With the recent announcement that German grocer Aldi is going to spend more than $3 billion to expand its presence in the U.S., traditional supermarkets have their work cut out for them if they want to compete with discounters.
According to a recently released report from Bain & Co., “Getting Ready to Battle Grocery's Hard Discounters,” the growing popularity of low-price food stores such as Aldi and Lidl means that traditional retailers will need to address four key myths in order to counter the rise of discounters—a segment that is expected to grow around 8% to 10% through 2020 (five times the rate of traditional grocers).
“Incumbents need to acknowledge the growing threat from hard discounters, then develop a feasible strategy to compete,” Kent Knudson, a Chicago-based partner of Bain & Company’s retail practice told FierceRetail. “It’s not going to be easy. Hard discounters’ curated assortment, lean staffing models, supply chain principles and approach to overhead make it nearly impossible to beat them head-to-head unless you’re willing to rebuild your organization from the ground up. Winning is about preserving as much share as possible while taking share from slower-moving incumbents.”
FierceRetail spoke with Knudson to address these myths and learn the truth behind the competition.
Myth: Hard discounters cater primarily to low-income shoppers, so they are not representative of traditional grocers’ shoppers.
Fact: New consumer research from Bain suggests that hard discount shoppers are not too different from traditional grocery shoppers in income. Indeed, Bain’s research shows that over the last few years, hard discount stores have pursued more affluent, suburban shoppers—those who typically shop at mass retailers and club stores and who account for about 25% of grocery spend in the U.S. Aldi’s remodel program is in part targeted at improving the shopping experience, while Lidl will feature fresh produce, bakery and floral departments, and locally sourced products. This will continue to increase the appeal of the hard discounters to shoppers of all types.
Myth: Even if they resemble hard discount shoppers, traditional store shoppers won’t try hard discounters because they love shopping their old store.
Fact: The survey revealed that about 61% of shoppers who have never shopped at an Aldi before say they would be likely to try the discounter if one opened nearby; just over 71% said they would probably try a Lidl.
“We found the main reasons they haven’t yet tried hard discounters are merely unawareness and lack of presence,” Knudson said. “This should change with the big expansion plans as more people have the opportunity to try a hard discounter.” Bain’s research suggests that 60% of shoppers regularly shop at least four different stores to meet their grocery needs, further suggesting a willingness to try out new shops.
Myth: Even if they try hard discounters, traditional grocery shoppers continue to strongly prefer branded goods and aren’t attracted to private labels.
Fact: Bain found that 85% of all shoppers are open to private-label products across a broad range of categories. More than half of respondents said private labels are as good as or have even better quality than national brands. It’s a sentiment shared by high-, middle- and low-income shoppers alike. Furthermore, shoppers have a very positive perception of Aldi products specifically.
“Among our consumer survey respondents, 75% of shoppers, regardless of their primary grocer, believe that Aldi’s products are as good as, or better than, national brands. This holds across almost every category, but most predominantly in milk, eggs, dairy, and canned and frozen foods,” Knudson said.
Myth: Traditional grocery shoppers may buy a couple of items from hard discounters, but they’ll never capture a meaningful share of the weekly spending.
Fact: Bain sees a predictable pattern of behavior when shoppers try Aldi, and the company expects this will be similar when Lidl begins opening stores in the U.S. Shoppers typically start out by buying a few products in key value item categories where price is very competitive and quality is assumed, such as milk, eggs and some canned goods. These items become the conduit to trying other categories like dry grocery, produce and meat, putting shoppers on their way to seeing Aldi as more of a primary grocery outlet and one-stop shop.