What is European Discount Retailing?
Many retailers seek to use low prices and value as their main customer proposition, whilst also seeking to minimise operating costs, and could potentially be categorised as operating in the ‘discount’ channel. However, a group of such retailers can be identified as displaying a set of key characteristics that, when used in conjunction, distinguish them from other operators.
These characteristics are:
- Focus on price. The primary customer proposition of all discounters is the provision of low priced goods. In most operating markets, discounters specifically target low and mid-income households.
- Limited product range. Discount retailers exercise strict range discipline to limit the number of products available in their stores. This is at its most extreme among the traditional ‘hard discounters’, such as Aldi and Lidl, where it is rare to have a permanent range of over 1,200 SKUs. This compares with a typical supermarket SKU count of 20,000 to 30,000 lines.
- Low cost operations and merchandising. To facilitate the profitable execution of their low price strategies, discount stores have EDLC (Every Day Low Cost) operations, with low cost store fitout and multi-skilled staff that reduce store operating costs. Merchandising is basic, frequently utilising pallets placed directly on the shop floor and limited display shelving.
- Small store formats. Core discount stores are relatively uniform in size, and often layout, which help keep operating costs low. Typically stores range from 800 sq.m. (8,600 sq.ft.) to 1,500 sq.m. (16,000 sq.ft).
- Limited role of national brands. Discounters traditionally emphasise private label products, and often ‘exclusive’ labels that do not carry the store name.
Blurring the Traditional Discounter Classification
Traditional thinking has identified three classifications of discount retailers:
Traditional Classification of the Discount Channel
| Hard discounters |
Soft discounters |
Limited-line discount supermarket |
| • |
Range of less than 1,200 SKUs |
| • |
Focus on dry grocery |
| • |
Limited national brands |
| • |
Limited in-store fixtures |
| • |
Price and value are only parts of proposition | |
| E.g. Lidl, Aldi Süd, Aldi Nord | |
| • |
Up to 4,000 SKUs |
| • |
More fresh, chilled & frozen than hard discounters |
| • |
Role of national brands varies |
| • |
Display shelving in-store (up to three shelves) |
| • |
Service elements may be communicated alongside price | |
| E.g. Penny, Plus, Dia | |
| • |
4,000 to 7,000 SKUs |
| • |
Even more fresh foods than other discounters |
| • |
National brands key part of proposition |
| • |
Substantial display shelving |
| • |
Increased importance of customer service over other discounters | |
| E.g. Colruyt, Kwik Save | |
Source: IGD Research
However, recent developments, particularly by Aldi and Lidl, have blurred the boundaries of these classifications. For example, Lidl stores in Germany now include the following features traditionally associated with soft discount stores:
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Wider ranges – expansion into new categories and range broadening through the use of multi-product cases has widened the range to over 2,000 items. This range includes fresh meat and produce.
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Increased range of national brands – 16% of Lidl’s German range is now comprised of manufacturer’s national brands, and some new categories (e.g. baby food) are completely branded.
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Improved service – German Lidl stores now offer scanning and accept payment by debit cards.
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New messages – In addition to price and value, Lidl’s customer communication also features healthy eating, organic and fair trade themes.
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Display shelving – Lidl has increased the amount of display shelving it uses, particularly to enable the ranging of new categories such as cosmetics, baby food and magazines.
The European Discount Market
Europe is the home of discount retailing, and the leading 14 global discount retailers achieved 83% of their total turnover in from within Europe. Reflecting this bias, the leading six global discount retailers are also the top six European discount retailers.
The ranking of European discounters is dominated by German-based traditionally hard discount retailers – Lidl, Aldi, Plus and Penny Markt. These are the discount retailers that have followed the most aggressive internationalisation policies. Traditional soft discounters have achieved, in general, less successful international expansion.
Germany dominates the European discount sector. In excess of 40% of sales in all European discount stores occur in stores located in Germany.
Discount Retailer Market Size by European Country
Discount Retail Map Source: IGD Research and Estimates
Strategic Options for Suppliers
Trading with the discount channel requires a specific approach to negotiation, packaging, merchandising and supply chain. Manufacturers must recognise the unique set of criteria that identify discount retailers, to focus on meeting their distinct requirements.
- The case for suppliers to target the discount sector is more compelling than ever. Growing market share, expanding demographic appeal, range enhancements, signs of a more welcoming attitude towards brands and rising consumer acceptance of the discount channel are just some of the reasons why they are becoming increasingly attractive accounts to target.
- The ground rules for supplying discounters are maintaining a low cost base and offering low prices, delivering high quality and operating an efficient supply chain emerging.
- The volume growth opportunity is a key advantage of supplying the discount channel. The combination of scale and modest SKU count, which drives particularly high sales per item, means discounters are capable of delivering extremely large volume contracts to their suppliers.
- Suppliers are also increasingly recognising the discount channel as an opportunity to put their products in front of more customers, more often, illustrating the growing significance of the channel and the increasing breadth of discounters’ socio-demographic appeal.
