October 22-23, 2015 Arlington, VA
Responding to the rise of the discounters: As Aldi expands and Lidl enters, how and when should incumbent American grocers react? October 22, 2015
Our Guest Speakers
Need Chris’ Photo
George Faigen
Chris Baker
Roland Neuwald
Partner, North American Retail & CPG Practice at Oliver Wyman
Partner, North American Retail & CPG Practice at Oliver Wyman
Former CEO of Real, Germany, Member of Metro Group
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Agenda Item
Speaker
Introduction
Mark Baum George Faigen
Discounters and their relevance to North America
George Faigen
Discounters’ successes in other geographies. How did they do it?
George Faigen
Live Interview: Lessons from a Pro
George Faigen Roland Neuwald
What does this mean for you and your company?
George Faigen
Question & answer session
George Faigen
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Discounters have entered and won in mature markets across the world – Aldi and Lidl have plans to make a big push in the US
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Both of these companies have had massive success in other geographies… Company Facts Europe’s largest grocery chain
3x the size of Walmart in private label; already 16th largest food retailer in US and Canada
• 11,500+ stores
• 10,500+ stores
• 26 countries; EU only
• 17 countries; EU, AUS, US
• $87BN revenue (No. 1 in EU)
• $75BN revenue (No. 4 in EU)
• EBIT margin > 3%
• EBIT margin > 4%
• ~1,600 SKUs including leading brands
• ~1,500 SKUs (still) focused on private label
• Average 9,800 sq. ft. stores
• Average 9,800 sq. ft. stores
• Highly flexible
• Highly flexible
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…and the magnitude of their ambitions for the US appears substantial indeed Plans in the United States
• 100 US stores opening in 2017/18
• $3 BN investment planned in the US
• HQ established in Arlington, VA
• Adding 530 stores prior to 2019
• Store sites being purchased
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• Expanding to CA by mid-2016
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But they start from a low base in a nation not used to this style of grocer retailing – is there really any cause for concern? US Market by Channel $1,500 BN Liquor stores
Drug stores
Warehouse clubs Convenience stores
Discounters 4%
Mass merchant Supermarkets / grocery
Note: All data for 2014
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The German discount model is simple but powerful Lowest possible prices Matching discounters on price is not an option. Aldi’s extraordinarily lean operating model allows them to run approximately 7% EBITDA despite up to 12% gross margin disadvantage
Very high level of store efficiency Discounters use store-specific mixed cases and pack sizes with display ready packaging, including bar codes on all four corners to enable quick scanning; they have very high turnover, and deliver a unexpectedly high level of service with a minimum number of staff
Excellent product quality and value Low cost, but high quality private label products, including fresh products
“Bulls Eye” lines Hard discounters use a single or very small number of products designed to pull in volume from the entire category. They design private label products that deliver equal to or better quality to national brands, sold at prices 30 to 60% less.
Sophisticated talent management Top school hiring, paying highest salaries in the industry
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The range will start with shockingly inexpensive products, but evolve and soon be very credibly adapted to the local market
Sweden
UK
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They will look to take over baskets one step at a time…
• At it’s core is a targeted “basket erosion strategy” – Bridgehead categories – Focused on KVIs – Ultimately, taking over the entire basket Private Brands Summit
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…and go aggressively after the Fresh categories – Lidl will move aggressively into branded promotions on key SKUs
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Both will seek to drive footfall using so-called “in-outs” – great value promotions on non-food products outside the core range
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Their aim will be to establish “unbeatable” credibility on value while continually moving up the food chain on “offer” Customer perception mapping Discounters quickly improve their offer
Mass channel
Weak
Offer
Strong
+
-
Traditional grocery / supermarkets
-
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Weak
Discounters
Value
Strong
+
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In Germany, this strategy has moved them from irrelevance to dominance German grocery market shares 100%
Discounters
90% 80% 70%
Neighborhood grocery 60% 50% 40% 30%
Supermarkets
20%
Mass merchants
10% 0%
197 0
198 0
199 0
200 0
201 0
201 4
Source: EHI, GfK; Note: Excludes specialty stores
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It took 20 years, but it is now happening in the UK - explosive ID sales growth and expansion at a breathtaking pace Number of stores Market share
Aldi market share, number of stores UK (1990 – 2012)
Market share growth: new stores Market share growth: like-for-like
Recession : 1990 Q3 to 1991 Q3
Financial crisis recessions
3.5%
500 450
3.0% 2.5%
350
300
2.0%
250 1.5%
200 150
1.0%
Number of stores
Market share
400
100 0.5%
50
0.0%
0 1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Source: Planet Retail, Kantar, ONS
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If you leave an open flank, it may take time, but discounters will exploit it – and they are very willing to play the long game Germany
UK
United States
Are the discounters present?
Were/are consumers looking for value?
Were/are the discounters poised for growth?
40%
20%*
4%+
What market share have the discounters achieved? *: UK market share estimate includes Asda
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The early format in the US is easy to look down upon – but it will improve as they expand Early format (US)
Polished format (Germany / UK / Australia)
• Standard, uninspiring assortment
• Localized often exciting assortments
• Very basic store interiors
• Expanded non-food assortment to clothing and other goods, similar to mass merchants
• Limited fresh selection • Non-mainstream practices (e.g. no credit card acceptance, pay-for-use shopping carts) • Excellent customer service
• In-store practices are mainstream in the markets • UK Supermarket of the Year 2012 & 2013 • Lowest prices, lowered every year
• Lowest prices Private Brands Summit
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Incumbent complacency is the discounter’s best friend
Mindset
Reality “The discounters are serving a different market segment”
“We sell national brands, and they don’t!”
The demographics of the customer sets are nearly identical Discounters offer brand names too, and their private label product is often preferred
“We are just as cheap. Consumers just don’t get it!”
Discounters can offer cheap prices, without compromising on quality
“Our promotional program can match the discounters value. We get paid handsomely to run promotions. So it´s a win-win!”
EDLP has a stronger value perception than promotions
Source: EHI; Note: Excludes specialty stores
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Live Interview with George Faigen and Roland Neuwald
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What might this mean to you?
1 2 3 4 5
Understand the threat Discounters will grow their presence in the U.S. and steal market share from incumbent players. You need to understand where you are on the customer perception map vs. discounters
Resist before discounters become a serious threat Do not wait until the discounters have become a strong presence in your territory
Drive out costs relentlessly Aldi is going to be here for the long term. You’ll have to lower your cost basis or else you’ll struggle to invest in price
Focus on the right assortment How strong a connection do you have between what you offer and what customers expect, including private label
Improve and leverage fresh departments You can continue to differentiate on the fresh offer, but it’s no guarantee. Just having a produce department isn’t good enough
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Discounter growth and market penetration follows a broadly predictable pattern – even though the timing varies by country Progression of discounters Discounter improves assortment, signs of localization
Improved Fresh proposition at the discounter
Opening in your market Announcement of broad market entry No discounter presence / immediate threat
Discounter buys real estate / hires team
Declining sales in your most price sensitive shoppers
Declining sales in your KVIs
Declining trips from your customers
Where do you fall on the timeline? Private Brands Summit
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An effective discounter strategy involves improving not only on price but also on offer Customer perception map
Mass channel
Weak
Offer
Strong
+
-
YOU
Traditional grocery / supermarkets
-
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Weak
Discounters
Value
Strong
+
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What if mulligans were possible in countries where discounters took off? Full-range traditional grocers would… • …take the discounters very seriously early on • …spend a lot more time understanding what really is happening underneath the surface • …realistically assess their competitive positioning relative to the discounters • …prioritize sales and cash profit growth over percentage-margins • …invest in shelf prices instead of raising them whenever they can • …use promotions as an element of their strategy, not its absolute core • …communicate value and price competitiveness • …seriously upgrade the range offering, service, friendliness, shopability, check out times • …introduce value brands immediately and narrowed the price gap to brands • …introduce store brands, lifestyle brands, organics, kids brands – all with good value for money
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What does this mean for private label manufacturers? A number of possible upsides….
… and a few risks or downsides
• Opportunity to become a contractor for Aldi and Lidl
• Traditional approach to private label could become more esoteric
• Opportunity to invest in capacity, innovation, new product lines
• Risk of losing power by adopting Aldi or Lidl approach
• Aldi and Lidl could drive an increased interest in private label and, over time, create greater demand for private label vs. national brands
With so much potential upside, what do you do next? Private Brands Summit
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Questions from the group
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