Don't discount the discounters

Date : 10 June 2010
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Despite the recession, 2009 proved to be a challenging year for discounters in many European markets.

So does this signal a pause or a full stop in the discounters’ growth story? Here, we look at the reasons behind this subdued performance and explore the growth prospects for the channel.

Mixed success for discounters across Europe

Last year seemed like the perfect storm for discounters. However, as unemployment soared and shoppers reassessed their budgets, mass migration to the discount channel failed to materialise.

In some countries, discounters did outperform. For instance in Ireland, where GDP retracted by 7.1%, discounters have gained significant ground and new customers. Aldi and Lidl continue to outperform their competitors and grow their market share; this is a significant achievement considering Aldi and Lidl only entered the Irish market in 2000. Both players are now accelerating their store expansion programme to capitalise on the Irish opportunity.

In Spain, the downturn affected Dia's performance less than the wider grocery market

In Spain, another recession-stricken European market where unemployment is at an all time high, Carrefour’s discount arm Dia only registered a sales drop of 1.6% in 2009 whereas the total grocery market decreased by 3.3% according to the provisional indices from INE, the Spanish national institute of statistics. Discounters, like other retail operators, were heavily affected by price deflation, but volumes held or increased, mitigating the negative impact of deflation for the channel.nsion programme to capitalise on the Irish opportunity.

In other markets, however, discounters seem to have lost their appeal. In France, the discounters have failed to capitalise on their 2008 successes when a large contingent of new found shoppers were first tempted by their proposition in a context of runaway food inflation.

Similarly, in the UK, Aldi and Lidl failed to steal market share from the major players – although they did continue to grow with a strong pipeline of new space providing a boost.

More significantly, in Germany (the land of the discounters), the recession did not translate into the anticipated market share jump for the channel, despite heightened promotional efforts and a continued emphasis on store expansion.

Core challenges for the discounters in European grocery markets

There are a number of reasons for this performance. They range from short term circumstances to longer-term challenges. Furthermore, the nature of these core challenges can vary significantly across markets depending on the channel growth history, on the players and more importantly on shoppers’ perceptions.

One of the short-term circumstances affecting performance is deflation. While inflation was a driver of traffic, deflation and promotional activity seem to have distracted shoppers away from the discounters.

In a survey IGD conducted earlier in 2010, we asked European suppliers currently working with the discount channel which factors would hamper growth in 2010 and beyond.

Limit growth   Bolster growth
Deep promotions in supermarket chains 93% Unemployment rises 81%
Improved entry-price private labels of supermarkets 84% Fast expansion of discount stores 81%
Slow expansion of discount stores 83% Lower prices / more special offers in discounters 81%
Discounters reduce the number of brands 79% Discounters introduce more brands 81%
New low-cost formats from competitors 79% Wide range in discounters 77%
Economic growth resumes 71% Food inflation 63%
Food deflation 64% Ageing population 63%
Source: IGD Survey on ‘Trading with Discounters’, 2010

Beyond the strategies put in place by competitors (private label and deep cut promotions), one major concern for manufacturers is the ability of discounters to add new space. In our survey, 83% of respondents rate the mechanical expansion of discounters as one of their key success factors. A slowdown would, in their view, significantly impact their growth prospects.

Mixed bag of opportunities in Germany, France and elsewhere

At IGD we also see store expansion as a critical factor of success. While Lidl has announced to the German press that it would be expanding at a lesser rate than in the past – which seems to be a logical step for the retailer - we expect the leading discounters to focus their investment on the biggest opportunities both in Europe and beyond to yield a better return on investment internationally.

France is one of these target markets due to a legislative window of opportunity which retailers suspect might not remain open for very long. Current planning restrictions on stores of up to 1,000sq m have been eased significantly, making it easier for small supermarkets, convenience outlets and discounters to expand.

The discounters are keen to leverage this opportunity. For example, Leaderprice plans to open more than 100 stores this year. Aldi and Lidl are also accelerating their store opening programme and IGD estimates that both discounters could increase their store count by 350 over the next two years in France.

In contrast store expansion in more saturated markets (e.g. Germany) will inevitably slow down. In these markets the emphasis has already shifted from adding space to driving like-for-like performance through more innovative marketing activities, range extensions and the addition of new services.

Is this a pause or a full stop for the discounters?

France is a good case in point. For the first time in years, shopper frequentation has stabilised in mainstream retailers. In contrast, both market and volume shares retreated slightly in 2009, marking an historic slowdown for the discount channel.

There were two main reasons for this. Firstly, penetration, remained unchanged - the discount sector failed to attract new customers - and secondly, the number of articles bought per trip fell.

Such data encapsulates two combined realities:

  • Core customer groups in France are low-to-modest income families within the 35-49 years age bracket. They were heavily affected by the recession and consequently revised their food budget downward
  • The multitude of promotional offers and lower prices in mainstream retailers provided a value alternative for many shoppers

Shopper loyalty to discounters

Store network expansion is key in securing customer growth for many discounters

This highlights the most important hurdle for discounters outside of Germany: low levels of loyalty.

In 2008, discounters attracted customers from smaller households – both younger and older. These new customers have not stayed with the channel and are, de facto, not loyal enough to guarantee future growth.

Discounters in France need to constantly recreate a new pool of customers, usually through their store expansion programme. This is why expansion is so critical to success, not only in France but also many other international markets.

So far, this weaker performance has lingered with further market share losses in France for the first quarter of 2010. However, it is likely that a slow, fragile economic recovery will ultimately play to the discounters’ strengths. After all, resilience is at the heart of the formula. Furthermore, targeted store expansion will continue to provide a platform for growth.

In the UK, a recent study published by him! shows that 8% of today’s customers started shopping at the discounter chain in the last 12 months - suggesting that discounters continue to grow and recruit shoppers.

The rate of growth may have slowed down compared to the record performance of 2008, but the channel still offers a convincing alternative for many shoppers.

Discounters are also increasingly positioned as a low-cost convenience format – broadening their appeal. It is both an opportunity and a challenge, as the success of Aldi Nord in France would suggest. Aldi Nord is the only hard discounter which has remained faithful to its original philosophy. Paradoxically, it is also the only discounter which has successfully recruited new customers in France in recent times.

Is this the end of the line for the discounters?

Does this mean that, to succeed, discounters need to remain faithful to their original formula? Not necessarily, but it is true that the differentiated offer of the discounters is being challenged by mainstream players who have themselves adopted and integrated discount principles into their businesses. Leaner supply chains, range rationalisation, zero-waste - these are new 'buzzwords' of retail.

Discounters have been evolving in response to changing shopper needs, but ultimately, offering more for less is the best chance of success for discounters.

Over 80% of suppliers surveyed by IGD in February 2010 still considered that the discount channel offered positive or very positive growth prospects considering the current economic outlook. At IGD, we also believe it would be premature to discount the discounters.

Top 3 Challenges

  1. Competitors successfully erode the price perception advantage of discounters with both revamped entry-price own label ranges and successful price / promotional campaigns
  2. Internationalisation is not a quick win for discounters. Price not products is the main driver for European shoppers when visiting discounters according to IGD research. The quality recognition achieved by Aldi & Lidl in Germany amongst its shopper base is not yet a reality in other markets. This means low levels of loyalty for the discounters outside of Germany.
  3. Blurring of formats. Discounters are revisiting their concepts and are moving away from traditional hard discount formats to softer, more attractive discount concepts. At the same time, ‘low-cost’ has become central to mainstream retailers’ strategies and several retailers are trialling many discount-inspired new formats.