Low Prices, High Impact: Discount Grocers Are Changing the Game

Walk down the aisles of your local discount grocer, and here's what you're likely to see: piles of off-brand items, many still in their boxes from the warehouses. Small selections, little variety. Much of the merchandise will be seasonal, weekly, and/or private label – and they'll all, of course, be low priced.

What you won't see is this: an in-house bakery, butcher shop, café, or grocerbar. Beautiful, thoughtfully curated displays. National brands that, in other stores, are ubiquitous.

And you certainly won't see the dent that discount stores have put in traditional grocers' sales.

When they first came on the scene in the early 1990s, discount stores appealed primarily to lower-income shoppers. But in recent years, that's changed. Thanks to their high-quality private label brands, their proliferation of customer favorites (such as fresh produce and specialty goods), and of course, their low prices, discounters now appeal to shoppers at all income levels – so much so that they've come to rival eCommerce as one of grocery's most disruptive trends. In fact, just this week, Aldi edged out Amazon on Progressive Grocer's 2019 ranking of grocery stores.

Some discounters are quick to go digital, and often in innovative ways. Brandless, an online pure play, offers low-priced, off-brand goods for sale, with services such as subscriptions and a “shop by values” filter. Just last week (May 2019), Lidl announced its partnership with Boxed, a digital retailer who will facilitate the discounter’s eCommerce platform on a test basis.

It's safe to say that discounters have come a long way – and they're poised to keep growing.

Channel Dynamics, courtesy of The Nielson Company

Channel Dynamics, courtesy of The Nielson Company

Today, customers flock to discounters for their quality as well as their low prices. "Deep discount grocery is seeing some of the largest increases in shopper activity," writes Nielsen in a 2017 report. "In fact, while [shopping] trips across all channels are up 0.5%, shoppers took 2.8% more trips to deep discounters over the last year."

While shoppers take more frequent trips to discounters, though, overall, a fewer percentage of households – just 40% - shop at those stores. About 30% of those who shop at traditional grocery stores also shop at discounters.

Nielsen notes that there's greater opportunity for growth in the discount sector than in traditional grocery, and other experts agree. "All told, we expect the deep discount segment in the US to grow by 8% to 10% annually through 2020—that’s five times the rate of traditional grocers," writes Bain & Company. PlanetRetail, the global intelligence and advisory business, predicts that discounters will have a 5.8% annual growth rate globally, with sales increasing from $74.8 billion in 2016 to $101.2 billion by 2021.

How do they do it?

The growing popularity of discount grocers has led many people to ask: How? Why are discounters' prices so low?

Here are the main reasons:

Store Brand Share by Channel, courtesy of The Nielson Company

Store Brand Share by Channel, courtesy of The Nielson Company

  • Smaller format means lower overhead. Because they sell a limited selection of items, discounters save money on store upkeep and rent, as well as employee pay. They don't need as much space or personnel, which means they're spending less money – and can pass those savings on to shoppers.

  • They sell more private labels than brand names. Aldi reportedly stocks as much as 90% of its inventory with private labels. That means they can buy in larger volumes than conventional retailers, selling at up to half the price of national brands, according to Jan-Benedict Steenkamp and Laurens Sloot, authors of Retail Disruptors: The Spectacular Rise and Impact of Hard Discounters.

  • They aim for efficiency over aesthetics. Instead of prettifying displays and end caps, discounters offer many of their products in stacks and boxes, which means employees can spend less time restocking.

Other reasons including spending less money on marketing, not supplying plastic bags at check-out, using energy-efficient lighting, and incentivizing the return of shopping carts, which cuts down on theft, damage, and again, personnel.

Discounters' effect on traditional grocers

Hard discounters lead in Net Promoter Score across majority of shopper journey types

Hard discounters lead in Net Promoter Score across majority of shopper journey types

Given the slow but steady growth of discount stores in the U.S. market (and their potential for greater growth in the future), it is essential for traditional grocers to take this trend into account, and respond accordingly. If grocers don't act, experts predict they will lose between $200 billion and $700 billion in revenue to discount, online, and nongrocery channels.

So how can conventional grocers keep – and grow – their market share, despite the discount threat?

Here are some ways:

  • Lower your prices. That might mean accepting lower gross margins by lowering prices on your own products (specifically, the products they share with the discounter). A 2017 report from Bain & Company named price and value as the top factors in choosing one grocer over another.

  • Increase your value (and variety). Attract customers by promoting high-demand items that the discounter doesn't sell.

  • Expand your online presence – strategically. Offer customers services they can't refuse like home delivery, click-and-collect, and meal planning.

  • If you can't beat 'em, join 'em. Take a page out of Tesco's book and open your own version of a discount store. In 2018, Tesco responded to the arrival of discounters by opening Jack's, a low-cost, small-format model that rivals the operating model of Aldi and Lidl.

Traditional grocers need to stay on top of customer trends, which include the demand not only for low prices and high quality, but also for services such as online shopping, delivery, and subscriptions. Fortunately, thanks to third-party software-as-a-service providers like locai, grocers can compete with both Amazon and Aldi by offering a sophisticated, on-brand omnichannel experience.

To learn more about how locai can serve your grocery business, click here.