Pile 'em high, sell 'em cheap: euro discount boys heap the pressure on the high-street giants

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The Independent Online

That J Sainsbury has its problems can hardly be a surprise. Undercut by the likes of Asda and Tesco, beaten on quality by Waitrose and Marks & Spencer, the supermarket group is the sick man of its sector. And with Wm Morrison now seeking, via the integration of its Safeway stores, to leapfrog it into third place, the job of Sainsbury's recently installed chief executive, Justin King, has become even harder.

Richard Hyman, the chairman of retail consultancy Verdict, says: "Sainsbury's development is some years behind Asda and Tesco, and it shows. It's a challenging market and with every passing month, it's getting still more challenging for Sainsbury's as it gets left behind that little bit more."

The British supermarket sector is one of the most powerful within retailing. Thanks to the big supermarkets, many a high street operator has seen its market share, sales and profits ease in recent years.

Yet the sector is also fiercely competitive internally. After all, until 1995, Sainsbury's was its clear leader, while Tesco was merely a cheap and not-so-cheerful distant relation.

But compared with their competitors in mainland Europe, Sainsbury's and Mr King have it easy. Only last week, French giant Carrefour - tipped as a potential (though in reality unlikely) suitor for Sainsbury's and with a market value of €24.8bn (£17.1bn) - cut its sales growth targets for the second time in three months.

As its share price continued on its lengthy downward trek, Carrefour's chairman, Daniel Bernard, also abandoned promises of double-digit earnings growth for this year. Instead, Mr Bernard pledged to invest "whatever is necessary" to beat off the competition, much to the displeasure of the market. In the course of a week, shares in Carrefour slumped nearly 5 per cent, closing on Friday at just €34.72.

The blame is being laid at the door of the "hard discounters". This growing sector is inflicting problems everywhere, including in the traditionally high-value hypermarket industry dominated by the likes of Carrefour.

Between 1995 and 2003, the number of hard discounters in France is understood to have doubled. The trend started in Germany, however, and the country remains the biggest market for such retailers. Their no-frills stores give customers the bare minimum, selling a small selection of unbranded food and other staples. Shops may be spartan, with pallets instead of shelves, and the workforces tiny, but the savings made in this way are ploughed back in to keep prices as low as possible.

The add-on services that most punters have come to expect from supermarkets - banking, insurance, large non-food ranges, for example - are nowhere to be seen.

Two of the leading brands in the sector are Aldi and Lidl, both of which are German and have a presence in the UK (Aldi opened its first British store in 1990). Danish rival Netto has also expanded into the UK.

As Carrefour has found, these rivals may be smaller but they are not easily dismissed. Aldi has been going since the 1940s, founded by two secretive brothers, Karl and Theo Albrecht. They now regularly top the lists of Germany's richest citizens, and their group has 7,000 stores worldwide. Aldi is reportedly looking to have 1,000 shops in the US by 2010.

The message for Mr King is clear. Things might be tough on his home turf, but with the hard discounters showing no signs of backing off, and even hurting giants like Carrefour, it would appear that the sector's notoriously stiff competition can only get tougher.