Discount retailers deal harsh blow to UK middle-range supermarkets

If you believe George Osborne, Britain's economy has turned the corner and the millions of people who make up the "squeezed middle" might finally be about get some respite.

But in the supermarket sector, discount chains fuelled by those same hard-pressed consumers continue to turn the screw on the “squeezed middle” of Britain’s big grocers.

Tesco, the big daddy of UK supermarkets, unveils its interim results this morning. Still hurting from its first profit fall in 20 years, chief executive Philip Clarke will put the best possible spin on his numbers in a bid to appease investors, who are still angry about Tesco's expensive international failures.

Clarke will have to spin hard; analysts expect Tesco to post further falls in profit of as much as 6 per cent in Asia and 20 per cent in Europe.

The Tesco boss is expected to stress the investment in Tesco’s long-neglected British heartland, which still accounts for three-fifths of its sales.

But the underlying bad news story at home is the unabated growth of discount chains Aldi, Lidl and Poundland, which continue to take market share from Tesco, Asda and Morrisons.

The latest figures from market research firm Kantar Worldpanel show that, in the UK, in the 12 weeks to September, Tesco, Asda and Morrison all lost market share to discounters, with J Sainsbury a notable exception. In the same period, Aldi and Lidl saw double-digit growth of their shares.

In Ireland, Tesco saw its market share fall by nearly 2 per cent in the last year as discount chains such as Dunnes Stores and SuperVal lured away cost-conscious shoppers.

Aldi soars 40%
When German chain Aldi reported its latest figures on Monday, the contrast with Tesco could not have been starker. Sales at Aldi's UK stores soared by 40 per cent to £3.9 billion in 2012, with the discount retailer aiming to open 50 new UK stores over the next 12 months, on top of 34 last year.

The difference in fortunes will not have been lost on Andrew Higginson, the former finance director of Tesco and now chairman of Poundland, where all items cost a pound .

Poundland said yesterday its sales for the year to March rose by 15 per cent to £880 million, while underlying pretax profit was up by 29 per cent to £23.1 million. Management of the chain, which trades as Dealz in Ireland, plans to more than double its stores to 1,000.

Poundland is being prepared by its American private equity owner Warburg Pincus for a sale or IPO next year. The deal will almost certainly see Higginson and Poundland’s chief executive Jim McCarthy, the former managing director of J Sainsbury’s convenience stores, take home bumper payouts.

Warburg Pincus, which is expected to reap £600 million from its investment, shares an eye for a bargain with Poundland’s customers; it paid just £200 million for the retailer three years ago.

Back at Tesco, analysts are predicting the retailer will unveil a fall in UK sales of about 0.5 per cent for the three months to September. The silver lining for Clarke is that he has likely maintained the retailer’s market-leading UK profit margin of some 5.2 per cent.

Stuck in the middle
The question, with Tesco & Co pinned between the discounters and the bottom and Waitrose's quality at the top, is for just how long? If you believe JP Morgan, which until recently was Tesco's house broker, not very. "We believe that discounters are making inroads into the current 'good, better, best' price/range architecture used by the big four [Tesco, Sainsbury, Asda and Morrisons] over the past two decades," said JPMorgan analysts last week. "The good is not good enough and the better is not cheap enough."

How Tesco's old hands must long for the golden days of Sir Terry Leahy, whose departure as chief executive in 2011 coincided with a difficult phase for the supermarket. And what is Sir Terry up to now? He runs Lancashire-based discount retailer B&M Stores for a US private equity firm.