Tesco Ireland chief executive Tony Keohane: now seeing the benefit of price-cutting campaign

The latest grocery market performance figures from Kantar Worldpanel, published for the three months ending 13 June, show some light at the end of the tunnel following the harshest period in the grocery industry for decades.

Over the past year-and-a-half the annual value of the grocery market has fallen dramatically as households cut back on their spending. The average amount we spend on groceries in a year has dropped from €6,139 at the end of 2008 to a current low of €5,559, a level last seen in early 2006.

The bright spot for businesses in the industry is that the rate of decline in shopper spend is slowing, from an annual decline of 7.4% to a quarterly drop of 4.4% and a monthly fall of just 2.8%. This provides evidence that the tight grip on the nation's purse strings is beginning to loosen.

From a segment perspective, the most significant drivers of this slowdown in decline are the food categories. Shoppers are seeking out cheaper options within less essential categories such as alcohol, toiletries and healthcare. These categories often include higher-value purchases and so the consumer can save more by trading down to cheaper alternatives. As a result, a greater proportion of our grocery budget is now allocated to food.

Cooking is one activity that appears to have been boosted by the recession, with home baking being one of only four macro categories to have seen growth over the past year. Rice and noodles, multipack chocolate and canned goods are the other apparently recession-proof categories.

The worst-hit product categories are those which combine higher-value purchases with obvious opportunities to trade down. An example of this is chilled drinks, where consumers have begun to purchase more retailer private-label products, and fresh poultry, where consumers have traded down to cheaper options such as whole chickens ahead of more expensive options such as breast fillets.

From a retailer perspective there is a very clear picture of who has won and who has lost. Lidl, Aldi and Tesco have all managed to gain market share while Superquinn and Dunnes Stores have lost ground. Supervalu has performed well, holding a consistent level of market share.

Looking at Tesco in particular, the onset of the recession had an initial adverse effect. In June 2008 its value share of the grocery market stood at 26.5%. Over the following 12 months Tesco experienced the first decline in sales since entering the Irish market. This led to a fall in market share of one percentage point, with Lidl, Aldi, Dunnes Stores and cross-border shopping all eating into sales.

Tesco's response was to launch a price-cutting campaign with the aim of price reductions of an average of 22% across 12,500 products. This also incorporated the introduction of new ranges and new shop layouts, with all of this implemented from May 2009 onwards. Tesco is now seeing the benefit of these price reductions in a consistent increase in its value market share since the start of 2010. This has peaked at 27.4% in the three months to 13 June, a record share level for Tesco in Ireland.

We anticipate this growth continuing for three main reasons. Firstly, Tesco attracts more young family shoppers than any of its main competitors, providing a natural engine for future growth. Second, Tesco is strongest in Leinster, and the Central Statistics Office has predicted strong population growth within the region over the next ten years.

Finally, Tesco's current sales growth enables it to invest in new shop openings. It has 120 shops within the Republic and has committed to opening another seven over the next year. The past ten years have highlighted that, when it comes to growing sales and market share, nothing works better than opening new shops.

Shop openings have proved decisive for the discounters Aldi and Lidl over the past two years, with each retailer increasing its value market share by one percentage point. Aldi now captures 3.4% of the take-home grocery market and Lidl has 5.6%. They are the only retailers to have persevered with a shop-opening campaign throughout the recession, driving growth and switching shopper spend away from Dunnes Stores, Superquinn and Supervalu. Lidl alone now has more shops than any of its main multiple rivals.

Supervalu has performed well in the face of mounting competition from Tesco and the discounters. Its share of the grocery market has held firm at 20%. Losses to Tesco in Leinster have been offset by gains in Supervalu's traditionally strong area of Connacht and Ulster, as shoppers are now less inclined to buy their groceries in Northern Ireland. Looking ahead, Tesco's continuing growth will pose a challenge.

Superquinn has suffered the biggest adverse impact of the recession and this has continued in the latest quarter. Superquinn's share of the market has dropped from 7.5% in 2008 to 6.7% this quarter as shoppers move to retailers that are perceived to offer better value. The closure of the Dundalk shop in February 2009 will have also contributed to the drop in market share.

Dunnes Stores' current three-month take-home grocery market share of 23.5% shows a slight drop compared to the 23.9% achieved in the same period last year. However, the current share is significantly down compared to Dunnes' peak share of 25% at Christmas 2008. This brought Dunnes Stores to within one percentage point of Tesco; Dunnes now lags behind Tesco by almost four points and this gap is widening as the two experience contrasting fortunes.

This is further highlighted when you look at regional performance. Last year, Dunnes Stores was the joint number one retailer in Dublin with Tesco and had a clear two-point lead in Munster. Tesco now has a clear lead in Dublin and Supervalu is within half a point in Munster.

This highlights the challenge facing Dunnes Stores and identifies the clear need to retake the initiative to combat the growing threats to its business posed by Tesco and the discounters.

David Berry is commercial director at Kantar Worldpanel