Aldi and Lidl to Capture 10 Percent of U.K Grocery Market

The U.K.’s “Big Four” supermarkets face declining profit margins over the next 12 to 18 months as discounters Aldi and Lidl boost their share of the grocery market, according to Moody’s.

Competition from the two budget chains will intensify as more established grocers including Tesco Plc and J Sainsbury Plc cut prices to try to curb the “losing battle” of market share, Sven Reinke, a Moody’s Investors Service analyst and vice president, said in a report.

The combined share of Aldi and Lidl, both based in Germany, will probably reach 10 percent over the next two years and may settle at 12 percent to 15 percent “over time,” similar to the share held by discounters in other European markets, Reinke said. Aldi and Lidl together capture 8.3 percent of grocery sales in the U.K., up from 6.7 percent a year ago, according to the latest figures from Kantar Worldpanel.

“Further price cuts could be particularly credit negative for Tesco and Morrison as their cost-cutting and efficiency measures are unlikely to fully offset the negative impact of lower prices on their margins,” Reinke wrote. Operating margins will probably fall to 2.5 percent, about half the historical average, from about 3 percent, he said.

The rating and analysis company lowered Wm Morrison Supermarkets Plc’s credit rating in March by one level to Baa2, with a negative outlook. It dropped Tesco’s rating to the same level in June. The two companies, along with Sainsbury and Wal-Mart Stores Inc.’s Asda, are Britain’s biggest supermarkets.

Price War

The growth of the discounters has set off a price war as sales declined at Morrison, Tesco and Sainsbury, causing their shares to drop to the lowest in more than a decade. Morrison this month became the first to say it will match its prices to Aldi and Lidl. Sainsbury is cutting prices on thousands of items and matching them to Asda.

“There is a race to the bottom on price,” Reinke said.

While the discounters’ like-for-like U.K. sales growth will slow from the current 20 percent to 30 percent, some of that will be offset by store openings, Reinke said. Morrison is “better positioned” to adapt through store portfolio and cost adjustments, in part because it has smaller shops that are less exposed to declining footfall, he said.

Warren Buffett’s Berkshire Hathaway Inc. cut its stake in Tesco to less than 3 percent this week after the billionaire said the investment had been a “huge mistake.” Buffett has owned a stake in the grocer since 2006, and his holding was worth more than 1 billion pounds ($1.6 billion) in 2012.

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