While the promised disruption of the U.S. grocery landscape by insurgent hard discounters Lidl, which opened its first stores in this country two years ago, and Aldi, which has embarked on an aggressive expansion plan, hasn’t quite come to pass, a new report from management consulting firm Bain & Co. cautions that mainstream grocers should remain on guard.
According to “How U.S. Grocers Are Standing Up to Europe’s Hard Discounters," the German retailers’ slow and steady gains in the United States translate to a growing competitive threat for their mainstream rivals.
The report found that Lidl and Aldi have leveraged their strong customer advocacy and ability to attract shoppers into cross-shopping as a wedge to bolster their presence and popularity Stateside, noting that as many as 30 percent of shoppers at mass and traditional grocery stores also routinely shop at Lidl and Aldi.
Indeed, Batavia, Ill.-based Aldi continues to lure American consumers, Bain & Co. observed. The retailer’s consumer advocacy rose to 55 percent last year from 46 percent in 2017, outperforming in the two most critical areas for shoppers: best everyday low prices and best value for the money. This has resulted in strong market performance and the above-mentioned slow but steady gains. According to a study this past summer, Aldi – No. 9 on Progressive Grocer’s 2018 Super 50 list of the top grocers in the United States – racked up a more than 3 percent share of grocery spending in six of the eight markets studied, and experienced share gains in the majority of those markets over the past two years.
Arlington, Va.-based Lidl likewise snared 3 percent or more share in five of the seven markets studied in summer 2018, gaining spending from traditional competitors.
As both retailers carefully tend their U.S. growth, traditional grocers will need to develop strategies for dealing with this formidable competitive threat.
“Lidl and Aldi are just beginning to flex their competitive muscles,” explained Mikey Vu, a partner with Bain & Co.’s retail practice and a co-author of the report. “What we’re seeing is that U.S. grocers can effectively stand up to these hard discounters, but that they need to remain vigilant and innovate in strategic areas to keep their edge.”
How to Compete
A 2017 Bain & Co. report highlighted price as the most crucial factor in competing with hard discounters and laid out five rules for growing share: Embrace your own private brands before your shoppers move on to someone else’s, lead with fresh, become more convenient while your competitors become less so, transform your cost structure rather than just tweak it, and employ advanced analytics to unlock new sources of value. While all five are still key, two have risen in significance, the company noted: investing in convenience, and using advanced analytics or other new technologies to boost operational efficiencies.
Examples of convenient measures adopted by grocers cited by Bain & Co. are Amazon Go and Walmart’s free curbside pickup at 1,800 locations. Further, the company’s research found that while just 26 percent of respondents reported shopping online for groceries, these customers spend more money more often than customers whose purchases are just in brick-and-mortar stores. On average, customers who shop online spend $122 per month, versus the $63 a month spent by customers who shop only in stores. Bain & Co. stressed that this is a prime area for differentiation for traditional grocers, as just 1 percent of Aldi shoppers surveyed reported buying groceries online.
As for data and analytics, Kroger acquired a research firm to enhance its grocery data analysis, and Amazon is expected to integrate high-frequency, real-time data across platforms. As the cost of data plunges while overall computational power and ability rises, mainstream grocers will have to be increasingly strategic about how and where they make use advanced analytics and digital technologies, Bain & Co. advised, noting that just 5 percent of grocers surveyed name analytics as an important priority. As top grocers gain ground, followers will need to spend commensurately just to keep up.
“While hard discounters’ expansion into the U.S. turned out to be less overwhelming than expected, it still will prove tumultuous for traditional grocers who are slow to differentiate,” noted Kent Knudson, a partner in Bain & Co.’s retail practice and a co-author of the report. “As we’ve seen over the past year, the hard discounters know how to pivot their strategies in real time as they get a feel for the U.S. market. They are still a force to be reckoned with.”
The study of more than 17,400 consumers was conducted in partnership with research services company ROIRocket, which has offices in Denver; Vancouver, Wash.; and Jacksonville, Fla.