By: Scott Waldron, President NCH and Managing Director, Valassis International
Published Thursday, Aug 25, 2016
Over the last four years, grocery supermarkets in the United Kingdom have gone to great lengths to persuade consumers that they don't need to shop around for the best prices on their favorite brands. Retailers have even promised to reimburse the difference if the same product is cheaper elsewhere.
Consumers got used to these promises and one assumes have been more loyal with their shopping destinations than they otherwise might have been. However, the success of Aldi and Lidl have caused the big four U.K. grocers to reevaluate where their competitive guns should point.
These deep discounters offer the consumer generally lower prices on a much narrower range of basic products. Often, the brands they feature aren't well known, but that's just one of the trade-offs that consumers expect when they walk in. Others include wooden pallets in the aisles, long checkout lines and let’s not forget that you need the speedy hands of a poker dealer while checking out, otherwise your shopping ends up on the floor.
According to Kantar Worldpanel data for the 12-week period ending Aug. 14, 2016, Lidl is the fastest-growing supermarket in Great Brittan with sales up 12.2 percent, increasing its share by 0.4 percentage points to 4.5 percent of the market. Sales at Aldi rose by 10.4 percent, up 0.6 percentage points to 6.2 percent. The market-share growth suggests that consumers see the deep discounters’ shortcomings as a reasonable trade-off. Such is the success of discounters in Germany, where they originated, that consumers won't pay a premium for basic staples.
However, it seems that the big grocers’ price-comparison programs may have run their course. To begin with, they are costly to run, and the major grocers now prefer to reinvest in an “Every Day Low Price” model (EDLP) to directly compete with the deep discounters.
How all this plays out in the next year or so will be fascinating to follow.
Now, many consumers expect price matching, and to collect that savings on top of the other benefits from loyalty programs. Some might feel as if a reward has been taken away and could be more tempted to explore shopping alternatives.
How will branded goods manufacturers compete in this new environment? Trends would suggest that unless the product has a strong differentiating advantage, whether perceived or real, it will be fighting with private label products, and often the discounter’s own private label. That looks like a short battle.
And, while we consider the impact of deep discounters on the major grocers, let's not forget the 800-pound e-commerce gorilla in the room. Amazon is just around the corner, with not just low prices but also lightning fast ordering and payment, same-day (drone) delivery and most likely several other disruptive innovations on the horizon.
This battle is about to play out on American shores, as well. Aldi has already made inroads in the United States with over 1,500 stores, and Lidl is planning to enter the market soon. At the same time, several major retailers have begun to focus more on EDLP. And Walmart recently announced the acquisition of Jet.com.
Deep discounters have changed the landscape, and it’s only going to keep evolving.