Half-way up the unlovely thoroughfare that is Camden High Street, between the dilapidated office blocks north of London’s Euston railway station and the bustling trendiness of Camden market, there is an interloper. Its exterior lines are white and clean, broken only by a single homeless Big Issue seller, hawking his magazines beside the wide glass doors. It is mid-morning and a steady stream of people, all sizes, colours and ages, are making their way in and – weighed down with bulging bags – out.
All that might deter anyone from exploring further is the gaudy, blue, yellow and red logo, which seems, well, not very classy. Any paid-up member of north London’s middle class would not necessarily want to be seen with this store’s trademarked carrier bags. Some people, I note, are packing their purchases into other stores’ branded bags.  Sandwiched between an Argos catalogue outlet for household goods and a “pound shop”, whose batteries, brushes and detergent bottles spill out onto the street, this store is an interloper, as far as the home-grown British supermarket sector is concerned. Lidl – a subsidiary of the German company, Schwarz – has become their Enemy Number One. The combination of inertia and snobbery that still defines supermarket shopping in the UK, may help to shore up the supremacy of British stores for a while. But for how much longer?
Over the past year, Britain’s aspirational food-shoppers have been forsaking their established supermarkets in droves. They have been seduced – the apocrypha goes – by the cut-price lobster and champagne offered by Lidl and the sought-after Wagyu beef (“only £6.99 a steak”), promoted by a second German chain, Aldi. But it cannot only be the little luxuries that explain their success. Between them, these two companies have cut a swathe through the UK’s domestic grocery sector, prompting panicked price cuts at established outlets such as Tesco and Morrisons, and driving good old middlebrow ­Sainsbury’s into an alliance with Denmark’s discount chain, Netto. Only up-market Waitrose seems so far untroubled by the Teutonic advance.
Tesco, the UK’S biggest supermarket, has suffered particularly badly. This week, amid fresh warnings that the company’s sales are far worse than originally expected, Philip Clarke, Tesco’s chief executive, resigned after only three years in the job. He will be replaced by Unilever’s Dave Lewis. It would be easy to dismiss the arrivals as a flash in the British shopper’s dented frying pan – nothing for the home-grown titans to worry about. And, for the time being, Britain’s “big four” – Asda, Tesco, Sainsbury’s and Morrisons – retain their dominance. They still account for three-quarters of the market overall. They are opening new stores. Yet there is evidence that what once seemed a settled landscape is in the throes of a great transformation, with shoppers’ habits and old loyalties fading fast.  
Supermarket Sweep
The contrast in the trajectories of the new-comers and the old-stagers is stark in practically every respect. Sales at the two German chains rose faster in 2013 than in any year since they set up in the UK – by 35.9% at Aldi, and 22.7% at Lidl. Their combined market share is set to exceed 10% this year, compared with 7% last year. No new players, let alone foreign players, have ever made such inroads into what has traditionally been a very home-dominated sector. Set against such growth, the performance of Britain’s “big four” has been indifferent to lamentable. Morrisons, a well-regarded northern-based chain that has expanded with less success in the south, watched its sales fall by 3.9% last year. Taken together, Aldi and Lidl are on the verge of overtaking it in terms of market share.  
Sainsbury’s, which manages to keep the wholesome image of its white-aproned founder, John Sainsbury, ingrained in the Brirish national consciousness almost a century and a half on, did better. Even as it raised annual profits by an impressive 5.3%, however, it also experienced falls in its food sales and market share.    But it was the decline at Tesco that shocked market analysts and investors the most. Long held up as the all-British rags-to-riches success story, it had worked its way up over eight decades from the pile-it-high, sell-it-cheap market stall of second-generation Jewish immigrant, Jack Cohen, to become Britain’s largest grocery chain and was widely seen as the future of retailing.
Only Asda, owned for the past 15 years by the US giant, Wal-Mart, has partly bucked the trend. The UK’s second largest retailer, since it overtook Sainsbury’s in the 1990s, the company ascribes its recent relative success to aggressive price-cutting on the one hand, facilitated by the economies of scale, and the ­introduction of its own bargain luxury lines on the other. That success is only relative, however. Its market share, too, has marginally declined.That is no longer so. Two years ago, it issued a rare profit warning. This May, Tesco reported its worst trading figures for 40 years, with UK sales falling by 3.1% over the year and profits by 6%. As with Morrisons, the results seem to be deteriorating from quarter to quarter.
Falling sales at British supermarkets have had the logical knock-on effect on share prices. At Tesco share prices have fallen a dispiriting 26% over the past year. This matters, not just in the world of big finance and international confidence, but at the grassroots level. Many small investors and staff own shares in Tesco and have regarded them as a safe bet to supplement their relatively low incomes. With their lost faith will go another chunk of customer loyalty.
The downcast, even fatalistic, mood at three of Britain’s “big four” could not be further from the sunny optimism at Aldi and Lidl. Even as Tesco offered excuses and a three-year turnaround programme to its frustrated shareholders, Lidl’s UK managing director, Ronny Gottschlich, was delivering quite a different message: 20 stores to open before the end of this year, bringing the total to 600, and 2,500 new jobs. Far more worrying for its home-grown competitors, Lidl is also venturing out of what was regarded as its initial habitat, the poorer urban areas, into England’s leafier heartland, where it will stake a claim to more affluent shoppers. Nor is this an unreasonable ambition: British shopping is no longer as stratified by class as it was.  
LOSING THE PRICE WAR
What is bad news for Britain’s “big four” food retailers and their shareholders, of course, is not necessarily so for their customers. The German chains are described in the business as “hard discounters”, and one result of their expanding presence in the UK market has been a fierce price war that is keeping food prices lower than they would otherwise be. At 1.2%, food price inflation is lower than it has been for almost a decade. Price has, indeed, provided the main thrust of the British fight-back. Tesco has set aside £200m to cut prices in a programme it is now accelerating; recent adverts show a selection of products reduced or re-packaged to sell at £1 – a clear nod to the popularity of “pound stores”, but also a dip downmarket, after years of trying to reposition itself in the upper middle.
The price cutting has been most ­conspicuous at Morrison’s, which has begun a three-year campaign to reduce prices, it says, by a total of £1 billion. The new advertising pitch – “I’m cheaper”, “I’m your new cheaper Morrisons”, which is emblazoned on hoardings all over the country and greets customers in huge letters on garish yellow at the  supermarket entrance, betray a hint of desperation. Sainsbury’s, for its part, has gone in for “price-matching” on well-known brands, while persisting with so-called “multi-buys”, such as the time-honoured British stand-by of “Buy-one-get-one-free” (popularly reduced to the crude-sounding “Bogof”). There are tricks to this trade, and shoppers have to be alert to labels and arithmetically adept so as not to get caught out at the till. It is too early to judge the success of all this price-cutting. But if price is the key to halting the advance of the German discounters, the British may have some way to go.
2014-07-21T083745Z_376375684_LM1EA7L0QBG01_RTRMADP_3_TESCO-CEOPhilip Clarke preparing to speak during the National Farmers Union conference in Birmingham, February 2013. 
Just a short bus ride from the Lidl on London’s Camden High Street can be found a flagship branch of Morrisons, marooned in a vast car park. On the same weekday morning that Lidl was buzzing with shoppers picking up 70p a pound bananas, big pots of natural yoghurt at 55p and still cheaper bread and milk, this huge Morrison’s was shouting its “I’m cheaper!” slogans to almost no one. The quiet in the store – except for the piped music – was almost embarrassing.
Many of the check-outs were unstaffed – but they did not need to be. There was almost no one to serve. As for the prices, they were higher for almost everything, staples and luxuries alike, often by as much as 20% or 30%. In the half hour or so I was there, a couple of people emerged with full trolleys, reminiscent of the old-fashioned weekly or even monthly shop. But only a couple.
While price is clearly a compelling consideration, we have to ask whether it is the only reason why the German discounters are doing so well.
Justin King, the just departed – and highly successful – former chief executive of Sainsbury’s – tends to think not. Expressing some weariness with price wars – “There’s always a price war in supermarket retailing,” he said shortly before leaving office – he added, tellingly: “In the end, it isn’t just about price. Quality, the provenance of sourcing, is a big factor as well.”
And these are other areas where the Germans have been winning.
When Lidl and Aldi first arrived on British shores, 20 and 25 years ago respectively, they received only a qualified welcome. Many British shoppers regarded their often down-at-heel sites, like their low prices, as suspect. While a new branch of the John Lewis-owned Waitrose is said to enhance local house prices, the opposite might have been said of a Lidl.THE GERMAN FACTOR
The Germans also had to fight the deeply rooted assumption that British supermarkets, like much else British, were best. I remember, for instance, casting a superior eye at the chaotic freezers in a Karstadt food-hall in Cologne, and giving silent thanks for the hygienic look and ordered choice at the average Sainsbury’s. British supermarkets seemed state of the art, well-organised, and efficient – the best in the world. But that was more than 20 years ago. Since then, Britons who travel have flirted with the time-consuming munificence of French hypermarkets, despaired at the social gulf in the United States represented by a provincial junk-food Wal-Mart and the pricey excess of a metropolitan Freshfields, and – increasingly – delighted in the range and quality on offer at mid-size supermarkets in Belgium and Germany. Even the non-discounters put their ­British counterparts to shame in terms of prices, range and quality.
It has taken the best part of two decades, but Britain’s middle-class shoppers, their wallets slimmer since the financial crisis, are now more open to other possibilities, even if they come courtesy of the old enemy, the Germans.  The awkward truth is that British supermarkets have been caught up and in some respects overtaken by their nimbler and more quality-­conscious continental cousins. As King implied, the rise of Lidl and Aldi is to be explained not just by prices, but by other factors, too. No one needs to spend much time in a branch of Tesco or even the more successful Sainsbury’s to find fault. The British may be famously complaint-averse, but here they grumble out loud. They do not like the complexity of the multiple pricing offers, or the ­wastage it incurs – “two for one”, when you only need one. They feel confused and cheated, when the size of packaging, but not the price, changes. Above all, people don’t like queueing to pay, and they positively detest the banks of self-service tills that so many urban supermarkets have installed.
Women, in particular, seethe when they see the queue for the few staffed tills: “I’ve worked all day, why should I turn check-out girl as well,” was one comment. The faces of the queuers – glum and defiant – say it all. The bosses seem to have neglected what might be called the consumer experience. Then there is the quality issue. Having seemed for years not to care, Britons have suddenly become more discriminating. Take this comment from a discontented shopper: “Tesco has been a byword for cheap and nasty for years. The Germans have been doing cheap and decent for decades.”
The scandal over horsemeat only confirmed existing fears. In early 2013 , Tesco and several other food retailers – with the honourable exception of Morrisons – were stung by the discovery that what was labelled beef in some prepared dishes and burgers contained up to 30%, in one case, as much as 60%, horsemeat. Many ­reputations were tarnished in the investigation that followed.  Encouraged by ubiquitous television cookery programmes, British consumers have also become more adventurous. It is not just Aldi’s Wagyu beef that draws the punters, but the variety of continental delicacies on offer.
From many shoppers’ point of view, the German discounters have been doing a whole lot right. People like not being bombarded with ­“special offers”. The marked price is the price. At Lidl “you can buy a single pack of whatever you like without feeling you are being ripped off”, so reads one happy consumer’s chatroom comment. The stores seem less frenetic.  
The narrower range of goods on offer speeds shopping. It also means that we are unlikely to be confronted, as I was at one British supermarket recently, with more than a dozen types of “cook-in” sauces and, right opposite, an empty space where the toothpaste should have been. A rapid turnover of fresh food is another plus. There is enough, but not too much. Fewer options, indeed, can mean ­better options. Most satisfactory of all, the ­Germans have yet to discover the self-service till. At the stores I visited, all the checkouts were staffed, there was a simple queuing system, and a realistic estimate (“three minutes from here”) of how long the process would take.
If the comments of shoppers are to be believed – and why should they not be? – convenience, consideration and simplicity may explain as much of the German discounters’ British success as price. And this means that, so long as the UK’s “big four” treat price as ­paramount, they are not “getting” the message.  
GIANT SLAYERS
It is not only that Tesco and Morrisons, in particular, have rested too long on their laurels. Exacerbating their woes has been an accelerating change in the food shopping landscape, which Britain was slower to grasp than much of continental Europe. In recent months, the “radically” changed retail environment has been a recurrent theme of company executives and market analysts alike. Against a background of half a year’s falling sales, the new chief executive of Sainsbury’s, Mike Coupe, told shareholders that customers’ habits would change faster than ever before. Dalton Philips, head of Morrisons, said the discounters were “having the most profound effect on food shopping since the 1950s”. A situation where all the “big four” were losing market share simultaneously had, said one analyst, placed the sector “in totally and utterly uncharted territory”.
In theory, recent changes at the top – including the departure of two of the “big beasts”, Terry Leahy after 14 years at Tesco and Justin King after a decade at Sainsbury’s, offer UK chains the chance to take a new look. But they will be constrained by the slow growth of the sector as a whole – at just 1.9% in the first quarter of this year, the lowest for 11 years – and the expansion plans of the German newcomers.   
They may also have to recognise that at least some of the changes in their market may be permanent. With more people living alone and more pensioner households, the big weekly or monthly shop may be on the wane. The ­proliferation of smaller stores in urban locations – a development designed in part to address this demand and in part to offset falling sales at out-of-town hypermarkets – may not have the desired effect of improving companies’ bottom line, as shoppers use the local choice to spread their loyalties more widely.  
So what are the UK’s home-grown supermarkets doing about the changing market conditions and the German challenge? Price-cutting, in different forms, has been the favoured response at all the “big four”. But a focus on price to the exclusion of all else may misread the discounters’ appeal and may not be all that is required, and other solutions are being tried.
The UK has Europe’s most advanced online grocery sector – which may be one reason for the decline in sales at big out-of-town establishments. Then again it might reflect customer dissatisfaction with the shopping experience. The one could feed on the other. Online has suffered far less during the economic downturn than store sales, and companies are now trying to capitalise on this by offering more convenience, such as collection not just at the stores themselves, but at underground stations and other points that full-time workers may find more convenient than home delivery.
There are also efforts to make the out-of-town stores more attractive ­destinations in their own right, with the addition of eateries and recreational facilities, such as gyms and cinemas. Where the big stores still turn out to be too big, sections are being hived off to service online sales or administration. Sainsbury’s link-up with Denmark’s Netto is designed to create a subdivision of Aldi-like stores, “with a Scandinavian twist”, without damaging the Sainsbury’s brand by taking it downmarket. Tesco is reported to have toyed with a similar idea, but rejected it, preferring to branch out into services, such as banking, video and mobile phones.
The most conspicuous recent development is the move into smaller stores. All the “big four”, plus Waitrose and the Co-op (with around 5% of the UK market apiece) have been transferring their focus from hypermarkets to “mini-­markets” located closer to where people live. Membership of the group allows them to undercut traditional “corner shops” on price and outdo them on ­quality. While these mini Tescos and Sainsburys may eventually cause the demise of this familiar feature of the British streetscape, however, they are nowhere near seeing off the challenge from the Germans. Branches of Aldi and Lidl seem just the right size, with the right balance of choice and availability. Their British counterparts, in contrast, are often smaller, more congested, more capriciously stocked – and overall quite a lot more expensive.
True, a question hangs over the German model. If Lidl and Aldi do open stores in more upmarket areas, will they be able to maintain their price advantage? The class divide in British food shopping may be blurring, but there will always be a premium to be paid for moving to the right side of the tracks. If it is not all about price, however, the home-grown chains will have their work cut out. Today’s supermarkets have come a long way from the stores John Sainsbury and Jack Cohen founded. If they want to halt, even slow the advance of the German discounters, then the first step has to be an admission that, while price counts for much, it is on convenience, range and service – areas where they once reigned supreme – that they have lessons to re-learn.