German discounters are growing market share and their plan to target Dublin with new stores ups the ante in the supermarket competition war, writes Barry O'Halloran

Close to €1 in every €4 spent on grocery shopping in this country ends up in a Tesco Ireland cash till.

This week, the Irish arm of the UK-based multiple announced that it had sales of almost €2 billion in the year to February 28th. Its turnover grew by 9 per cent overall.

Five new stores helped to boost this growth, the underlying level of expansion was 4 per cent, ahead of the rate at which it is estimated that the economy grew last year. Tesco would not reveal its profits, but globally the group looked to be making a pre-tax margin of 4.7 per cent.

Tesco entered the Irish market seven years ago when it bought Quinnsworth. The business it bought was a market leader, along with Dunnes Stores, and has held that position today.

The latest industry figures show that Tesco's market share has grown slightly, to 24.7 per cent from 24 per cent, over the last year. Tesco Ireland's chief executive, Mr Gordon Fryett, also told reporters that he believed its market share had grown during the same period.

Its biggest competitor, Dunnes Stores, seems to have suffered slightly, losing 0.2 per cent to drop back to 22 per cent. Musgrave, which controls the Super Valu and Centra franchises, has grown its share from 22 per cent to 22.4 per cent.

But as the graph on this page shows, the reality for those three operators is that their market share has moved little over the last 12 months. As a proportion of their overall market shares, a shift that is measured to the right of a decimal point is not massive.

Surprisingly, one group that also appears to be growing slowly is the much-feared German discounters, Aldi and Lidl. Because they still have a small portion of the market and share a similar approach to selling groceries, the industry statistics group them together. Their collective share of the market is 5.2 per cent, up from 4.3 per cent a year ago.

They have taken almost a percentage point from somewhere in the market. At this stage it looks like they might have taken some of this from Dunnes and the rest from the "others" category, which includes everything from Spar to your traditional corner shop.

Given that both have been here for over four years, their performance in grabbing market share has been steady rather than rapid. Mr Fryett makes it clear that he regards them as serious competition.

And this year, we could see how serious the discounters are likely to get. Mr Stephen Conmy, editor of grocery trade magazine, Shelflife, points out that that they are about to open a slew of stores in Dublin.

These include a couple of choice locations. Aldi is due to open in Cornelscourt, close to a Dunnes flagship store. Lidl will open in Deansgrange and Aldi is also preparing to launch in Glenageary. In addition, Lidl is planning a national distribution centre for Longford.

"The discounters have started to penetrate the Dublin market, and once those stores start to come on line, they will grow to 10 or 11 per cent by the end of the year," he says.

That will be a doubling of their market share, a significant achievement for any business. If that happens, presumably, all the existing operators will end up surrendering some market share to the German invaders.

The existing players seem to have a anticipated this to a certain extent. Tesco is not just developing supermarkets; it has also been adding to its convenience store numbers. In three cases, it has opened petrol stations and is using cheap motor fuel to bring in customers.

It's possible that their impact is being felt already. Food prices, which are obviously pivotal to the grocery trade, did not grow strongly over the last year. Economist Mr Paul Tansey, in a report on the industry commissioned by IBEC and independent grocers' body, RGDATA, pegged food inflation at 0.6 per cent in the year to October 2003.

Tesco said that all its growth came from extra sales, not increased prices. Mr Fryett was keen to point out this week that it had increased its value range of cut-price offerings to 1,200 individual products. This begs another question: Shelflife recently carried out a survey that found Tesco's value range prices were lower in the UK than here. Mr Fryett argued that the survey did not compare like with like, as many of the products sold here are produced here. "You have to come back to the fact that the Irish economy is a high-cost economy," he said.

The features of the economy that caused this are to a certain extent in the past. The weakness of the euro versus sterling resulted in imported inflation and there was a rapid increase in labour costs in this country for a sustained period.

Mr Tansey singled out both of these reasons for food price inflation here between 1999 and 2002. He also found that while retailer's gross margins grew from 20.3 per cent to 21.8 per cent from 2000 to 2002, net margins shrank from 2.93 per cent to 2.65 per cent. But the pressure from these problems has eased considerably since then.

Some food costs are affected by the fact that the farmers own the co-ops that produce the dairy products consumed here. The EU's own supports also keep food prices artificially high, but this hits all countries in the union, not just this State.

But reforms at EU level are going to force co-ops to cut the prices they pay their shareholders for milk. From July, the EU will divorce farmers' supports from production, hopefully starting a process that will begin driving down food prices.

It remains to be seen if the reduced costs reach consumers. In the meantime, we're going to have to rely on competition between the supermarkets.