Discounters in the grocery landscape have carved out a substantial chunk of the market in the last ten years. And though discount grocers saw an opportunity and capitalized on tighter wallets during the last U.S. recession, they’ve only continued to grow as the economy has improved.
“All told, we expect the deep discount segment in the U.S. to grow by 8 to 10 percent annually through 2020 — five times the rate of traditional grocers,” writes Kent Knudson and Mikey Vu of Bain Insights in Forbes.
Discount Grocers Continue Gaining Marketshare
Discount grocer, Aldi is no exception to this growth. If Aldi meets its goal of reaching 2,500 stores in the U.S. by the end of 2022, it will be the third-largest grocery chain (by the number of outlets) in the U.S. The Illinois-based chain with German roots already operates more than 10,000 stores in 18 countries and on four continents. As of last year German discounter Lidl — the fifth-largest grocery retailer in the world, with annual revenues exceeding $100 billion — already had 10,000 stores in Europe and 47 in the U.S.; this year it plans to open 100 more.
Some analysts are even predicting the discount grocers segment will shortly represent half the industry market share.
Discount Grocers Strategic Approach
What’s behind the strategies of the big discounters, and how are they disrupting the traditional marketplace?
- Low costs: Cost-conscious customers of Aldi and Lidl have remained loyal to those stores even in better economic times. Luxuries such as store expansions, broader product mixes, and customer conveniences have recently been and only reinstills their loyalty. Still, both discount grocers have been able to keep operational costs manageable while increasing productivity, bettering the shopper experience, and ultimately driving higher margins. Deep discounters’ prices are typically 15 percent lower than other grocers’ private-label offerings and up to 200 percent lower than their branded products, report the authors of a recent Boston Consulting Group article.
- Private labels: Eighty-five percent of U.S. shoppers are open to private brands while more than half (across income brackets) consider them at least as good as national brands, say Knudson and Vu. Private labels have allowed Lidl and Aldi to establish credibility while strictly controlling both cost and quality. “Store brands play a strategic role for winning over shoppers from other channels,” notes a recent report by Nielsen. “And compared to other major retail channels, deep discounters have more than twice the store-brand share of dollars.”
- Convenience: This is the third-most-popular reason shoppers patronize Aldi (and other discount grocers) after good value and price, according to Knudson and Vu. Though discounters have increased store sizes by an average 16 percent over the past 10 years, according to BCG, they’re still small enough so goods are relatively easy to locate. Discount grocers are also strategic in choosing locations, often establishing themselves where groceries are needed but larger format stores wouldn’t succeed.
Competitive Displacement of Discount Grocers
Traditional grocers looking to compete for business head-on with discounted grocers should consider bringing the following into their strategies:
- Curated merchandise mix: discount grocers control prices and still meet customer needs by offering minimal options in each core product line. In many cases, according to BCG, those options beat out established brands in taste tests. “Because discounters focus so intently on understanding what customers want, they can meet a wider range of needs, even though their stores are still smaller than those of traditional grocers and carry fewer products,” it reports. “This (curation) allows for a much more efficient supply chain arrangement with the manufacturer, including larger production sizes and full truckloads, for example, and thus lower product prices for the discounter.”
- Improved shopping experience: Aldi is especially known for its lightning-fast checkout services, and BCG notes many discount grocers now feature extended opening hours, wider aisles, better lighting and other amenities.
- Lower overhead: Aldi famously staffs its stores with minimal associates who act in many different capacities, stocking shelves and checking out customers as needed. Everything else for customers is self-service, with no prepared foods, counter service or bagging of groceries available. By using display-ready reusable plastic containers for many of its product shipments, the chain avoids heavy labor costs associated with stocking and merchandising, while maximizing its floor space with uniform displays.
Taking a close look at everything discount grocers are doing right may inspire other grocery movers and shakers to change their long-time operating models. One example? Trading in old-school corrugated boxes for highly efficient RPCs (reusable plastic containers). The clean, reusable plastic containers have greater structural integrity providing superior product protection and less damage. They can also be moved directly from trucks to sales floors, streamlining unloading and eliminating the need for the hands-on stocking. RPCs help grocers optimize the supply chain and lower overall costs- a crucial layer of the discount grocer strategy allowing them to gain traction in the marketplace.