- What is discount retailing?
- Blurring the traditional discounter classification
- The European discount market
- European discount retailers by turnover
- Strategic options for suppliers

What is 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. At IGD, our definition of the grocery discount channel focuses on a number of key attributes. These are as follows:

1. Low cost operations and merchandising: 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 (e.g. pallets placed directly on the shop floor), while display shelving is limited.
    
2. 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 operators such as Aldi, where the SKU count can be as low as 800.  This compares with 20,000+ in a typical European supermarket.
    
3. Focus on price. The provision of low priced goods is at the core of the model. Prices are prominently featured in-store, typically in a high profile position above the product itself, with the focus as much on price as it is on product in some cases. A strong price message is also used in marketing, with low prices therefore acting as an important footfall driver.
    
4. Small store formats. Core discount stores are relatively uniform in size and 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).
    
5. Limited role of national brands. Discounters traditionally emphasise private label products, and often ‘exclusive’ labels that do not carry the store name. However, important changes are taking place here, with greater willingness to list manufacturer branded goods.
    

Blurring the traditional discounter classification

Traditional thinking has identified three classifications of discount retailers:

Traditional Classification of the Discount Channel

Source: IGD Research

However, the discount sector is evolving fast. While the core principles still remain, in a number of these areas there have been significant changes. For example:

• Limited product range: While the fundamental strategy remains in place, many ranges are being extended, notably through the introduction of mixed cases and newer fresh products
   
• Focus on price: Low prices and price competitiveness still remain key, although increasingly accompanied by more quality-oriented messages
   
• Small store formats: Although there is little change to the core focus on operating smaller stores, many newer stores are towards the upper end of the traditional size band, with ample car parking
   
• Limited role of national brands: The house brand element remains key at Lidl and in particular Aldi.  However, in many of its core markets Lidl has sought to bolster the presence of brands over the past 2-3 years
   
• Range emphasis: Core ranges are evolving to reflect changing consumer preferences. For example, new products are being introduced across broader ranges, stronger produce and chilled ranges are being brought in, while healthy eating and organic ranges are also being developed and expanded where appropriate

The European discount market

Europe is the home of discount retailing, and more specifically Germany, where four of the five leading European discounters originate from. Furthermore. worth over €50bn, the German discount sector is more than double the size of any other discount market.

The European Discount Landscape: Market Sizes by Country 2007

The European Discount Landscape. Source: IGD Research

Moreover, continuing improvements and developments to the propositions of leading discounters combined with a more value conscious customer base should result in discounter outperformance over the next five years. As a result we are optimistic in our forecasts for the growth of the discount channel across Europe. Growth continues, even in what were previously regarded as saturated markets such as Germany, as discount operators increasingly flex their models and propositions to meet new and emerging needs of consumers.

European discount retailers by turnover

The following table outlines the discounter rankings on a solely European basis. 

Source: IGD Research and estimates, Companies

As this shows:

• Aldi and Lidl stand out some distance ahead of their discount competition
   
• Combined, Aldi and Lidl accounted for 58.3% of the sales of the European Top 10 Discounters in 2007
   
• The total turnover of Aldi and Lidl amounted to €64.3bn n 2007
   
• Lidl has grown sales by over €8bn since 2004, a figure that is not far off the total discount sales level of the fifth largest player, Rewe.

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.
   

	Related Items on IGD.com:  Reports: - The Evolution of Discount Retailing - The Future of Discounters - The Shopper Perspective