Getting Ready to Battle Grocery's Hard Discounters

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Prepare to see America’s grocery landscape change before your eyes. German discounter Aldi, which now operates 1,600 stores in the US, already has plans to open about 400 more stores by the end of 2018, while simultaneously embarking on a $1.6 billion remodeling effort to give existing stores a more upscale look. And we’re in the early days of Lidl’s big launch into the US market, which is likely to add as many as 500 locations in the next five years.

All told, we expect the deep discount segment in the US to grow by 8% to 10% annually through 2020—that’s five times the rate of traditional grocers. This torrid pace of growth is fueled by discounter store economics that quickly generate cash to reinvest into both store expansion and remodeling programs that attract new customers.

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While this could be great news for consumers looking for lower prices, it will become a huge challenge for incumbent grocers. A recent Bain & Company study of nearly 2,800 US shoppers at traditional grocers such as Kroger and Safeway, mass retailers such as Walmart and Target, and club stores such as Costco and Sam’s Club helps show how the grocery landscape has changed. Not only do incumbents need to be on the forefront of this change, but they also need to break down four long-held myths, or risk being ill-equipped to compete and win against hard discounters in this increasingly competitive environment.

4 myths about discounter

Myth 1: Hard discounters cater primarily to low-income shoppers. They’re not representative of my shoppers.

Reality: According to our findings, Aldi shoppers are not too different from traditional grocery shoppers in income and education. Historically, Aldi’s strongest segments have been smaller households that are not fussy about brands. However, over the last few years, the discounter has pursued more affluent, suburban shoppers—those who typically shop at mass retailers and club stores. In particular, Aldi has increased its penetration in two specific segments that together account for about 25% of all grocery spending: Mainstreamers, classic, low-maintenance shoppers whose major preference is for stores that are clean and organized; and family focused, private-label fans who actively seek deals, scan weekly ads and shop at the lowest-priced grocery stores.

Aldi is targeting upscale areas for new store locations, remodeling stores for a sleeker feel, offering more organic and premium foods, increasing its assortment into nonfood categories such as baby products and selectively adding even more national brands. It is partnering with health and fitness social media influencers, highlighting healthy-living brands in its stores and engaging new shopper segments directly on social media. As it makes these moves, more and more middle- and upper-income and college-educated shoppers are warming to Aldi.

Meanwhile, as Lidl adds locations in the US, it plans to replace its pure discount image with modern stores that feature fresh produce, bakery and floral departments, and locally sourced products, such as wine, craft beer and coffee—items not typically associated with hard discounters. Lidl will offer more national brands than Aldi, but the foundation of its assortment will still be private brands at hard discount prices, making Lidl a compelling draw for many shoppers.

Myth 2: Even if they resemble hard discount shoppers, my own shoppers won’t try hard discounters because they love shopping my store.

Reality: Our findings suggest a different story. On average, 61% of shoppers who have never shopped at an Aldi before say they would likely try the discounter if one opened nearby; just above 71% said they would likely try a Lidl. (In both cases, respondents who were unfamiliar with the stores were shown photos and descriptions of the store concepts.) The main reasons they haven’t tried hard discounters yet are merely unawareness and lack of presence. This should worry grocers in the markets where Aldi—and soon Lidl—are making big expansion plans: across the Northeast, Southeast, Midwest, Texas and California. Other reasons shoppers have stayed away include assortment, value and quality perception—concerns that both Aldi and Lidl are systematically addressing (see Figure 2). Meanwhile, shoppers who shop primarily at traditional grocers but already have tried Aldi perceive the discounter to be superior on value and price, which also happen to be their top two criteria.

Myth 3: Even if they try hard discounters, my shoppers continue to strongly prefer branded goods and aren’t attracted to private labels.

Reality: On average, shoppers of all types have a favorable perception of private labels. We found that 85% of all shoppers are open to private-label products—with more than half of them saying private labels are as good as, or have even better quality than, national brands (see Figure 4). Age is more of a factor than income in private-label perception. Younger shoppers are more likely than their older counterparts to believe that private labels are equal to, or better than, national brands. However, high-income shoppers are just as likely to have that same sentiment toward private labels as low- or middle-income shoppers.

Furthermore, shoppers have a very positive perception of Aldi products specifically. Among our 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 (see Figure 5). Most concerning to incumbents is the fact that 69% of shoppers who have never tried an Aldi, but would consider trying it, agree or strongly agree that Aldi’s quality matches or beats national brands.

Myth 4: My shoppers may buy a couple of items from hard discounters. But they’ll never capture a meaningful share of my shoppers’ weekly spending.

Reality: We see a predictable pattern of behavior when shoppers try Aldi. In looking for great prices and good value, they typically start out by buying a few products in key value item (KVI) categories where price is very competitive and quality is assumed, such as milk, eggs and some canned goods. These items are a barometer of quality for the entire store, and they become the conduit to trying other categories, which are usually fresh produce, other dairy, frozen foods and cereal. If consumers start purchasing from this many categories, they are well on their way to seeing Aldi as more of a primary grocery outlet and one-stop shop. Bain’s survey data suggests that a high percentage who shop across three categories not only see the price as better, but perceive Aldi quality as on par with, or better than, national brands. The shift has a significant effect on share of wallet. Shoppers who purchase one category from Aldi spend an average of 13% of their total share of wallet at Aldi vs. 45% for shoppers who purchase three or more categories.

This scenario will get tougher for incumbents as Aldi and Lidl introduce new product lines in new categories.

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