Reuters/Berlin 

The German grocery market, long dominated by discounters such as Aldi and Lidl, is undergoing a makeover as shoppers demand more upmarket products like organic meat and exotic cheeses and retailers take tentative steps onto the web.

Run down after years trying to match discounters on price, mid-market supermarkets Edeka and Rewe, as well as their listed rival Metro, have changed strategy and are investingbns of euros to bring their produce and stores up to a level taken for granted in countries like Britain and France.

And faced with Amazon aiming to expand into fresh produce in its second biggest market after the US, German grocers are starting to move into e-commerce, which currently accounts for less than 1% of sales.

After years of retail stagnation, Germans are more willing to spend than at any time since 2006 as the economy picks up and low interest rates make saving less attractive.

Retailers are also responding to a new willingness among shoppers – who have traditionally preferred to splash out on cars, homes and travel rather than food or clothing – to pay more for quality groceries and a better shopping experience.

Discounters still have a huge 43.9% of the market – compared with 7% in Britain and 15% in France – but that is down from a 2008 peak of 44.5% as mid-market supermarkets have risen to 26% from 23.6%.

“We are slowly moving away from ‘Geiz ist geil’,” said Martin Ohsawa, manager of a gourmet Frische Paradies supermarket in Berlin, referring to an ad slogan meaning “stinginess is cool” that had come to epitomise German retail.

“A lot of people have changed their priorities because of food scandals. They will splash out on a litre of olive oil instead of a litre of motor oil,” the trained chef added.

Originally set up as a supplier of ingredients to trade customers like restaurants and hotels, Frische Paradies has opened its stores up to ordinary shoppers in recent years to meet a growing demand among Germans for more quality produce.

“Most German supermarkets have just two types of potato. We have eight,” said Ohsawa as he showed off pricey specialities like French cheese and butter, Italian capers, Himalayan rosa salt and a fresh fish counter he boasts is the best in Berlin. GfK market research group predicts German grocery sales will grow at least 2% in 2014 after a 2.7% rise in 2013 – the fastest rate in five years – boosted by price rises.

But retailers have a way to go to improve the shopping experience, with 59% of customers dissatisfied with the service they receive, according to a Porsche Consulting study.

Rewe Chief Executive Alain Caparros wants to attract shoppers to his stores with in-house bistros and sushi bars as well as events like oyster and caviar tasting.

“Customers want sustainability, they want organic, they want the best quality and still at a reasonable price,” he told the Handelsblatt business daily.

Rewe plans to invest 1.6bn euros ($2.19bn) this year in expanding and modernising stores while Edeka says it will spend more than 1bn. The two supermarkets invested 3bn euros in total last year.

Aldi and Lidl are also responding to the changing consumer mood, introducing more branded goods as well as in-house bakeries and a wider range of premium products like “Aldi Gourmet” and “Lidl Deluxe”.

 The shift, which GfK says led discounters to hike prices by 3.3% last year, has actually created opportunities at the super-budget end of the market. Metro’s Real out-of-town hypermarkets are trying to exploit that with a “nameless” range of low price own-brand products like toilet paper and pasta.

“Discounters have traded up so our chance with Real is to undercut the trend towards more quality to appeal to lower income and older people,” said Metro Chief Executive Olaf Koch.

Germany, which has no big upmarket grocery retail chains like Britain’s Waitrose, may look like an attractive target for foreign chains - but most will think twice about a full-scale assault after Wal-Mart beat a retreat in 2006.

The US retailer failed to capture market share in the cut-throat German market and acknowledged it had misunderstood the country’s regulations, shopping habits and tastes.

“Against the background of this trading-up trend, Germany could be of interest for those who have a quality range but this is still the most hotly contested market,” said GfK retail expert Wolfgang Adlwarth.

Dutch supermarket group Ahold has opened six small Albert Heijn convenience stores in western Germany, but Swiss chain Migros ended a foray into the German market last year, closing its four stores in the south of the country.

Despite a recovery in consumer sentiment, Germany’s underlying demographic trends - an ageing population and low birthrate - are not exactly attractive to retail investors.

That also helps explain why discounters may have lost ground. Pensioners have less need to do big bulk buys at discounters than cash-strapped families with young children.

Meanwhile, grocers are positioning for a rise in online ordering. Web sales make up less than 1% of the grocery market, compared with 5% in Britain. But consumer goods research group IGD sees German food e-commerce growing to 2.5bn euros by 2016 from 1.1bn in 2012.