Budgens pulls out as battle looms in discount food

Yesterday's decision by Budgens, the supermarket operator, to abandon its Penny Market discount chain speaks volumes about the market for discount food retailing in Britain.

Only a few years ago, discounting was hailed as the sector's promised land. While foreign groups, such as Aldi, of Germany, and Netto, of Denmark, began operations in Britain, other established supermarket groups, such as Somerfield, hastily turned stores into discount formats to cash in on the trend. Superstore groups, such as Sainsbury and Tesco, were worried.

Now things look very different. While the superstore operators still have cause for concern, the discounters are not having everything their own way. Penny Market has gone. Shoprite, the struggling Scottish discount chain, was absorbed by Kwik Save last November. And Lo Cost, formerly part of Argyll, the Safeway group, has been sold to the Co Op.

The problem is not that the discounters' march has been halted - the sector is expected to continue its growth - but that there is not room on the battlefield for all those who would like to fight. As Clive Vaughan, of Verdict Research, says: "I expect the shake-out to continue. There are far too many discount fascias in the market and the major players will win through. Things are pretty tough down at the bottom end of the market."

The key changes of recent years are increasing pressures on prices and on sites. According to Verdict, there are two over-lapping price wars developing: one between the superstore groups, such as Sainsbury, Tesco and Safeway, and another between the discount groups, such as Kwik Save and the foreign-owned operators.

Bill Currie, retail analyst at BZW, adds that the launch of lower-priced ranges by Sainsbury and Tesco has also helped the larger groups to reassert their authority on the sector.

Competition for new sites has increased as the discounters embark on headlong expansion. Kwik Save, the largest discounter, now has nearly 1,000 stores and a headstart on the rest. Aldi has more than 100 stores and Netto 80. Both are looking for more than 200 each. And Lidl, another German chain which only came to Britain in November, is opening a store a week.

Budgens says that since it began its Penny Market venture 18 months ago, the cost of new sites has doubled and it has been forced to lower the prices on its top 100 lines by 10 per cent.

Privately owned groups, such as Aldi, the doyen of German "hard" discounting, can afford to take the long-term view and run at a loss in order to build market share.

Industry observers question whether Ed, owned by the Carrefours group, has the stomach for a war of attrition. The jury is out on whether Lo Cost, even under the Co Op umbrella, can weather the storm. Meanwhile, Kwik Save, a highly skilled and profitablebrand discounter, is caught in the middle. Further rationalisation seems certain.