The secrets to their success: How discount grocery retailers prosper
Stores like Aldi, Save-A-Lot and Lidl embrace smaller footprints, limited product selection and low prices to attract cash-strapped consumers
New-age technology and time-saving innovations might seem like all the rage in the ultra-competitive grocery industry, but for some companies keeping it simple has proven to be the key to success.
Discount retailers such as Aldi, Save-A-Lot and Lidl, which is entering the U.S. later this summer, have embraced a less-is-more strategy by stripping out the bells and whistles at their stores while funneling the savings into lower prices popular with cash-strapped consumers. They use a smaller footprint with limited product selection composed largely of cheaper, private brand labels. Strong operating efficiencies allow them to offer lower prices without sacrificing healthy margins and overall profitability.
“Grocery chains that differentiate themselves by offering convenience, the right assortment of product, and a good shopping experience at a better price point are going continue to grow share at the expense of traditional retailers that do not adapt to the new realities,” Keith Daniels, a partner at Carl Marks Advisors, told Food Dive. “Lidl and Aldi have significantly altered the Great Britain grocery landscape since entering the market in 2012 and this should put traditional U.S. grocery retailers on notice.”
Aldi opened its first U.S. location in 1976 after almost seven decades in Europe. The stores are designed with plain shelving, and products are displayed in their shipping cartons. Customers must provide their own bags. And if they have too many groceries and need a cart, they’ll have to rent one.
“Lidl and Aldi have significantly altered the Great Britain grocery landscape since entering the market in 2012, and this should put traditional U.S. grocery retailers on notice."
Partner, Carl Marks Advisors
Save-A-Lot stores use a smaller footprint with each location carrying about 1,800 products shoppers buy the most.
Lidl has been operating in Europe with a similar strategy. The retailer offers deep-discounts on national and special limited-availability brands. It often holds sales for limited periods of time — sometimes for as little as an hour.
Former Southeastern Grocers and SuperValu executive Joseph McKeska, now president of advisory firm Elkhorn Real Estate Partners, said the factors determining whether a discount store will succeed are similar across the industry.
“The secret to being successful in this category is operating with a high degree of efficiency in every business area, including all facets of the supply chain and store operations,” McKeska told Food Dive in an email.
He said this includes selling quality, value-oriented, private label brands; limiting the assortment of products to create efficiencies for the store without curtailing customer choice; and having a shopping environment that promotes value while at the same time is convenient and enjoyable for the shopper.
There are some levels of variation depending on each company’s business model. Aldi adheres to a traditional hard discount model. Save-A-Lot operates with a higher degree of variability in store size and offerings due to the fact that the majority of its locations are individually owned and operated. Licensees adjust their operations depending on their business model and the neighborhoods where they operate.
McKeska said when Lidl starts operating in the U.S. its stores will be larger store than either Aldi or Save-a- Lot (16,000 square feet for Aldi, similar for Save-a-Lot but 30,000 to 36,000 square feet for Lidl). The extra space will allow it to offer more variety, including fresh product and national brands.
The Aldi way
Aldi has more than 1,600 stores in 35 states, serving more than 40 million customers every month. Liz Ruggles, an Aldi spokeswoman, said executives learned that while low prices may attract first-time customers, it’s value and quality that keeps them coming back.
The ALDI formula isn’t complicated. It keeps costs down by focusing on food, bypassing non-essential grocery store services like in-store banking, pharmacies or check cashing common in other U.S. supermarkets.
McKeska said discount grocers have a better chance of weathering online competition from the likes of Amazon than traditional grocers because they cater to a more moderate income customer base who values a better shopping convenience and low prices.
For now, Aldi isn’t concerned with data showing more people are grocery shopping online. A joint study by Nielsen and the Food Marketing Institute revealed online shopping is expected to increase to $100 billion by 2025. The company has no plans to scale back its ambitious expansion plans. Aldi projects there will be nearly 2,000 stores from coast to coast by the end of next year, with more planned in the future.
The retailer also is planning to spend $1.6 billion to remodel and expand more than 1,300 U.S. stores by 2020, Ruggles said. The new look will focus on fresh items, including more robust produce, dairy and bakery sections. They will feature a modern design, open ceilings, natural lighting and environmentally friendly building materials. Checkout lanes will employ healthier snacks such as single-serve nuts, trail mixes, dried fruits and granola bars to tempt shoppers.
“We’re replacing the usual impulse treats like candy and chocolate,” Ruggles said. “We developed criteria for all food items in our Healthier Checklanes … to make sure customers are getting a better option.”
The industry takes notice
Traditional grocery retailers have been working to improve efficiencies and make changes to their operating models to better compete with these growing formats. They have responded by growing the breadth and improving the quality of their private brands, driving efficiencies by reviewing their product assortments and lowering overall prices for consumers.
“Traditional and discount retailers are reacting, highlighted by Wal-Mart’s recent price reduction test in approximately 1,200 stores, where prices are now 5% to 10% below Aldi,” McKeska said. “Previously, prices were estimated to be 15% to 20% higher than Aldi.”
Kroger, Wegmans and Albertsons all declined to comment for the story.
James Moir, managing director for Nectar, a marketing and analytics company, said U.S. grocers can learn from how their counterparts in the U.K. reacted to low-cost providers to stay competitive.
While price is undoubtedly important to customers, it doesn’t actively build relationships over the long term. To do that, more stores have turned to loyalty programs to better understand the shopper and take information the cards provide to improve the customer experience.
“Grocery stores that are remaining competitive against these discounter brands provide other elements that matter to customers, such as an app that adds to the shopping experience, stock availability and a seamless website.”
Managing director, marketing and analytics company Nectar
“Grocery stores that are remaining competitive against these discounter brands provide other elements that matter to customers, such as an app that adds to the shopping experience, stock availability and a seamless website,” Moir said. These stores “are engaging with customers and moving towards giving a more personalized experience — one which isn’t solely driven by price.”
Still, Moir warns adopting a discount-driven strategy is a race to the bottom that larger retailers can capitalize on this quickly.
“Large retailers are learning (and proving) that it won’t always be about lower prices. It’s about good products, stock availability at the right times, a seamless website, compelling content on social media channels, an app that adds to the shopping experience, and yes, even friendly bricks-and-mortar stores and a good old-fashioned ‘thank you, ’” he said.
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