How WM Morrison Supermarkets plc Can Beat Aldi And Lidl

In one imaginable scenario, the problems at Wm Morrison Supermarkets (LSE: MRW) and its peers Tesco, J Sainsbury and Asda will soon fade away as the British economy gains traction and wages grow to make the majority of the population better off again.

Under that vision of the future, the threat from German retailers Aldi and Lidl will fade and we’ll all go back to our fast-and-loose spending habits, of which the mainstream supermarkets all became so adept at taking advantage.

Forget it!

It won’t happen. The gathering challenge from Aldi and Lidl is set to intensify, not to fade, and there is very good reason for that. It’s been a dirty little secret that the mainstream supermarkets don’t want us to know about, but I’m shouting it from the rooftops now: the quality of many of the goods we buy from Aldi and Lidl leaves the mainstream supermarket’s offerings in a trail of dust. Did you get that? Aldi and Lidl lead on quality as well as on price — that’s a powerful combination and it’s no accident.

This two-pronged attack is something the traditional supermarkets in Britain need to take very seriously if they are to survive, let alone to thrive. Research from Kantar Worldpanel shows that 50% of UK households shopped at Aldi or Lidl over the Christmas period. That tells us something important: shopping in the hard-discounting stores is not such a terrible experience after all. In fact, we are warming to it.

That’s a serious threat to the likes of Morrisons. Yet Morrisons seems best placed of all the well-known traditional supermarket chains to meet the challenge head on. After all, Sir Ken Morrison built Morrisons on the ethics of good quality and great value in the first place. The outfit seemed to lose its way around the time it took on the Safeway chain, which arguably pitched its offering at the other end of the value-scale, looking upmarket with a bewildering array of choices on its shelves.

How Aldi and Lidl do it

Morrisons is also the smallest operator, which raises tempting potential for the firm to leapfrog the larger, lumbering firms it competes against by being fastest to embrace the new supermarket world order. Although smaller size isn’t an essential requirement for the role of chief warrior in the fight back against Aldi and Lidl, the stars seem aligned. Morrisons starts its new chief executive, ex-Tesco man, David Potts next week.

I reckon Mr Potts needs to take a long hard look at Aldi and Lidl’s business models and emulate them as fully as possible. Academics following the rise of the hard-discounters reckon they aim to supply customers with basic goods of daily need at the lowest possible prices, while maintaining high quality-standards. That sounds obvious, right? Yet I think the discounters play a blinding game with the ‘quality’ part of that statement, which doesn’t get as much attention as it should–‘amazing good quality’ is the secret weapon that Aldi and Lidl are using to slay Morrison, Tesco, Asda and Sainsbury.

Aldi and Lidl use four pillars to support their strategy:

  • A limited choice of products.
  • More private label offerings (of blinding good quality).
  • Maintaining a high quality/price ratio–high quality at low prices.
  • Efficient operations

Less means more profits

Dealing with fewer, well-targeted, products keeps volumes high, but with fewer stock keeping units. Cost reductions seem assured, and it works because we customers don’t balk at the reduced range thanks to the high quality and great value of the stuff we can buy.

Much of what we find in hard-discounting stores is private label. Aldi and Lidl ensure that suppliers pass rigorous quality controls, and flexibly switch suppliers fast if quality or service objectives slip. They can do that because the focus is narrow, and suppliers have a powerful incentive to maintain standards. The result for customers is delight. For example, we buy twice as much cheese for half the price and it tastes twice as good as the private-label offerings we get from Morrisons and its peers.

Fast-turning goods generate efficiency savings at every point in the logistical chain for the hard-discounters. On top of that, we see fast moving till operators whizzing goods past the bar code readers at counters with no buffer zones. The stuff goes straight back into customers’ trolleys for bagging up at the back of the store or at the boots of customers’ cars. We don’t mind. In fact, the saving of time and cost makes us delight in the practice. It’s clear what the de-bottlenecking does for Aldi’s and Lidl’s bottom lines.

What we don’t see at Aldi and Lidl is overuse of marketing, or complex sales strategies, or customer manipulation techniques. That reduces costs no end. By focusing on operational efficiency, customer satisfaction, quality and value, Aldi and Lidl don’t need any of that other nonsense.

So, will WM Morrison Supermarkets rise to the challenge under David Potts? We shall see. However, I'm not investing in Wm Morrison Supermarkets in case it doesn't. Instead, I'm keen on another potential investment that our outperforming analysts at the Motley Fool believe is poised to excel. Wm Morrison could go either way from here but, if you click the link that follows, you can find out more about an exclusive Motley Fool wealth report that examines the hidden story behind one of the most daring e-commerce stealth attacks of 2015. Growth flying under the radar can reward early investors well. You can follow this idea up right now by clicking here.

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.