What will it take to compete with Aldi and Lidl?
Through a special arrangement, presented here for discussion is a summary of a current article from Frozen & Refrigerated Buyer magazine.
Although no one knows exactly how big a share they’ll take, it’s clear that Aldi and, eventually, Lidl are likely to become key players in the U.S. marketplace. So what’s a retailer to do?
At one end of the spectrum, conventional grocers could try to fight fire with fire by opening up a discount format of their own.
Mike Paglia, director of retail insights for Kantar Retail, said he wouldn’t be surprised to see more chains follow the lead of retailers like Supervalu (Save-A-Lot), HEB (Joe V’s Smart Shop) and ShopRite (PriceRite) that have already gone that route. However, he’s quick to point out that discounters require a very different business model than conventional supermarkets, and retailers may find it difficult to operate two such disparate formats.
A similar but less drastic approach is to offer a value-oriented private label collection, perhaps merchandised in a separate section of the store.
“Clearly, Aldi and Lidl are filling a consumer need that other retailers aren’t,” said retail food industry consultant Michael Sansolo.
But retailers should be very careful not to focus only on prices, lest they spark a U.K.-style price war they can’t win. That said, some price adjustments may be necessary, even if only in certain zones where the discounter threat is particularly strong. And retailers should definitely take a close look at key value items to make sure they’re in the right ballpark. Areas such as frozen and refrigerated that are more expensive for the discounters to run and maintain can be positioned into destination categories.
Mr. Paglia believes differentiation is, indeed, the right approach. Unlike those in the U.K., Portuguese chains reacted to discounters’ growth by really emphasizing the high quality of the brands they sell, differentiating themselves through their assortment.
“As a result, [discounters] there didn’t have the same decimating effect they did in the U.K.” He adds that, in the U.S., retailers that already have differentiated value propositions — think Publix, Wegmans, HEB, and even Whole Foods — will be in the best position to weather the discounter storm.
How should conventional grocers meet the threat of Aldi and Lidl? What adjustments should they make and what strengths should they build on?
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21 Comments on "What will it take to compete with Aldi and Lidl?"
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I think the Portuguese model cited above makes a lot of sense — better quality, better assortment, better value and perhaps a nicer place to shop.
Differentiation, selection and customer service will be the best ways to counter Aldi and Lidl. This may be hard for traditional grocers, but it is possible. The last thing competitors should do is have a fight to reach the lowest price.
Aldi can’t take the place of conventional supermarkets because there are so many SKUs they don’t carry. (That’s also true of Trader Joe’s.) That said, the allure of 70 cent cans of tuna and 99 cent imitation Cheetos is definitely there. Customers who are willing to put up with the absence of bags and atmosphere will continue to shop there. Grocers would be wise to hedge their bets by having a variety of formats.
I agree with Mike Paglia. The more distinct the differentiation, the better U.S. traditional grocers can stave off the erosion of shoppers to off-shore discounters. And that differentiation must (IMHO) include the re-invigoration of human assistance and interaction across the shopping journey. Shoppers should feel the difference.
As the income and therefore spending gap widens between the haves and the have-nots, traditional grocers must be able to attract the 60 percent of have-nots into stores, not just the 40 percent who have more disposable income.
It’s wise to consider how shoppers feel when shopping discounters to save money. Aldi has made strides in making people I know feel smarter by shopping there, especially for organics. That’s a win. The more the newcomers focus on these aspects, the better they will do.
The worst thing they cold do is try to go head-to-head, even on a partial level. The best thing they could do is enhance what they are already doing and do it better. The customers are different customers. Like every business, understand who your customers are and why they are your customers and not someone else’s. Trying to get the other guy’s risks losing your own.
Do nothing different. Aldi and I assume Lidl are in a world of their own. There is no way to compete on price so don’t waste time trying. We’ve seen it done before and Aldi just makes fools out of the competition. Find another niche.
Always avoid a price war unless you have a sustainable competitive cost advantage. Conventional grocers need to get out of the black hole, big middle. No need to be Aldi- or Lidl-like, nor Wegmans- and Publix-like. Instead, decide what your strengths are relative to your competitive array and develop a strategy based on them.
Options might include: unique assortments, terrific fresh departments, home delivery, front-end checkout convenience and speed, health and wellness focus (e.g., partner with registered dietitians, do healthy cooking demos or classes), be the community leader, etc. In short, discover your differential advantages, fund them and tout them.
Aldi prices (in the U.K. at least) are approximately 25 percent less than a full service grocer such as Tesco or Sainsbury. Because the business models are so different (hard discounter v. full service supermarket), the supermarkets are never going to close the price gap.
And once you have shopped at Aldi or Lidl a few times, you really notice the price differential if you go back to one of the main supermarkets.
Aldi and Lidl attract people from the wealthier demographics, so it’s not a case of their shoppers being people on a budget. it’s a case of shoppers deciding they can have equal or better products at a significantly lower price than the main supermarket chains.
All the answers about fighting back using differentiation or customer service miss the point – it is the price differential that is allowing Aldi and Lidl to grow market share. And it is the price differential that stops people switching back.
It’s like a ratchet — the mechanism only works one way.
The reality of the “weekly grocery shop” is that baskets will continue to be split among several providers.
As an example from a Florida shopper, Publix may be a “home base,” but there are advantages to buying specific items at lower prices via Walmart and Aldi. A monthly Costco visit might satisfy the need to buy bulk or other specialty items. For others with brand affinities in play, Whole Foods and Trader Joe’s will merit an occasional visit.
If you agree with this scenario, the question is how each provider can find incrementality in basket size. Therefore the answer is not so much “how” to combat an overall threat from Aldi and Lidl, but how to preserve as much basket share as possible in the future as the shoppers are swayed by a plethora of choice.
Grocers should focus on differentiation and personalization to meet the threat presented by Aldi and Lidl. These new operators are similar to Walmart with their emphasis on reasonable quality at rock-bottom prices.
To compete, grocers will have to provide shoppers with differentiated products and a differentiated experience. Furthermore, grocers need to customize their offering and promotions to the needs of their top shoppers. Using shopper data to create more relevant offers will enable grocers to maintain the loyalty of their top shoppers.
We have been supplying nonfood products to the German discounters for a long time and could observe with close view how specially those both chains evolved. We are convinced that they will become very visible also in the US market.
As the format is completely different from other retailers in the US, it seems hard to fight an enemy where only a few understand how it really works. To compare their stores with Walmart or Target is an example of this. They have nothing to do with this kind of retail.
And a big mistake would be in believing that they sell “cheap” items. The contrary is true. One of the main reasons for their success in Germany, Europe, Australia and now starting in the US, is and has always been the unbeatable proportion of quality and price. That’s pretty different.
So what to do? Maybe try to learn from them. Pay attention to a similar strategy on quality and have an eye on nonfood.
It’s really quite simple: In ANY store in the world, of ANY kind, more people leave the store with a single item purchase than ANY other number! For supermarkets, HALF the shoppers leave with FIVE or fewer items. Smaller stores eliminate more than half of the barely functional “PARKED CAPITAL.” What large stores just can’t seem to understand is that it is those SMALL baskets, that drive the TRAFFIC that over time, gets the fewer, but all important, LARGE basket trips.
These are stark facts, readily observable, in any store’s transaction logs. Quick! Nobody look! Why be one of those moving to fact driven retail? Why not stick with the crowd fighting rear guard actions — like closing a lot of stores, in preparation for sale or bankruptcy?
How many of your consumers fall into the lower middle class or shrinking middle class? If that is not your most valuable consumer set, you are not competing with Aldi or Lidl. If that is your most valuable consumer set, then you need to provide better quality food in the right assortment at a competitive price to Aldi or Lidl with a good shopping experience.
This is a lot of words to say focus on your most valuable consumers and provide the right products at the right price with the right shopping experience. Mimicking another retailer is not the solution.
Differentiation through assortment, service, customer experience, and fresh will always be the “levers to pull” to continue to attract customers to any operation. Sharper price points, deployed selectively and in a more limited fashion, through promotion and long term deals can also blunt the pricing differential against these discount stores.
That said, understand that these stores compete on price with private label brands; an area that conventional grocers have utilized to protect margin in their categories. If conventional grocers bring down their private label prices, their margins will be greatly impacted, not only on these category margin protectors, but also on their brands. Price spread management is key to a proper mix of private label — brand sales/margin. So, if private label pricing goes down, brand pricing will need to follow. This will create a deflation in sales that will be near impossible to make up, and will obviously drag the profit dollars down with it. So, the pricing lever pull is fundamentally “off the table.”
Having watched the German discounters grow in the UK market, I can concur with much of the above … however, an incumbent launching a discount format is doomed to fail as it can only dilute volumes and raise complexity — exactly what the discounters want in their competitive set. These retailers will use global scale and a lean business model to out-Walmart Walmart. Their stores will not be for every shopper, or every shopping trip, but they will change US food and drink retailing forever.