The Penny drops on retailers: Hard discount types from Germany plan a UK invasion, writes John Eisenhammer

IT IS scarcely surprising that Rewe, Germany's biggest food retailer, should have chosen England for its first foray abroad. To Germans, used to battling in one of the world's toughest retail environments, Britain looks like the grocer's idea of the promised land.

With little room to expand in their fiercely competitive home market, the powerful German players, most of them private companies, are looking over the borders and over the sea.

Through Budgens, in which it has acquired a 29 per cent stake, Rewe plans to open 40 Penny Market discount food stores in southern England over the next two years.

The Germans are not the only ones on the move, of course. The recent go-ahead for Costco, the American warehouse club operator, to open its first low-cost outlet is another prong of the international assault on British retailing.

But while warehouse clubs have dominated the headlines, it is German-led 'hard' - highly aggressive - discounting that looks likely to put the most pressure on UK retailers.

Germans pay some of the lowest prices in the world for groceries, thanks largely to the development of hard discounting over the past three decades.

Although they are putting a brave face on it, big British food retailers such as Safeway, Tesco and Sainsbury are worried.

'The days of the fat 8 per cent profit margins are probably gone for most big food retailers; prices are falling month by month,' said Richard Hyman of Verdict, the retail analysts. 'Things will change a great deal, and much of that will be due to the hard discounters.'

Rewe is one of several German contenders. Aldi, the father of low-price, no-frills retailing with a limited product range, has been quietly tightening its grip on England since 1990. And two other groups, Norma and Lidl & Schwarz, are planning moves into the English market.

Wolfram Schmuck of Rewe described the English market as 'particularly interesting as we Germans are particularly competitive'.

Josef Lachner, retailing specialist at the IFO research institute in Munich, took a less diplomatic line. 'The place is ripe for a killing. British food retailing is ossified. The consequences of a long, comfortable oligopoly between the big local operators has been a lack of innovation, especially in the level of discounting,' he said.

While the British stores have enjoyed the highest profit margins in the world, sometimes reaching 9 per cent in foods, their German counterparts would be happy to make 1 per cent.

'The German market has been extremely competitive for years. The only one you can compare with it is the US,' Mr Lachner said.

The Aldi concept of hard discounting was born in the 1950s and has been much copied. Among the imitators have been Kwik Save and Shoprite in Britain.

But the Germans see themselves as masters of the art, and are convinced that the British firms have only scratched the surface.

Hard discounters like Aldi offer a very narrow range of goods - between 600 and 1,000, compared with 8,000 to 10,000 in supermarkets.

Moreover, products in a hard discount store are often unbranded and presented in a rudimentary fashion, stacked in boxes with a price ticket stuck on the top.

Whether in Germany, Britain or the US, Aldi stores follow the same rigid formula of paring costs to the bone and passing this on to consumers in highly competitive prices, sometimes 25 per cent less than big supermarkets nearby.

Staff costs are also kept to a minimum, few personnel have a telephone, and there is no meat counter since that would require a fridge and service. The concentration is on dry, non-perishable goods, perhaps with the odd box of bananas, apples and oranges.

But those who dismiss hard discounting as a return to the pile 'em high and flog 'em cheap days of self-service shopping in the 1950s and 1960s underestimate the sophistication of the operation.

In otherwise stagnant food retailing markets, the hard discounters continue to grow rapidly. In Germany, they represent some 20 per cent of the grocery sector; in Britain, their share is less than 10 per cent.

Groups such as Aldi have high quality standards. They buy in such quantities that they are able to extract low- cost deals. The goods may be unbranded, but most come from the well-known biscuit, washing powder or shampoo manufacturers, just in different packaging.

'The logistics is brilliant. They have buying teams that are very quick on their feet, a very lean cost base, a system dedicated to shifting volume very rapidly through the business. These are the just-in-time distributors of retail. British retailers are not used to this,' Mr Hyman said.

With their limited product ranges and quick turnover, hard discounters can often supply a region with a single lorry load. The big supermarkets, with their extensive product ranges, have complex supply structures that weigh heavily on costs.

Aldi is the most dedicated German hard discounter. Hard discounting is all it does, and by all accounts, it does it well. Just how well, however, is impossible to verify; Aldi, like most of its German rivals, is a private company, and an obsessively secretive one.

'There are no market insiders on Aldi; everyone just guesses at its operations, and accepts its reputation as a business to be feared by competitors,' said Joachim Bernsdorff, senior analyst at Societe Generale in Frankfurt.

Estimates of Aldi's turnover last year vary between DM24bn ( pounds 9.6bn) and DM32bn. Rewe, which claimed a turnover last year of DM38bn, began as a traditional co-operative but has evolved into a classic big group, with powerful central management and dependent branches. Unlike Aldi, it covers the gamut of food retailing, from large supermarkets to hard discounters.

The question now is how swiftly the Germans can invade the UK market, given that British shoppers seem much less value-conscious than the Germans or the Americans.

'Being thrifty, putting yourself out not to pay more than you have to is seen in Britain to be a bit tacky. Whereas for Germans and Americans, looking for value is only natural,' Mr Hyman said.

But he believes the British are becoming more price-sensitive. It is notable that Aldi, with 90 stores in England, carefully chose locations where it judged people would be keen on bargains - the poorer areas of Birmingham, Manchester and Merseyside - and is only now slowly moving south.

Hard discounting is where the growth is, according to Verdict, but it is unlikely to be as strong as in Germany, reaching about 14 per cent of the British food retail market by the mid-1990s.

However, the squeeze on the big supermarkets may tighten if the trend developing in Germany accelerates. The middle ground between the big stores and the hard discounters is being taken up as the discounters seek to move into fresh produce.

The basic concept remains the same: shifting volumes extremely quickly with a minimum of effort. In distribution terms, it is a challenge, but it is the only route left for the cut- price retailers to expand.

'If the discounters succeed in this, then it will become even harder for the big supermarkets,' Mr Lachner said.

'Many will probably be forced to move down, becoming fresh discounters themselves. We may be looking at a new round in price competition.'

(Photograph omitted)