Germany: tackling the discount threat

Related tags Retailing

Mainstream food retailers in Germany need to do more to combat the
growing threat of discount chains such as Aldi and Lidl, claims a
recent report by consultancy firm KPMG. But companies offering more
convenient stores with a wider variety of products are more likely
to succeed than those who try to tackle the discounters head on by
slashing prices, writes Chris Jones.

Discount store numbers have been rising steadily across much of western Europe over the last few years, driven by weak economies and declining consumer spending levels. Germany, western Europe's biggest economy, has been particularly badly hit by recession, driving more and more shoppers into discount outlets, already the most popular place for German grocery purchases even before recession kicked in.

Fewer planning restrictions - stores up to 700 square metres can be developed with the minimum of red tape - have also helped discounters expand their store portfolios far more rapidly than traditional supermarket operators who tend to operate larger outlets, and mainstream food retailers now risk falling so far behind the likes of Aldi and Lidl that they might never be able to close the gap, according to KPMG.

So what can supermarkets and hypermarkets do to win back custom from the discounters, especially in light of the continued economic recession? KPMG highlights a number of areas where the more mainstream grocery players can take positive action to improve their competitiveness.

Perhaps the biggest challenge will be the creation of a viable own label strategy by the supermarket operators, according to the consultants. The own label market in Germany is huge, accounting for more than 33 per cent of all FMCG sales in 2003, and the sector has shown double digit growth for the last three years as consumers become more price conscious and less brand aware.

But almost all of this growth has come from the discount sector - 80 per cent of the increase in sales of private label products can be attributed to consumers switching from supermarkets to discount stores, according to KPMG, with Aldi alone accounting for a whopping 54 per cent of total own label sales in 2003. Aldi eliminated all but a handful of branded goods from its shelves back in 2001, and this has been a major factor in the growth of the own label market since that time.

Own labels can still help traditional supermarkets increase sales, according to the report, offering a distinct price differential to major branded goods, but these retailers need to ensure that they offer a different own label selection than the value ranges of the discounters.

"It is crucial that these [own label] products are provided with an added value which can be clearly recognised by the consumer,"​ the KPMG report states. "They should certainly not just provide an alternative price to the respective manufacturers' bands. Product assortment extensions have already proven to be successful, but other factors such as healthy nutrition, environmental awareness and time-savings can also constitute extra product services which are capable of providing private label products with genuine added value."

For the discounters, their own label 'brand' reflects their corporate identity, and this is an area where non-discount operators have been traditionally weak, the report noted. "The development of a corporate identity and strengthening of the corporate brand into an umbrella brand (retail brand) by means of a finely co-ordinated mix of store architecture, colouring, selection of materials and presentation of goods, including the development and maintenance of private label product ranges, should be a core focus for non-discounters."

Consistent, convenient quality

But supermarkets should also focus their efforts on other areas where they can clearly differentiate themselves from discounters, the report suggests. Chains should aim at consistent quality rather than price leadership, for example, since "not all players can be cost or price leader"​, while a varied assortment of products, including fresh produce and other items not stocked by the discounters, can also help.

"The rapid implementation and consideration of new consumer trends when compiling the product assortment, as well as adaptation of locations to consumer requirements,"​ should also be paramount, KPMG said.

If discounters offer consistently low prices, non-discount retailers should offer absolute price stability and transparency, the consultants continue, offering a low number of discount items per week and additional low-cost basic items with stable prices.

Other means of competing more effectively with the discounters include developing a network of convenience-style stores, the report suggests. These stores are much more likely to get planning approval and have the added benefit of appealing to consumer demand for a selected range of quality products in a convenient location - but KPMG stressed that most German retail companies had still not progressed beyond the pilot stages of convenience store projects, many opting instead to add a range of convenience-orientated products (top up groceries, ready meals, etc.) near the entrance of their existing stores.

Supermarket operators also need to ensure that "shopping is enjoyable"​, according to KPMG. "The retail outlet is no longer merely a place for storing goods and services [the 'stack it high, sell it cheap' model used by the discounters]. The increasing homogeneity of product assortments necessitates the creation of individual sales rooms and a presentation of goods which differ from those of competitors."

Attracting customers is obviously a major part of the challenge facing non-discount operators, but keeping them is just as important. Many companies have been increasing their focus on customer loyalty card programmes, said KPMG, noting that around 70 million customer loyalty cards are currently in circulation in Germany, a figure expected to rise to 102 million over the next five years, and most groups have gone down the partnership route, running loyalty schemes in association with other companies.

But research cited by KPMG suggests that the majority of these loyalty cards are not in fact being used by customers - suggesting that retailers still have a long way to go before they understand how to use loyalty schemes effectively by "providing customers with genuine, tangible added value".​ German retailers could learn a lot from the approach of UK store operators in this regard, KPMG suggested.

With German consumers likely to remain highly price conscious even after the country's economy returns to more normal growth levels, the threat to supermarkets from the highly-organised, sophisticated and widespread discount sector will remain high, and only those operators more in tune with consumer demands for healthy, quality and convenient products at the right -but not necessarily the lowest - price are likely to succeed, KPMG said.

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