Europe's hard discounters refuse to go easy on U.S. grocers: The deep discount segment is poised to grow by 10 percent annually through 2020

EUROPE’S HARD DISCOUNTERS REFUSE TO GO EASY ON U.S. GROCERS: THE DEEP DISCOUNT SEGEMENT IS POISED TO GROW BY 10 PERCENT ANNUALLY THROUGH 2020

New perspective from Bain & Company finds that many U.S. grocery incumbents are ill-equipped to deal with the competitive threat from discount grocers despite a growing consumer migration to these new stores

New York – May 31, 2017 – The same hard discount grocers such as Aldi and Lidl that have shaken up Europe are accelerating their growth in the U.S. While their larger footprint here means greater choice and lower prices for shoppers, it is creating new headaches for traditional supermarkets and mass retailers. In its new report, Getting Ready to Battle Grocery’s Hard Discounters, Bain & Company projects that the deep discount segment in the U.S. will grow by 8-10 percent annually over the next several years – five times the rate of traditional grocers. Incumbents need to be on the forefront of this this change, or they risk losing $30-45 billion of incremental sales growth to hard discounters by 2025.

German discounter Aldi, which now operates 1,600 stores in the U.S., already has plans to open about 400 more stores by the end of 2018. Lidl will open the first of its stores in the U.S. next month with plans to add 100 more over the next year. Still, many incumbents are not equipped to push back against these hard discounters, or they simply do not believe these competitors pose a real, lasting threat.

“The torrid pace of growth among hard discounters is fueled by discounter store economics that quickly generate cash to reinvest into both store expansion and remodeling programs aimed at attracting new customers. And, based on what we’ve seen, it’s working,” said Kent Knudson, a partner in Bain’s Retail Practice, who co-authored the report. “Even the most faithful shoppers at traditional grocery stores are increasingly rolling out the welcome mat for these European imports. While this should be a wake-up call for U.S. incumbents, few seem to be concerned about the potential impact to their business, and even fewer are taking the broad range of actions necessary actions to address it.”

Bain found U.S. grocers labor under several misconceptions about hard discounters that may prevent them from seeing the true impact to their business. A recent Bain study of nearly 2,800 U.S. shoppers at traditional grocers, mass retailers, and club stores dispel these myths, which may prompt incumbents to take hard discounters more seriously:

Myth 1: Hard discounter shoppers are a low-income, bargain hunting segment that doesn’t overlap with traditional grocery store shoppers.

Reality: Aldi, historically focused on smaller households with less interest in brands, is making in-roads into new customer segments – specifically mainstreamers and family-focused – that together account for about 25 percent of all grocery spending. For example, the company recently announced a $1.6B remodel investment program to appeal to a slightly higher-income shopper.

Myth 2: Shoppers won’t trial Aldi because they are loyal to a specific traditional grocer.

Reality: Bain found that, on average, 61 percent of shoppers who have never shopped at an Aldi before say they would likely try the discounter; just above 71 percent said they would likely try a Lidl. The main reasons they haven’t tried hard discounters yet are merely because they do not know Aldi or Lidl exist or one has not opened nearby.

Myth 3: Customers are loyal to national branded products, and aren’t attracted to a heavily private label offering.

Reality: Approximately 85 percent of all shoppers are open to private-label products from hard discounters —with more than half of them saying private labels are as good as, or have even better quality than, national brands. Among survey respondents, three-quarters of shoppers, regardless of their primary grocer, believe that Aldi’s products are as good as, or better than, national brands.

Myth 4: Aldi can never become a meaningful portion of shoppers’ weekly share of wallet

Reality: According to Bain, shoppers who purchase one category from Aldi spend an average of 13 percent of their total share of wallet at Aldi vs. 45 percent 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.

Incumbents—both traditional grocers and mass retailers—need develop a clear and feasible strategy to compete with hard discounters. Retailers getting this right are:

  • Evolving from private label to private brands and building a holistic private brand. Using robust private brands to convey the store’s identity, increase customer loyalty, boost category innovation, provide negotiating leverage over suppliers, raise gross margins and – most importantly – control the price perception of their store versus hard discounters.
  • Investing in quality and boosting the perception of quality with a focus on fresh foods. This means improving the sourcing and supply chain to increase initial quality, reduce the time it takes to get fresh produce on shelves, keep inventory fresh longer and cut down on waste.
  • Making themselves more convenient, by expanding their presence, creating new formats or providing more convenient options in their existing stores, including investments in omnichannel.
  • Transforming their cost structure, don’t just tweak it, through zero-based budgeting
  • Using advanced analytics to unlock new sources of value.

“Hard discounters aren’t going away, and this is not going to be an easy fight,” said Mikey Vu, a partner in Bain’s Retail Practice and the report’s co-author. “They have a significantly different business model and cost structure, which make it nearly impossible to beat them head-to-head unless grocers are willing to rebuild their organizations from the ground up. Retailers need to think about how to play defense where they can via price and private brands, while they play offense against other competitors. Hard discounters inevitably will take market share, but the key is ensuring that it comes from a slower-moving competitor.”

Editor’s Note: To arrange an interview with Mr. Knudson or Mr. Vu, please contact Dan Pinkney at dan.pinkney@bain.com or +1 646 562 8102.

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