Interesting research done by the Harvard Business review-this would pertain to anyone in the retail sector-agencies with retail clients pay close attention.
Aldi – A chain of low-budget retail stores, or more commonly refered to as “hard-discount store”, with sales in 2008 of $73.5 billion, have forced other European retailers to acquire their own hard-discount formats over the past decade in order to stop hemorrhaging market share to Aldi.
Hard discount stores differ from US bargain stores like Wal-mart. It is a minimally decorated outlet that sells a small assortment of foodstuffs and household goods – typically 1,000 to 1,500 SKUs. (A US supermarket sells 30,000 on average and a Wal-mart supercenter sells 100,000.)
Hard discounters keep their SKU numbers low and thus cut supply chain costs, in part because their own brands account for at least half their offerings. In Aldi’s case the number exceeds 90% (at Wal-mart it is 38%). Because these private labels are typically priced at 50% below manufacturers’ brands, their success has been disastrous for both traditional supermarkets and brand manufacturers.
To combat market share losses, mainstream retailers have been forced to emphasize their own private labels and develop cheaper versions of them.
Brand manufacturers are also feeling the heat to reduce prices. P&G was forced to cut the prices of Always sanitary napkin by 17% and Pampers diapers by 11% to remain competitive in Germany against Aldi’s private label.
Hard discounters success ($250billion annually) is responsible for destroying between a quarter and a half trillion dollars in mainstream brand sales annually. And no end in sight. Sales of the top hard discounters are forecast to increase by roughly 50% over the next five years. Aldi alone is expected to top $100billion in sales by 2013.
Brand executives at major consumer packaged goods companies have been caught off guard by the hard discounters’ success. They underestimated the threat to their revenues and market share.
Research conducted on hundreds of brands in Germany, the UK, Spain and other European countries from 2003 to 2008, identified four misconceptions about hard discounters that caused brand managers to ignore them until it was too late. These misconceptions still prevail at many consumer packaged goods companies- especially those headquartered in the US.
Misconception 1 – Hard discounters will succeed only in Europe.
Although Western Europe is home to the world’s fiercest hard discounters, the rest of the world, including the US is not immune.
Aldi is leading the charge in the US, where it has more than 1,000 stores in 29 states. Aldi stores are mostly in the Northeast, but the chain entered Florida in September 2008 and will be in Texas in 2010.
Its 2009 sales in the US are $8 billion and modest by comparison with mainstream retailers such as Kroger, Super valu and Safeway, nevertheless, its growth is astounding. Since 2000 Aldi has grown by an average of 12.2% annually and in 2008 it grew by 21%
Misconception 2 – Hard discounter are for the poor.
Executives at brand manufactures and traditional retailers often comfort themselves by asserting that hard discounters are for the bottome strata of the market.The relationship between hard-discount buying and income is weaker than one might think. In Germany for example, hard discounters own 43% of the market in the lowest income quartile and 34% in the highest. Wealthy consumers patronize hard-discount stores because they want to. They are educated consumers and know there is very little difference between private label and brand label.
Misconception 3 – Hard discounters offer inferior quality
Consumer organizations and independent testing agencies have demonstrated time and again that the products of hard discounters hold their own on objective (functional) quality. Aldi’s laundry detergent has been rated higher than the brands of Europe’s big-three detergent manufacturers: P&G, Henkel, and Unilever. Market research agency Gfk analyzed the results of consumer tests in 26 product categories conducted from 2002-2006 by Stiftung Warentest, Germany’s leading consumer safety group. The tests included 90 premium brands, 45 market-leading brands, 75 other national brands, and 232 Aldi private labels. 74% of of the national brands – and 81% of the Aldi private labels were rated as excellent or good. In the US, Aldi offers a “double guarantee if for any reason you are not 100% satisfied with any product, we will gladly replace the product AND refund your money.” This program sends a message that the price premium charegd by national brands is tied to wasteful marketing and advertising rather than to quality.
Misconception 4 – Hard discounting is for recessions.
Executives at competitor argue that the success of hard discounters is a recessionary phenomenon. There is some truth to this. Even rich consumers are more price sensitive in recessions. But research in Europe demonstrates tht the truth is more nuanced. Hard times do lure shoppers to hard discounters but many of these consumers keep coming back for at least some of their purchases even after the economy recovers.
From 2002-2003, an economically tough period in Germany, the combined market share of Aldi and Lidl increase from 22% to 26%; but in the more expansive period from 2004 to 2007 it increased even further to 28% Why??? Because consumers discovered the quality of the discounters’ private-label offerings.
Brand manufactures see hard discounters as their direct competition, rather, they should see the opportunity in seeing them as a link in the distribution channel. Private lables can only win so much market-share. Germany has probably seen its max of hard discounters with 40% market share.
Curretnly, Aldi’s target demo in the US is the lower-income segment. With the current economic status, Aldi is poised to grow in the US by 10% a year over the next five years, conpared with Kroger at 3.7%. – source Planet Retail.
The Germans are coming and it looks like they will be here for quite some time.
Stewart Severino
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