As economic problems spread, the German discount chains are expanding into middle class neighborhoods where many of their customers live

By Martin Hickman

Budget food stores Aldi and Lidl are about to march into 1,000 affluent areas, according to new research.

Hundreds of places across the UK have been identified by a market research firm as suitable for cut-price grocers, including many locations in London and the South-East.

The German-owned ‘hard discounters’ are expected to colonise enclaves such as St Albans, Horsham and Highgate, where they will pile pressure on the likes of Tesco and Sainsbury.

Aldi and Lidl will be able to expand so fast because their customers, far from being drawn only from low income groups, accurately reflect the social composition of their area, say the researchers CACI.

As the credit crunch and rising bills have eroded spending power of families, some 50 per cent of new Aldi customers are from social classes ABC1.

At present, Aldi and Lidl are each only one tenth of the size of the country’s dominant retail force, Tesco. But they are fast catching up with sales rising by 11 and 20 per cent respectively in the 12 weeks to 7 September.

The chains are embarking on expansion into the mainstream that could resemble the rapid rise of the no-frills airlines Ryanair and easyJet in the 1990s.

By 2013 Aldi, which has 410 stores and a market share of 2.3 per cent, aims to own 1,500 UK outlets.

Peter Casey, the chain’s regional managing, said: “We are experiencing strong growth across the whole of the UK and over half of our customers are now in the ABC1 category – about 17 per cent up on a year ago. Our plans to open one store a week, until we reach our target of 1,500 stores are well underway and we are currently looking at locations across the whole of the UK – many of which are highlighted in the CACI’s findings.”

He added: “Discounters occupy more than 40 per cent of the German market so we believe there is a substantial opportunity to grow our UK market share.”

Lidl, which is bigger with 2.9 per cent share, has no upper limit for expansion but aims to grow at the rate of 12 per cent annually. It says it will review its plans once it reaches 750 stores – double its present size – but has an inclination to stop at 1,250 outlets.

Tesco, which has 2,184 stores in the UK, has invested £100m in a new range of 350 Discount Brands to compete with the cut-price arrivistes. Asda has also fought back with a campaign of price cuts, reducing all 5,000 items in its Smart Price range.

CACI believes Sainsbury’s is vulnerable to the price-cutting attack because it has only had a “limited” response to budget competition.

According to its research, Tesco is vulnerable to the advance of the hard discounters, because an estimated 78 per cent, or £20bn, of its £25.6bn turnover is earned from areas where Aldi and Lidl are not currently represented. About £11bn of Sainsbury’s £17.8bn revenue comes from areas where it could soon be in competition with Aldi and Lidl.

While the demographic group most frequenting Aldi and Lidl for their main grocery shopping are ‘struggling families’, mid-market ‘secure families’ are key to the discounters’ changing fortunes, according to CACI.

Paul Langston, CACI’s location expert said: “The people who go to Aldi and Lidl to top up their main weekly shop are representative of the population living nearest to those stores.

“So if Aldi and Lidl can locate in new areas with similar demographic profiles they stand to attract a good customer base. As well as struggling and secure families, this includes many of the wealthiest groups in the UK, many of whom are traditionally Sainsbury’s shoppers.”

He added: “These cash-rich, time-rich ‘affluent greys’ and the ‘flourishing families’ will use Aldi and Lidl if they are within the catchment – significantly increasing the discounters’ market share.”

The report pinpoints London and the South East as presenting the greatest opportunities for the discount grocers – where they currently have few stores and where many of their target customers live.

If the discounters manage to deepen their share of the broader groups already using their stores for top-up shopping, 959 new locations UK-wide could support a discount store.

Mr Langston said: “Tesco has acted swiftly in the face of the threat from Aldi and Lidl, introducing new discount ranges and investing heavily in marketing strategies. It is right to be concerned. However, Sainsbury's response so far appears limited in the face of this new threat. No longer can the so-called discounters be classed as fringe players in the grocery market.

“With an increasingly broad appeal across all demographic groups, and with shoppers growing more value-conscious as the credit crunch deepens, larger swathes of the country are becoming target territory. The discounters are already moving into the mainstream and as they expand rapidly their appeal is set to widen.”