Winning With Global Discounters

Source: David Gordon, Friday, May 25, 2018

Lidl owner Schwarz Group has reported 7.4% growth in 2017, to reach a net sales value of EUR96.9 billion. Like Lidl, many retailers within the discount channel have created strong growth through physical stores when other often larger formats have stalled. In a retail environment that will be increasingly influenced by digital, PlanetRetail RNG considers the future prospects for this channel and the opportunities for suppliers to win with discount.

Shopper preferences have fuelled discount growth

The discount channel – limited assortment value-based retail – is enjoying a strong period of growth. Aggressive expansion has been matched by a consumer willingness to shop with discounters, driven in part by social and economic influences.

Urbanisation and lifestyle trends have led to smaller, more frequent shopping trips. In developed markets, structural pressures on the middle classes have triggered heightened price sensitivity. Both have contributed to a transfer of spend towards discount and market share gains. There are headwinds as well, with technology a significant factor for every channel. New digital points of purchase, underpinned by rapid growth in broadband and smartphone penetration, are creating new online competitors.

Beyond ecommerce, other channels are learning to compete more effectively with discounters. Lidl’s arrival in the US has been met by fierce competition as Walmart lowered prices in nearby locations, staying true to Doug McMillon’s early guidance: “We are going to try to take away the advantages the discounters have, and then play to our strengths.”

However, discount retailers are masters of adaptation and possess an evolutionary instinct. The channel has momentum at the current time and its strong growth is forecast to continue.

Ongoing investment and market expansion will create an annual growth rate of almost 6%, ensuring discount remains the fastest-growing brick and mortar channel. Europe is the engine room for discount and, despite its relatively mature status, opportunities are significant in this region. While several larger markets have a high level of discount penetration, such as Germany, Poland and Austria, the discount market share in many of Europe’s major economies is still low.

In the years ahead, the UK, Spain, France and Italy will offer strong incremental growth opportunities for this channel.

Discounter winning strategies must evolve for long-term growth

Aldi, Lidl and their peers have always moved with the times, waiting for trends to become established on a wider basis before adopting them. However, the pace of change is quickening and the challenge in the digital era will be to remain relevant.

For long-term success, the discount channel will need to embrace further change, with the model capturing more elements associated with the winning strategies identified by PlanetRetail RNG.

The channel will need to build capabilities to be relevant in a landscape increasingly shaped by Ecommerce & Ecosystem Management. In Europe, for example, where Lidl trades general merchandise from a handful of market-specific online shops, its new Lidl Digital team is now tasked with bringing physical and digital together.

In the US there is more tangible evidence of progress, with intermediaries including Shipt and Instacart providing online and fulfilment solutions for Lidl and Aldi respectively. This third party option sits well with the low-cost, low-complexity model that has underpinned the discount channel.

Supply Chain & Fulfilment solutions have also been trialled by Dia in partnership with Amazon in Spain. Over 5,000 Dia products are now available through Amazon’s Prime Now service in three cities, a partnership that expanded from an initial launch in Barcelona.

It is, however, within the discount Store of the Future where most advancement has been made. Newly built and remodelled stores feature in-store bakeries, self-checkouts and an improved, more convenient customer journey. While social spaces and frictionless concepts found in other formats are beyond economic feasibility here, the channel has certainly moved further on enhancing the shopper experience and providing curated ranges.

Gradual range expansion, with focused assortments including fresh foods, organics, free-from ranges, loose fruit & vegetables and, most recently, convenience offers have broadened the appeal and relevance of discount. For example, more fresh and chilled foods can be found in the variety discount giant Dollar General as it seeks to boost traffic. Lidl’s recent announcement to expand its core range from 1,800 to 2,500 SKUs in its domestic market typifies this approach.

Shopper Engagement & Retention is an important retail concept, yet there are few major initiatives – such as loyalty and personalisation programmes – being driven by discount retailers. Instead, the priority for the discount channel is to win loyalty every week through price and value. Discounters trade on value - without it, there is no competitive differentiation. While discounters begin to experiment with digital applications and online communication, shopper engagement and retention is profoundly driven by value in this channel.

Discount must drive change and manage the risks

When comparing discount to other channels, overall developments are far more limited and often tentative. Yet the rate of change in modern retail is more pronounced than ever before. To sustain long-term success, discount retailers have a balance to achieve and a risk to manage. They must move with this pace of change while not losing the discount spirit of simplicity that has underpinned its economic model.

As masters of survival, they must place some bets on the winning strategies and consider the spirit shown by the current retail pioneers who accept failure as part of a dynamic learning culture.



RECOMMENDATIONS FOR SUPPLIERS

  • While longer-term challenges exist, CPG suppliers looking for new revenue streams can consider the potential of the discount channel:

  • The channel is growing and retailers continue to expand their store networks. Assessing trade channels will identify whether more exposure to discount retail will offer stronger sales growth opportunities. Likewise, discounters continue to expand into new markets, offering possibilities for manufacturers to sell into new territories.

  • As retailers expand assortments, suppliers should be aware of more possibilities emerging, both for private label and brands. Product innovation will be key. Suppliers should expect a more sophisticated offer going forward as retailers look to upgrade assortments to encompass more niche categories, like vegan, organic and free-from.

  • Branded suppliers approaching the channel must focus on high volume products. Best sellers, specifically those with global brand strength or local brand strength are most relevant. Locally recognised regional products can also be a good fit in larger markets.

  • Short-term promotions, with products rotated in and out on a fixed-term basis, can allow CPG suppliers an opportunity to test a brand in the discount channel. Limited edition or short-term value packs are popular.

  • Expect negotiations to become more challenging as retailers better organise their scale. International retailers will seek to co-ordinate volumes and seek multinational buying terms. Suppliers must consider cross-border pricing implications in this situation.

  • Packaging is a crucial component when supplying the discount channel. Robust, retail-ready packaging that can support one-touch replenishment is a basic requirement. Mixed cases, with several SKU variants, can also be effective in a channel where shelf space is limited.

  • Unique pack sizes and alternative variants can provide a point of differentiation that limits comparability with assortments sold through other channels.