A useful definition of ‘asymmetric warfare’ is of a conflict between belligerents whose relative military strength and/or strategy or tactics differ significantly. It helps to explain how the US, despite its apparently invincible weight of arms, was unable to overcome the Viet Cong, and why sophisticated modern security forces live in fear of suicide bombers. It also describes the challenge big supermarket chains face from the German discounters. To watch Tesco and Carrefour et al squaring up to Aldi and Lidl is remarkably reminiscent of images of cavalrymen confronting tanks.
Take a brief look at the strength and strategy differences between the two sectors. The traditional companies (which I’ll call the ‘grocers’ for the sake of brevity) have: expensive sites; extensive ranges; (relatively) high staff costs; and shareholders whose loyalty depends on quarterly results.
The most significant of these is arguably the shareholder. Even Walmart − which is still very the domain of its founders, the Walton family − is facing increasing pressure from the outsiders who hold 49% of its shares. The attendees at the 2014 shareholder’s meeting may have been entertained by stars such as Harry Connick Jr, but they also heard calls against the re-election of board members from an organisation called Institutional Shareholder Services (ISS). For ISS, there was nothing good about Walmart’s five consecutive months of reduced US sales. For the moment, the Waltons’ seats on the throne seem to be secure, but the speed with which Tesco’s management image has gone from hero to zero shows how rapidly things can change.
At Aldi and Lidl, there is a potent mix of steady growth and full-on family ownership. In the UK they are expanding by as much as 30% per year, while traditional UK supermarkets are effectively standing still. Carrefour, France’s biggest retailer, with 20% of that market, has recovered from some of its recent woes but is caught in a price war with its big rivals. Its shares are still trading at €22.00 ($28.20), approximately half their price in 2007. According to Planet Retail, the chain will soon lose its position as western Europe’s largest food retailer – to Lidl.
A lack of outside shareholders is not restricted to the German discounters. The French giant E. Leclerc is privately owned, the UK chain Waitrose belongs to its employees, and co-ops obviously have business models of their own. But most of these chains still carry the baggage of those expensive sites, extensive ranges and high staff costs, in an era when consumers increasingly favour smaller outlets. The grocers are all desperately trying to change that situation with programmes of opening local stores, but they cannot change their spots completely. Most hypermarkets will stock as many as 50,000 different products; a discounter might have 1,000, an apparent lack of choice that does not seem to have frustrated as many consumers as might have been imagined. Nor, in markets like the UK and US, can the grocers easily alter the business model they apply to their relationship with suppliers.
A large part of the famous £250m ($400m) hole found in Tesco’s accounts recently is reportedly largely explained by various ‘marketing’ contributions that have little to do with the basic business of buying and selling. Aldi and Lidl strike famously hard bargains but once they’ve struck them, they accept that a deal is a deal. Unlike their UK counterparts, they don’t change their minds about the quantities to which they’ve committed themselves and they don’t come back for retrospective discounts. This straightforward attitude is, perhaps unsurprisingly, popular with suppliers, who may not appreciate the tight margins, but like the certainty.
Interestingly, the UK retailer Sainsbury’s has reacted to the threat from the discounters by launching a joint venture of its own with the Danish discount chain Netto, but it will still have to satisfy its shareholders – as will Sainsbury’s UK rival Morrisons, which has just offered to match the German chains’ prices.
There is a delicious irony to this situation: it is not so long ago that the asymmetric conflict was between the grocery chains and the traditional independent stores. It was the big chains’ buying power and lower cost of sales that helped force the closure of so many of those small businesses. Today, the bullies are learning how it feels to be at the receiving end of attacks against which they have little defence. And that’s before they even begin to have to face up to the threat from Amazon.
