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Will Tesco PLC And Sainsbury’s plc Wilt Under The New Onslaught From Aldi And Lidl?

New boss Dave Lewis has won plaudits for the way he has set about restoring ailing fortunes at Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US). Markets were even willing to overlook the small matter of the recent £6.4bn pre-tax loss, the largest ever announced by a UK retailer.

This week’s final results at J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) were also viewed leniently, even though it posted its first annual lost in a decade and slashed its dividend by nearly one-fifth. At least the 15% drop in underlying profits to £681m beat gloomy market expectations of £654m.

The general feeling was that things could have been worse, and maybe, just maybe, one day they will get slightly better. But that day isn’t upon us yet.

Birth And Death

It is hard to shake the feeling that buying Tesco and Sainsbury’s involves investing in a declining sector of the grocery market. Especially when you look at Aldi and Lidl. Trade journal The Grocer has just reported that the two German discounters have 33 and 20 projects lined up respectively for 2015, as they continue their aggressive expansion plans.

By comparison, Tesco has just three while Sainsbury’s trails with two (although it has disputed The Grocer’s figures, saying it plans to open eight superstores in the next three years). Last year, Tesco was laying out only slightly less floor space than Aldi. This year, Aldi is laying 10 times as much.

Tesco and Sainsbury’s are retrenching, Aldi and Lidl are booming, confident and scenting blood.

Growth Limits

At some point, the onward march of Aldi and Lidl will halt. Their novelty status may already be fading. Some customers are starting to complain that the quality isn’t there.

Not everyone wants to head down-market anyway. The big supermarkets are slashing prices, and the price differential isn’t as wide as it was.

This year’s expansion plans could even be the discounters’ moment of hubris.

Weak And Wilted

Chief executive Mike Coupe is confident that his strategy can turn Sainsbury’s round, and reckons his strategy of investing in price and quality is showing “encouraging early signs of volume and transaction growth”.

Tesco’s Dave Lewis clearly knows what he’s about, although may have created a rod for his own back, as investor expectations rise a little too fast.

Both supermarkets will inevitably lose further market share as they wilt under this latest assault from their fresher and crisper rivals. The discounters will find their natural level at some point, but that will be higher than it is today.

Tesco and Sainsbury’s look set to stay soggy for some time yet.

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Harvey Jones 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.