BERLIN/LONDON (Reuters) - Mid-market retailers face pressure to compete on both price and quality as they battle an expansion of On Sales chains that is powering ahead as recession-era shopping habits become entrenched in post-crisis Europe.
The enduring appeal of a bargain has been highlighted by the success of budget fashion chain Primark, and the imminent London listings of fast-growing discounter B&M and Poundland, Europe's largest single-price retailer.
"We're very good in austere times, but we're even better in good times," said Jim McCarthy, CEO of Poundland, which says nearly a quarter of its 4.5 million weekly customers now come from the more affluent part of the population.
No-frills grocers like Germany's Aldi ALDIEI.UL and Lidl LIDUK.UL, and Spanish chain Dia (DIDA.MC) are flourishing even as the consumer mood recovers in Europe, hurting the continent's top players like Tesco (TSCO.L) and Carrefour (CARR.PA).
Tesco, which has long sought to avoid a price war with the discounters in Britain, announced 200 million pounds of new price cuts on Tuesday, although analysts questioned whether that would stem a fall in market share.
Tesco's shares, which fell 4.3 percent by 1131 GMT as analysts downgraded the company after its strategy update, trade at 11 times forward earnings, a discount to Carrefour on 17 times, which started earlier to address its decline in France.
"Tesco is where Carrefour was in 2005, losing ground to distinct retailers, not addressing the problem," said Bernstein analyst Bruno Monteyne.
Dia, the world's third-largest discount grocer after privately-owned Aldi and Lidl, trades on 17.7 times forward earnings, while Primark-owner Associated British Foods (ABF.L) is on 27.9 times, compared with a fashion average of 17 times.
In France, discounters have been losing market share since 2009 as hypermarkets have axed prices, cutting them by an average of 1.4 percent in 2013, Nielsen data shows, while discounter prices rose by an average of 0.7 percent.
Discounters in France saw a slight net fall in selling space in 2013 for the first time in 15 years and data from Kantar Worldpanel showed their market share slipped to 12.2 percent from a 2009 peak of 14.9 percent.
In a sign the cut-throat trend is set to continue, four big European supermarket chains with combined turnover of about 88 billion euros (71 billion pounds) set up a purchasing alliance this month to drive down prices from suppliers.
"Consumers are feeling better in Europe, the economic forecasts are on the uptick, but unemployment is still really high," said Chris O'Leary, head of the international division of U.S. packaged foods group General Mills (GIS.N).
He said brands no longer saw discounters as "evil" and were selling more products there: "I don't anticipate a wholesale shift back. Those formats will continue to grow, similar to the way Wal-Mart grew, or the way dollar stores are growing."
Asda, Wal-Mart's (WMT.N) British arm, has pledged to spend more than 1 billion pounds on price cuts over the next five years and has abandoned vouchers to focus more on price, arguing that shoppers are tired of complex promotional deals.
Price competition also looks set to remain fierce in fashion as Primark encroaches further on the home territory of the world's largest fashion retailer, Spain's Inditex (ITX.MC), which is responding by reworking its lowest cost brand, Lefties.
Primark, which has already opened 39 stores in Spain and plans more, expects shoppers to remain loyal even as the unemployment-plagued economy starts to recover. It has seen like-for-sales there up over 10 percent so far this year.
"Primark welcomes an improving economy. We think we'll do well in it," John Bason, finance director of Primark owner Associated British Foods, told Reuters.
Primark's glitzy new stores are forcing rivals like H&M to invest in their own shops at the same time as cutting prices.
Aldi and Lidl have also cemented their appeal by investing in smarter stores and advertising and selling more branded and premium goods, with Aldi usurping Waitrose as Britain's "best supermarket", according to consumer group Which.
More than half of British consumers believe food sold in discount stores is of at least the same quality as that stocked in supermarkets, according to a survey by market researchers Canadean Custom Solutions.
"The image of discounters in the UK has been completely revamped. Middle and upper class consumers are going there because of their confidence in the product, not because they can't afford to go elsewhere," said Canadean's Michael Hughes.
German supermarkets, run down by decades of fierce price competition with discounters that have taken more than 40 percent of the market, have clawed back some ground in recent years by offering more quality products and upgrading stores.
But Britain's main supermarkets like Tesco and Asda have struggled to use premium quality as a differentiator from the discounters as upmarket players Waitrose JLP.UL and Marks & Spencer (MKS.L) have already cornered that part of the market.
Bernstein's Monteyne says Tesco's turnaround plan is doomed as long as it sticks to a mid-market strategy and does not try to dominate on either price or quality: "The problem if you have a 'one size fits all' model is you can't be good at anything."
Dutch grocer Ahold (AHLN.AS) has had more success by offering better fresh food and more deli products at its Stop&Shop and Giant chains in the United States, helping it keep growing despite the rapid expansion of Wal-Mart.
That echoes the strategy adopted by Hennes & Mauritz (HMb.ST), the world's second-biggest clothing retailer that has expanded limited-edition designer collections and moved into sportswear to defend shrinking profit margins as Primark expands.
A survey conducted by Societe Generale showed H&M has raised prices of its premium wares in the last two years, even as it continues to trim prices of basics.