costco, the third largest of the U.S ultra- discount format known as "w ar ehouse cl ubs", si gned up t w o si t es i n t he U .K ., Thurrock in Essex which it hopes to open in November and Trafford Park, M anchester . • Kwik Save said in February that it would expand into Scotland from its N orth West heartland and increase its opening programme from 50 to 70 stores a year. • Aldi, having previously concentrated on the North and Midlands, announced a search for sites in the south and have recently secured two sites in the London area. • In M arch, N etto said it w as looking for 100 sites in Scotland. • In A pril. cash and carry operator Nurdin and Peacock said it would open tw o U .S. sty l e w ar ehouse cl ubs i n the U .K . The expansion of discount chains marks a move away from the style of food retailing that flourished throughout the 1980's. For nearly two decades after the abolition of resale price maintenance in 1964, w hen manufacturers lost the right to fi x the pr i ce at w hi ch thei r good s w er e sol d i n shops, the U .K . gr ocer y sector was driven largely by competition on price.That changed in the 1980's with the gr ow th of "v al ue ad d ed " r etai l i ng f r om super st or es, as pr act i sed by Sai nsbur y , Tesco and Safew ay, the "big 3". These retailers do not claim to have the lowest prices, but do claim to be highly competitive while providing the most attractive "offer" - a concept that encompasses choi ce,quality, convenience, service, and shopping environment. They make their money from healthy operating margins which average around 8%, the env y of food r etai l er s al l ov er the gl obe, because the nor m el sew her e i n Europe is 2%- 3% and i n the U .S.A . betw een 1% and 2%. H ow ev er , the car tel and the hi gh mar gi ns they cur r entl y enjoy ar e bei ng ser i ousl y chal l enged by the d i scounter s.The cur r ent economi c r ecessi on has been long and shows no signs of abatement.This has fostered a new price- consci ousness i n U .K . consumer s. A t the same ti me, the top end of the gr ocer y mar k et became so d omi nated by the bi g thr ee that w oul d-be entrants had to find new w ay s of oper ati ng. Enter the discounters, which work on the opposite principle. Typical operating mar gi ns ar e 2 per cent or l ess, but the stor es mak e money by shi fti ng l ar ge volumes of goods. Both start up and operating costs are kept to a minimum by buying or renting cheap sites, spending little on technology or fittings - with goods often sold from cardboard boxes on warehouse racking, or shrink w r apped on pal l ets, or ev en d i spl ay ed on tr estl e tabl es and i n cheap w i r e baskets.They stock a limited range of say 1,000 lines and employ few staff. Typically, for example, A ldi has one store manager w ho has 3 checkout staff and no one el se ! The manager uses a pump tr uck to d r ag the pal l ets fr om the stockroom to the shopfloor where he/ she takes off the shrink wrap and the customer s d i v e i n. Ther e i s no E.P.O.S sy stem and the check out oper ator s hav e to memor i se the pr i ces and they are able to get customers through the checkouts at a r ate of k nots. The customer i s not gi v en any car r i er bags but they can ei ther buy them or ty pi cal l y they br i ng thei r ow n. They ar e al so expected to put al l thei r shopping back into their trolley and then pr oceed to a shel f ar ea w her e they can pack their bags before leaving. So the service and display element is minimal but the difference is that a basket of goods which would cost you say £50 at one of the big 3 supermarkets w ould cost a mere £28.30 at aldi. This is a very powerful i ncenti v e to consumer s and not just the har d up DE's, because ev er y one l i k es a bargain. The discount formula can be a powerful one. Efficient discounters can turn round thei r enti r e stock ev er y 20 d ay s or l ess, so they hav e often sold stock before they pay their suppliers for it. That means their working capital for expansion is effecti v el y pr ov i d ed by thei r ow n suppl i er s. I per sonal l y hav e seen the phenomenal success of Aldi at first hand when I visited a store in the Midlands as guest of Paul Foley, Operations Director. The stock was simply flying out of the stor e and w as i ncr ed i bl y effi ci ent and the customer s seemed to l ov e ev er y minute of it. City analysts agree that discounters are likely to double their annual sales from betw een £3.5bn and £4bn last year, to £7bn to £8bn by 1996.Their share of the grocery market is forecast to rise from about 9 per cent to 14 or 15 per cent d ur i ng the same per i od . That will have a big impact on the shape of the food market in the U.K. Shopper s ar e l i k el y to benefi t fr om i ncr eased pr i ce competi ti on thr oughout the sector . The crucial question is whether limited line formats can make their prices so tempti ng that ev en commi tted super stor e shopper s cannot i gnor e them.W i l l shoppers in the nineties become astute and shop for basi c l i nes at the discounters, followed by top up shopping from Sainsbury et al for more fancy l i nes t hat ar e not st ock ed by t he d i scount er s? W i l l some shopper s d i scount t he d i scounter s because of thei r l ack of r ange, sty l e, ambi ence and ser v i ce?W hi ch r etai l er s w i l l suffer the most by the i ncr eased pr essur e fr om the d i scount sector ? W hat w i l l the i mpact of the w ar ehouse cl ubs be on the sector i n the ni neti es? Finally, what are the big three doing to counter the growing threat from the ov er seas d i scount pr ed at or s? Some of these questi ons ar e r hetor i cal and need to be r efl ected upon.