A new class of European discounters have U.S. retailers squarely in their sights.
When the CEO of Procter & Gamble visited the company’s European headquarters a few years ago, Paul Polman, then P&G’s president for Europe (and now the CEO of Unilever), took him to visit P&G’s most dangerous competitor: not Danone, Nestlé, or Unilever but an Aldi store. Yes, Aldi, a chain of low-budget retail stores with sales in 2008 of $73.5 billion, is the four-letter word that strikes fear in the hearts of brand managers across Europe.
The devastation and poverty that characterized Germany after World War II provided the ideal environment for Aldi, which invented what is commonly referred to as the hard-discount store. The format has been widely imitated—most successfully by Lidl, also based in Germany and the flagship of the Schwarz Group. Other fast-growing European chains include Plus, Penny, Norma, Netto, Ed, and Dia, some of which are owned by huge traditional retailers such as Carrefour, Rewe, and Edeka. These giants have been forced to launch or acquire their own hard-discount formats over the past decade in order to stop hemorrhaging market share to Aldi and Lidl. (See the exhibit “.”)
Getting Bigger All the Time
A hard-discount store differs from U.S. bargain stores like Wal-Mart and Kmart. It is a minimally decorated outlet that sells a small assortment of foodstuffs and household goods—typically 1,000 to 1,500 SKUs. (A U.S. supermarket sells 30,000, on average, and a Wal-Mart supercenter sells 100,000.) Hard-discount stores are about one-tenth the size of a Wal-Mart, with comparably lower staffing levels, and are usually located in low-rent districts. Hard discounters have an extremely efficient supply chain, thanks largely to their limited SKU numbers and private-label focus, which make for a simpler operation. Aldi’s costs add 13% or 14% to the procurement price—2% each for logistics, rental, overhead, and marketing, plus about 5% for staff. Its efficiency allows Aldi to offer products at startlingly low prices. Indeed, most international comparisons of prices across retail stores have designated Aldi the winner. In Australia, for example, a 60-meter roll of Aldi’s Goliath plastic wrap sells for A$1.29, compared with A$3.71 for Glad.
Hard discounters can keep their SKU numbers low, and thus cut supply chain costs, in part because their own brands account for at least half their offerings. In Aldi’s case the number exceeds 90% (at Wal-Mart it is 38%). Because these private labels are typically priced at 50% below manufacturers’ brands, their success has been disastrous for both traditional supermarkets and brand manufacturers.
To combat market share losses, mainstream retailers have been forced to emphasize their own private labels and develop cheaper versions of them. Mighty Tesco, the fourth largest retailer in the world (with global sales of $109.1 billion), in September 2008 rolled out a discount private label, Discount Brands at Tesco, and highlighted price comparisons with Aldi in its promotional materials. Following Tesco’s lead, France’s Carrefour, the world’s second largest retailer (with global sales of $160 billion), launched the Carrefour Discount label in June 2009.
Brand manufacturers, also feeling the heat, need to reduce prices, or at least to restrain price increases, in order to ward off competitors. Procter & Gamble was forced to cut the prices of Always sanitary napkins by 17% and Pampers diapers by 11% to remain competitive in Germany against Aldi’s private labels.
We estimate that the success of hard discounters—which now bring in annual revenues of more than $250 billion—is responsible for destroying between a quarter and a half trillion dollars in mainstream brand sales annually. And no end is in sight. Sales of the top 10 hard discounters are forecast to increase by roughly 50% over the next five years. Aldi alone is expected to top $100 billion in sales by 2013, and Lidl to reach that milestone the following year.
Brand executives at major consumer packaged goods companies have mostly been caught off guard by the hard discounters’ success. They underestimated the threat to their revenues and market share. In our work with companies and our research into the sales performance of hundreds of brands in Germany, the UK, Spain, and other European countries from 2003 to 2008, we identified four key misconceptions about hard discounters that caused brand managers to ignore them until it was too late. These misconceptions still prevail at many consumer packaged goods companies—especially those headquartered in the United States. In this article we will address the misconceptions in turn and demonstrate how manufacturers’ brands can succeed in hard-discount stores.
The devastation and poverty that characterized Germany after World War II provided the ideal environment for Aldi, which invented what is commonly referred to as the hard-discount store. The format has been widely imitated—most successfully by Lidl, also based in Germany and the flagship of the Schwarz Group. Other fast-growing European chains include Plus, Penny, Norma, Netto, Ed, and Dia, some of which are owned by huge traditional retailers such as Carrefour, Rewe, and Edeka. These giants have been forced to launch or acquire their own hard-discount formats over the past decade in order to stop hemorrhaging market share to Aldi and Lidl. (See the exhibit “.”)
Getting Bigger All the TimeA hard-discount store differs from U.S. bargain stores like Wal-Mart and Kmart. It is a minimally decorated outlet that sells a small assortment of foodstuffs and household goods—typically 1,000 to 1,500 SKUs. (A U.S. supermarket sells 30,000, on average, and a Wal-Mart supercenter sells 100,000.) Hard-discount stores are about one-tenth the size of a Wal-Mart, with comparably lower staffing levels, and are usually located in low-rent districts. Hard discounters have an extremely efficient supply chain, thanks largely to their limited SKU numbers and private-label focus, which make for a simpler operation. Aldi’s costs add 13% or 14% to the procurement price—2% each for logistics, rental, overhead, and marketing, plus about 5% for staff. Its efficiency allows Aldi to offer products at startlingly low prices. Indeed, most international comparisons of prices across retail stores have designated Aldi the winner. In Australia, for example, a 60-meter roll of Aldi’s Goliath plastic wrap sells for A$1.29, compared with A$3.71 for Glad.
Hard discounters can keep their SKU numbers low, and thus cut supply chain costs, in part because their own brands account for at least half their offerings. In Aldi’s case the number exceeds 90% (at Wal-Mart it is 38%). Because these private labels are typically priced at 50% below manufacturers’ brands, their success has been disastrous for both traditional supermarkets and brand manufacturers.
To combat market share losses, mainstream retailers have been forced to emphasize their own private labels and develop cheaper versions of them. Mighty Tesco, the fourth largest retailer in the world (with global sales of $109.1 billion), in September 2008 rolled out a discount private label, Discount Brands at Tesco, and highlighted price comparisons with Aldi in its promotional materials. Following Tesco’s lead, France’s Carrefour, the world’s second largest retailer (with global sales of $160 billion), launched the Carrefour Discount label in June 2009.
Brand manufacturers, also feeling the heat, need to reduce prices, or at least to restrain price increases, in order to ward off competitors. Procter & Gamble was forced to cut the prices of Always sanitary napkins by 17% and Pampers diapers by 11% to remain competitive in Germany against Aldi’s private labels.
We estimate that the success of hard discounters—which now bring in annual revenues of more than $250 billion—is responsible for destroying between a quarter and a half trillion dollars in mainstream brand sales annually. And no end is in sight. Sales of the top 10 hard discounters are forecast to increase by roughly 50% over the next five years. Aldi alone is expected to top $100 billion in sales by 2013, and Lidl to reach that milestone the following year.
Brand executives at major consumer packaged goods companies have mostly been caught off guard by the hard discounters’ success. They underestimated the threat to their revenues and market share. In our work with companies and our research into the sales performance of hundreds of brands in Germany, the UK, Spain, and other European countries from 2003 to 2008, we identified four key misconceptions about hard discounters that caused brand managers to ignore them until it was too late. These misconceptions still prevail at many consumer packaged goods companies—especially those headquartered in the United States. In this article we will address the misconceptions in turn and demonstrate how manufacturers’ brands can succeed in hard-discount stores.
Copyright © 2009 Harvard Business School Publishing Corporation. All rights reserved.
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