Discounter growth: current and future implications for the retailers

06

June, 2017

Discounter the most growing format across Europe Discounters grew up in Germany in a complex economic context after the Second World War “as a small-box, no-frills-at-all, cans-on-pallets store with no support from the stock markets whatsoever” (Planet Retail, 2016) .

1. Discounter: history 

The first discounter was opened in 1946 by the brothers Aldi (acronym of Albrecht and discount) in Essen (West Germany). The simple format got a huge success as any other developed distribution system was existing yet and after few time other stores were opened across all the country.

The power of this format was so strong that still today they are dominating the German market (and gaining shares internationally) without much space for alternative formats and retail innovations (e.g. convenience stores and online) which, in contrast, are growing in other large markets as France and the UK.

As of 90s discounters started the internationalization in important markets as France, Italy and the UK achieving great results almost everywhere (with the exception of France). However, their relevance across Europe is huge and forecasts expect a further growth in the future.

Top 10 countries in terms of FMCG online sales
Top 10 countries in terms of FMCG online sales

 [1] Sales forecasts (2016, 2017, 2018 and 2019) made by Techingrocery assuming a CAGR rate (France -2%, Germany +5% and the UK +21%)   

We can summarize the discounter’s growth through different development stages despite the high differences still remain locally among each country. The development stages (Table 1) below are based on the empirical experience of Italy.

At the beginning discounters changed the Italian retail business (still underdeveloped vs other leading Western European markets) introducing something was not existing at all as many shoppers faced the first time with a format where they could spend less to get the same basket size. When traditional retailers (supermarkets and hypermarkets) got an important market share drop, they immediately reacted introducing the same unbranded low-tiers items of discounts to serve the growing price-conscious shoppers share.

Secondly, they made the first private labels trade-up, improving the product and they consistently reduce for the first time the price of many brands (who traditionally lead vs retailers).

To replicate to hypermarkets and supermarkets, discounters were forced to also trade-up their existing formats moving to soft discounts. Indeed, Italian shoppers vs German shoppers were less price sensitive and paid more attention to the product (they were more used to buy branded products) and to the service quality (the service counter presence was considered mandatory by most shoppers). For this reason, both Lidl and the other Italian chains launched this format with an assortment that was 15-20% less expensive than hypermarkets and supermarkets but that offered top brands (around 15-20% of the total assortment) and service counters (e.g. bakery and butcher).

As of 2009, due to the global economic crunch and the consequent household income drop, discounters consistently gained market share by increasing their power.

As a result, many discounters were forced to go back to the hard discount formula cutting prices and enlarging the unbranded and low-tiers items in its stores. Even though Lidl still have some brands in its portfolio, new players as Eurospin (probably) launched for the first time in Italy a grocery store with no brands and only private labels, but with the presence of service counters (bakery, butchery and fish shop). The launch and the success of this new “hybrid” formula can be defined soft-hard discount as attributes belonging to both formats are present. The success achieved by this format is shown on Graph 3 and 4.

As of 2009, due to the global economic crunch and the consequent household income drop, discounters consistently gained market share by increasing their power.

As a result, many discounters were forced to go back to the hard discount formula cutting prices and enlarging the unbranded and low-tiers items in its stores. Even though Lidl still have some brands on its portfolio, new players as Eurospin (probably) launched for the first time in Italy a grocery store with no brands and only private labels, but with the presence of service counters (bakery, batchery and fish shop).

The launch and the success of this new “hybrid” formula can be defined soft-hard discount as attributes belonging to both formats are present. The success achieved by this format is shown on Graph 3 and 4.

Top 10 countries in terms of FMCG online sales
Top 10 countries in terms of FMCG online sales

3. Implications for the all FMCG industry:

The rise of discounters created a massive disruption across the FMCG industry. The main changes are the following:

a) Moving from promotions to EDLP: the price war and margin erosion generated by discounters forced traditional retailers to also reduce and cut prices. From Germany this model has also affected other big markets as the UK and Italy, where all retailers (despite few differences) increased their communication based more on fixed low prices than promotions and offers.

b) New shoppers habits (from stock-up to top-up shopping): shoppers tend to buy less but more frequently due to the urbanization . The rise of discounters accentuated this trend and as a result traditional retailers forced to move to EDLP (see above)

c) Private Labels are more competitive: the rise of discounters but the need of shoppers to also buy qualitative items forced both retailers and discounters to trade-up their own brands. For manufacturers, this means a higher competition not only in terms of price but also in quality coming from retailers.

d) The rise of the e-commerce: in markets where online grocery is developed as France and the UK, the online has been an “army” that traditional retailers used to serve youngest generations (Millennials and Gen Z) who are massively moving to discounters and at the same time fight on price. The click and collect (especially in France) has been decisive to allow traditional retailers to be more competitive and stop the growth happened in other peers (e.g. UK). 

 e) Largest stores (e.g. hypermarkets) downsizing: the rise of discounters along with online forced many traditional retailers to rethink about the assortment of its largest stores. In this sense many hypermarkets chains consistently reduce their selling area by removing non groceries generating low rotations and low margins and subletting the exceeding space to noncompeting players to improve selling area efficiency or opening something different but more remunerative (e.g. own restaurants and cafes offering private labels fresh food and ready meals).

4. What’s next?

Future forecasts are unpredictable but (at least in the short term) we strongly think that discounters will continue to grow and to gain market shares in FMCG by also acquiring the share of less price-sensitive consumers.

However, in the medium and in the long term if discounters will not be able to trade-up again, with the rise of convenience stores and online in many markets (as it is already happening in France), it is not excluded that they will lose some shares if shoppers will benefit from economic recoveries. That said they will still keep some shares addressing to the more price-conscious shoppers.

On the other hand, in countries where the macroeconomic growth is still tiny and where retail is struggling to change as in Italy, we cannot exclude that the soft-hard discount model (even though with some upgrades ) will continue to rise and gain market share for more time vs the other Western European peers (as France and the UK).

As convenience stores and online can begin a relevant threat as in France, if discounters will want to remain competitive will be forced to adapt and their value proposition. Below some recommendations to let discounters to be more competitive in the future:

• Highest Quality in the assortment:

In markets (except Germany and few others in Scandinavia) where discounters are growing but are not still leading, they will be forced to adapt their assortment. Discounters in Italy, where the German hard-discount was not performing so much, after a while, have been forced to rethink and to modify their proposition, starting from the assortment.

Better shopping experience online and offline

If discounters will want to gain shares in markets where they are not leaders a better shopping experience is essential. For instance, in Belgium, Lidl discounter launched the possibility to charge the bike and the electric cars for free in one of its stores in Brussels (BCG, 2017). Other upgrades have been made in the UK, where still Lidl is now offering a faster checkout service and more flexible opening hours. Concerning the online with the rise of the e-commerce in many markets discounters will have to think about some propositions. In this sense, Aldi discounter launched in 2016 the e-commerce for wines and non-groceries items in the UK and Lidl has started testing its e-commerce in Berlin since December 2016.

• Keep price as the main competitive advantage being more efficient than the competition:

As discounter brand image is considered the price convenience all improvements and trade-ups will have to be made by thinking about it. To do as discounter brand image is considered the price convenience all improvements and trade-ups will have to be made by thinking about it. To do that discounter will have to identify strategies to keep costs down and high rotations. For example, it is important to plan the labor organization through job schedules aligned with deliveries or using internal processes vs external suppliers to develop private labels items (BCG, 2017).

Source:

BCG (2017), How discounters are remaking the grocery industry, April

Fung Business Intelligence Centre (2015), European Grocery Discounters: small stores, big threats? November

Mediobanca (2016), I maggiori gruppi italiani (2011-2015) e internazionali (2014-2015) della GDO alimentare, Area Studi Mediobanca

Nielsen (2016), Retail in Germany

Planet Retail (2016), Germany’s discounters – masters of survival

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