How Hard Discounters are Disrupting Grocery Retail

By Jan-Benedict Steenkamp and Laurens Sloot

It might surprise you, but so far online retail is not the main disruptor in the world's single biggest retail market - grocery retail. 

It is easy to overlook the hard discount concept that is puzzling many Boards of Directors of conventional retailers. How can these hard discounters with their austere stores, limited assortment, and absence of so many national brands be successful? How can they possibly disrupt markets traditionally dominated by textbook retailers such as Kroger, Tesco, Carrefour, Ahold Delhaize and Edeka?

Is the world’s largest retailer, Walmart, also at risk if hard discounters keep on extending their store network? At first sight, that seems an absurd question, but in fact, there have only been two retailers that have defeated Walmart not only once, but twice, in Germany and now also in the UK: Hard discounters Aldi and Lidl. The rise of hard discounters now costs other retailers around 400 billion dollars per year - and rising!

The archetype hard discount banner is Aldi, invented by the Albrecht-brothers. Aldi is an abbreviation of Albrecht Diskont. This concept was a big hit in Germany’s very poor post-WWII period. Gradually they developed and internationalized their concept and nowadays Aldi operates over 11,200 stores in 20 countries. With a turnover of almost $100 billion, it is now one of the top 5 largest grocery retailers in the world.

Other retailers such as Lidl, Biedronka and BIM successfully copied – and sometimes improved - the Aldi-concept. Lidl, for example, has spread globally. Consequently, hard discounters are now prevalent in almost every modern grocery retail market, lowering reference prices all over the world.

But what has been the secret to their success? There are some key strengths of the hard discount business model, which we outline in Retail Disruptors: The Spectacular Rise and Impact of Hard Discounters ($29.95 in U.S. and ￡19.99 elsewhere before Kogan Page discount of 20% - see at the end of this article). For instance, due to their concentrated assortment, hard discounters have the ability to buy huge volumes per Stock Keeping Unit (SKU) which leads to much lower buying prices compared to conventional retailers. This means they can then sell their products at about half the price of national brands.

Consumers embrace this concept not only because of the irresistible value for money of the products, but also because hard discount stores are often convenient and easy to shop around, given the low choice complexity and quality assurance. Consumers save time and money - and they love it.

Hard Discounter Success

With this strategy, hard discounters have become a real pain-point for almost every conventional retailer they encounter. In the UK alone, Aldi and Lidl have grown their market share in the last six years from 4.7% in 2011 to 13.2% in 2018 - a near tripling of their market share!

The UK’s most renowned grocery retailers haemorrhaged sales and profitability collapsed. This scenario has also unfolded in Australia, where Aldi's market share grew from less than 1% in 2001 to over 13% in 2018, debunking any lingering myth that hard discounters cannot succeed in geographically vast markets.

The same scenario is starting to unfold in the U.S. as well. Aldi has embarked on an aggressive refurbishing and store expansion program, adding roughly 750 stores to its existing 1750 by 2022. Every area where Lidl enters in the U.S., "mainstream" retailers must drop their prices on their private labels by an average 10% to remain competitive. That is real money!

We are not the only one who see the threat of hard discounters for U.S. retailing too. Earlier this week, Fred Morganthall, former executive vice president of retail operations at The Kroger Co. and former president of Harris Teeter, gave a keynote speech at the 2018 PLMA Trade Show in Chicago. What did he say? (We quote from trade magazine Supermarket News.):

“The deep discounters are clearly a disruption to the traditional grocer. Aldi has 1,752 stores today, and their own-brand quality really is equal to or better than national brands. If you’re a retailer in grocery and you haven’t taken your top 20 or 30 items that you sell today and cut them against Aldi, you’re going to be in for a surprise. It is amazing the quality that Aldi presents today, and they’re clearly a leader in the quality aspects of own brands... Own brands are going to have up their quality level. If Aldi wasn’t as good as Lidl was before, Lidl has forced Aldi to upgrade its quality again. Aldi has looked at every Lidl item that they sell. Kroger and Walmart have both looked at the brands offered by Lidl and Aldi and upgraded quality in line with theirs — and then on price. Not only does Aldi have a great product line and great quality in own brands, but Walmart has lowered its prices to align themselves with Aldi and Lidl, and Kroger has also reacted in their own brands.”

What can conventional retailers do in response to counter hard discounters?

There are a number of defensive and offensive response that traditional brand manufacturers and retailers can adopt in response to the rise of hard discounters. We outline and discuss these strategies in detail in our book.

The defensive approaches consist of strategies that lead to lower prices either by accepting lower gross margins (fight back strategy) or by cutting cost (downgrading strategy). In Retail Disruptors, we identify areas where conventional retailers can claw back some of these price reductions through lowering procurement costs.

These retailers leave many billions of dollars on the table; although defensive strategies might be effective in the short term, they usually lead to lower operating margins, as most service-oriented retailers do not have a cost structure that comes close to hard discounters.

Conventional retailers can also follow a more offensive approach. This is more aligned with the DNA and strengths of premium retailers. By adding value without increasing the price (value improvement strategy) or being an innovative leader (value redefinition strategy) they can try to sustain the high ground and prevent themselves from fighting with hard discounters based on their mains strength: low prices. Companies such as Waitrose and Wegmans are good examples of retailers successfully following a more offensive approach.

The most important thing for any conventional retailer to remember, is to never underestimate the power of the hard discount concept. The stores may not look as slick, but they are very hard to beat. And if you can't beat them, why not join them? Tesco recently did just that, by launching its own discount banner 'Jack's'...

More info? See our new book Retail Disruptors and order it via Kogan Page (and use discount code NMK46 to receive 20% discount for a limited time), Amazon, or any other digital book retailer. FYI: the book has already become required reading at both a global grocery retailer and a leading CPG manufacturer.

Jan-Benedict Steenkamp, is C. Knox Massey Distinguished Professor of Marketing at UNC's Kenan-Flagler Business School, Executive Director AiMark, Honorary Professor at EIASM (Brussels), Fellow at Fudan University (Shanghai), member of the Spinoza Committee (the Netherlands), lead consultant of the Brand Society of China Association for Quality (BSCAQ), and Chairman International Advisory Board, Institute for Nation(al) Branding (Shanghai). He is the author of four books Retail Disruptors: The Spectacular Rise and Impact of Hard Discounters, Private Label Strategy: How to Beat the Store Brand Challenge, Brand Breakout: How Emerging Market Brands Will Go Global, and Global Brand Strategy: World-wise Marketing in the Age of Branding.