The fastest growing food retailer in America is Aldi. Very soon, though, the fastest growing retailer in America will be Lidl. Both are deep-discount concepts, heavy to private label and lesser service.
How will traditional supermarkets respond?
If the experience of retailers in the U.K., where the market share of these deep-discounters now exceeds 10 percent, is any guide, the answer is: Not very effectively.
At first U.K. retailers ignored the threat, thinking these options were downscale and not likely to appeal to most shoppers. But Aldi and Lidl evolved and made their concepts acceptable to the vast majority for at least some of their purchases.
Then U.K. retailers responded by developing tiered offerings of their own private label lines. The bottom tier was made to be price-competitive with Aldi and Lidl. The programs did not have great success for two reasons:
First, top management did not reduce the margin requirements that store management was expected to deliver. So many stores stopped carrying these lower-margin lines or displayed them in such a way that they were guaranteed not to sell very much.
Second, in designing these products, the effort made was to offer something that was low priced enough to woo those shoppers tempted to stray and shop at a deep-discounter while simultaneously making the offer sufficiently unappealing so that the supermarket’s standard shopper would find the low-margin offer unacceptable.
It turned out that in the early years there was some stigma to shopping at the deep-discounters in the U.K., but, in time, the perception changed, the number of outlets changed and the economy changed – and some confluence of this made it socially acceptable to shop at these deep-discounters. In fact, since these stores offered a uniform experience for all shoppers, it turned into an advantage as everyone was shopping on an equal playing field as opposed to supermarkets where the ugly packaging of the low tier offer often made shoppers feel as if they were getting the fish eye from other shoppers or cashiers.
One interesting question is what role service delis will play in the supermarket response to deep-discounters that do not offer service.
It would make a lot of sense for supermarkets to seize on their service offerings as unique points of differentiation with the deep-discounters. Focusing on service and assortment certainly is an emphasis that will be difficult, if not impossible for the deep-discounters to compete against.
Yet that seems unlikely to be the response by most retailers. The response is likely to reflect “price investments” to make supermarkets more competitive on price with the deep-discounters. If the supermarkets cannot be competitive on every single item, these discounts will allow supermarkets to be price competitive at least on many key items.
It all sounds fine, but the cost structure of an Aldi or Lidl allows these stores to operate less expensively than a traditional supermarket. So to be price-competitive, retailers will look to do things to reduce costs, say, cut labor hours in every department.
Now consumers will be confronted not with a higher service, higher assortment option that costs more but offers value for money. Instead, consumers will be confronted with long lines, out-of-stocks, stressed employees and, in general, an unsatisfactory experience. And, guess what? It still won’t be as low cost as Aldi or Lidl.
Basically, it will not be a sufficiently low-cost option to dissuade those customers focused on price from going to the deep-discounters. The current supermarket shopper base will grow disenchanted because the shopping experience will have declined sufficiently due to labor cutbacks and efforts to reduce assortment to focus buying power and reduce operational costs.
The big development in retailing is the growth of national chains unconstrained by geographic limitations: Aldi, Lidl, Trader Joe’s, Costco, Whole Foods, Amazon Fresh, Wal-Mart and more. What both unites and differentiates these concepts is specialization. Whether it is the epicurean flair of Trader Joe’s or the discounting model of Aldi or the healthy luxury of Whole Foods, each concept is able to focus on particular strengths.
Generalists – like most supermarkets – simply won’t be as good on anyone point as dedicated specialists. Consumers are less loyal today, more prone to go to specialists for special things. When it comes to the deli, supermarkets have an enterprise that, done right, can be an attraction unto itself.
Delis can also be starved of resources and forced to go into battle with undo restrictions on labor and assortment — sending the deli into battle without these two powerful weapons guarantees failure. So the challenge is to position the deli internally as the crucial tool to fight the discounters — a tool worthy of investment.