Is Aldi right about the future of shopping?

Perhaps because the August figure was lower than anticipated – it had been forecast that inflation would increase due to a sharp rise in fuel costs and a rebound in oil prices, only for food prices to not rise at the rate previously expected – the word relief commonly appeared in the comments from observers reacting to the ONS data.

Some have expressed the view that the unexpected easing of inflation in August was decisive in the vote by the Bank of England’s Monetary Policy Committee to hold interest rates at 5.25%, which was announced a day after the ONS inflation figures came out. The decision to freeze rates was similarly welcomed, amid hope that the cost of borrowing has peaked, for the time being at least.

Yet, while it is certainly welcome that last week did not bring news of a further hike in the rate of inflation or a rise in interest rates, it is not exactly a cause for celebration.

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At 6.7%, the rate of inflation remains ferocious – not to mention well above the Bank of England’s long-term target of 2% – and a deep cause for concern for individuals and families as they struggle to make ends meet in this unforgiving economic climate.

Indeed, given that inflation has become so entrenched in the UK over the last 18 months – much of the slowing of inflation we have seen this year owes much to base-year effects – it was not surprising to hear the remarks of Giles Hurley, UK and Ireland boss at Aldi, this week.

Unveiling a bumper set of results for 2022, which revealed a near-£2 billion rise in sales to £15.5bn – a new record in its 33-year history – Aldi declared on Monday that the cost of living crisis has transformed the way people in Britain shop. Aldi reported annual operating profit of £178.7m, up from £60.2 million in 2021, on the back of increased sales.

“Although inflation is easing, households are still under real pressure from higher living costs,” Mr Hurley said. “As a result, Britain is shopping very differently to how it did 18 months ago – fewer trips, more own label products, and switching supermarkets in search of better value.

“What we are seeing is a new generation of savvy shoppers who have turned their back on traditional, full-price supermarkets in favour of transparent, low prices, which is what we are famous for. That is why we are still welcoming more and more customers through our doors – people who come to us for our low prices but stay for the award-winning quality of our exclusive brands.”

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The value-led approach which underpins Aldi has helped propel it to become the UK’s fourth-biggest grocer, at the expense of Morrisons.

And Lidl, which is so often mentioned in the same breath as Aldi, has been steadily growing its market share too, thanks to its similar pricing approach.

Lidl actually fell into the red in its latest financial year, reporting a loss of £75.9m for the year ended February 28 following a profit of £41.1m the time before. However, the loss was attributed to heavy investment by the grocer in pay rises for staff and price cuts at the till, a strategy which is continuing to help it win market share at the expense of its more established UK grocery rivals.

Lidl was recently named the cheapest and most popular supermarket in the UK, following polls by YouGov and industry bible the Grocer.

The success of Aldi and Lidl in the UK has not come overnight and has been building since the two discounters entered the UK market several decades ago. But it is beyond dispute that consumers have been shopping in their stores with increasing regularity because of the cost of living crisis, with both pulling out the stops to deliver competitive prices at a time when consumers need them the most. And it is hard to see that trend changing.

That is not to say the UK’s traditional "big four" multiple grocers have not been responding to the inflation crisis.

Sainsbury’s and Tesco, for example, have invested tens of millions of pounds to lower prices on certain lines and indeed have gone to the extent of implementing "Aldi price match" commitments on a growing number of products.

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But it appears that the bulk of their cuts are available only to customers who join their loyalty card schemes, meaning that there is often a yawning difference between the price charged to card holders and those who elect not to join up, which hardly seems fair.

Some may respond to this argument by saying, 'why not just sign up?'. However, there are valid ethical reasons why consumers are not comfortable about joining schemes which effectively allow companies to collect data about their shopping habits. Because of this, the price cuts currently offered by Tesco and Sainsbury’s come with strings attached.

Moreover, the tactic of cutting the price of certain goods while ramping up others in line with inflation (evident, for example, on products such as branded breakfast cereal) has certainly been helping profits at the big multiples. Reporting its first-quarter trading statement to the City in July, Sainsbury’s said that it expects to make underlying profit before tax of between £640m and £700m for its 2023/24 financial year.

Tesco, meanwhile, said it expects to deliver retail adjusted operating profit within its target £1.4 billion to £1.8bn range for 2023/24 when it announced its interim results for 2022/23 in April.

In the case of Tesco and Sainsbury's, their latest annual results did show a fall in profits.

But the magnitude of the profits they are continuing to make unfortunately leaves the impression that, while most of us struggle with rampant inflation, some companies are continuing to do very nicely indeed.