Discount grocers are enjoying massive success in the U.S., despite the long-standing presence of several major grocery retailers. Their success is projected to increase, as Supermarket News reported that discount sales will rise from $74.8 billion in 2016 to $101.2 billion by 2021.
The key to this continuous growth is that they have been highly receptive to the needs of their shoppers, cutting costs in various key areas without reducing quality. For example, many have relied on business models that eliminate the need for middlemen and decrease overhead costs – generating efficient, cost-effective operations.
For one, these retailers have embraced smaller footprints, which allow them to hire fewer people and further reduce costs. They’ve also limited their inventory to a calculated selection of products, including an assortment of private-label brands. In turn, these changes have allowed them to offer lower prices that attract shoppers without sacrificing healthy margins and overall profitability.
Not surprising, grocery shopping trips grew the most at discount grocery retailers (2.9%) compared to other brick-and-mortar channels last year. And these retailers only continue to expand. With the emergence of Lidl into the U.S. market, Aldi is making significant investments to remain competitive, spending $5.3 billion to build 800 new stores and remodel existing ones – on pace to expand its chain to 2,500 locations by 2021.
How Do Discount Grocers Drive Value and Efficiency?
These retailers employ a few key strategies to effectively meet shopper expectations, and thereby, inspire brand loyalty.
Private-label brands allow discount grocers to reduce costs while appealing to cost-conscious shoppers. These products offer them savings of about 35-40% compared to other supermarkets, as reported by NPR. This has contributed to their rise in popularity, as 61% of shoppers are spending more on private-label brands now than two years ago, according to Daymon’s 2018 Private Brand Intelligence Report. The same report found that 81% of shoppers are buying these brands on almost every shopping trip, and private-label sales have increased by 8x the amount of national brand sales.
Why do store brands cost so much less without reducing quality? Discount grocers buy their private-label products directly from the supplier, removing the middlemen in the supply chain. Trader Joe’s is a prime example, with 80% of its products falling under its private label. And more than half of U.S. shoppers (56%) would consider purchasing private label grocery products from them, according Progressive Grocer. By providing unique products that can’t be found elsewhere, they attract loyal shoppers and drive repeat business.
Compact or small-format stores
Discount grocers aim to maximize efficiency in almost every aspect of their operation, and that includes their store design. With smaller-format stores, these retailers can minimize the cost of opening and maintaining their locations, which includes staffing needs. Both Lidl and Aldi, for example, are around 12,000 square feet on average and are staffed by a few employees at a time.
Embracing smaller footprints also increases the efficiency of shopping trips. A growing trend among today’s shopper is micro-shopping, or grocery trips that take less than five minutes. And this strategy helps discount grocers take advantage of this shift in shopper behavior. According to Lidl spokesman Will Harwood, the discount retailer only has six aisles, whereas most grocers typically have 25-27 aisles. At Lidl, shoppers may complete 80% of their trip before reaching the end of the first aisle.
Limited stock and selection
Instead of offering multiple options like large supermarkets, discount grocers usually stock no more than 1-2 varieties of a particular product. For example, Trader Joe’s only offers 3,000 SKUs, while a traditional grocer may hold over 10x that amount, carrying approximately 30,000 SKUs, according to Kiplinger. Limited stock increases product turnover, which in turn allows the grocer to negotiate better pricing from the supplier and further reduce prices for shoppers.
This also eliminates the variable of price for shoppers, who no longer spend time on price comparisons. With only one or two options in every category, this approach simplifies the shopping trip, which only adds to the in-store experience.
How Does This Impact Other Grocery Retailers?
Traditional grocers need to take proactive steps to keep pace with the growth of this channel and capture their shoppers. They need to analyze the operational changes and efficiencies used by these retailers, and implement them accordingly. Lowering prices is the primary way to attract these discount shoppers, and doing so will most likely contribute to loyalty.
Major grocery retailers have already begun expanding their private-label offerings, with Kroger CEO Rodney McMullen reporting that private-label brands represented 26% of sales in Q4 of 2017, but more action is needed. Investing in both online grocery shopping and fresh product assortments would help retailers better serve shoppers’ needs. Implementing click-and-collect options and online delivery can help larger supermarkets gain a competitive advantage over their low-price counterparts. And since discount channels are largely recognized for their fresh produce assortment, traditional grocers can invest in this area to better compete for their shoppers.
Discount grocers are leading industry growth by bringing value and efficiency to shoppers through reduced costs, smaller footprints, and limited – but carefully curated – selections of products. And because they are able to facilitate savings without compromising quality, these retailers are attracting repeat shoppers who are loyal to their brand. While major grocers can emulate these key strategies to remain competitive, it is clear that the discount grocery channel will only continue to grow.