The success of hard discount chains Aldi and Lidl is putting pressure on the private label strategies of traditional supermarket groups. However, the radically different business models make it an unequal battle.
No adequate response
Across Europe, supermarket chains are trying to put up a dam against the unstoppable rise of price-driven retailers like Aldi, Lidl, Netto or Penny. The private label range plays a key role in this: with lower-priced private label brands, food retailers hope to persuade customers not to run away to low-cost chains, private label expert Koen de Jong of IPLC (International Private Label Consult) analyses in his latest book ‘The Power of Private Label’.
“What we particularly highlight in our book is the major impact of discounters on the private label strategy of mainstream retailers. Aldi and Lidl put pressure on the market: they offer high quality at low prices. Retailers do not have an adequate answer to this.”
“Aldi’s success in the United Kingdom speaks volumes: the discounter grew from 5 % to an 18 % market share there and is now among the ‘big four’. Lidl is the more successful discounter in Europe today, though. Aldi is nevertheless somewhat handicapped by the split between Nord and Süd. The new generation within the company does realise that they will have to work more closely together. They are going to merge further, I expect. In terms of private brands, that is already a fact.”
What are mainstream retailers doing to avoid losing customers to German discounters?
“In every country, you see different strategies. The common thread, though, is a cheap basic range in response to discount offerings. Gut & Günstig, Edeka‘s budget brand in Germany, is a pure copy of the Aldi Süd offer, with the same sharp price-quality ratio. Then again, in Britain, retailers opt for an ‘Aldi Price Match’: they bring a range of cheap private label, fancy label or white product at the same price as Aldi’s, hoping shoppers will then buy the rest of the range from them too, at better margins. But these are often smokescreens: they usually cannot offer the same quality.”
“In the Dutch and Belgian markets, Ahold Delhaize‘s response is typical, with the Price Favourites at Albert Heijn and the Little Lions at Delhaize: a basic assortment at low prices, so customers do not feel the need to run to the discounter as well.”
Focus on efficiency
Is this approach paying off?
“Retailers did manage to greatly reduce the price gap between their private brands and Lidl: the difference is now only 6 % on average. That has been a huge effort. The price gap between private brands and A-brands does widen as a result.”
But so is the pressure on margins?
“The point is: actually, as a mainstream retailer, you cannot compete with the hard discounters at all. The cost model is radically different. Thanks to their limited product range, hard discounters turn huge volumes per sku. Traditional supermarkets do not even come close, not even with their European buying alliances.”
“Discounters also have a total focus on efficiency throughout their organisation. In mainstream retailers, that is not in the DNA. Therefore, when supermarket chains try to launch their own discount formula, they always fail. Think of Tesco with Jack’s: a fiasco. Carrefour launched Supeco: not a success. Now they are trying it with Brazilian cash&carry concept Atacadão: I am sceptical. France is a somewhat separate market in Europe: discounters had a hard time really breaking through there until now, but now more opportunities are opening up. Hypermarkets are struggling, proximity is growing.”
So what should retailers do to defend their position?
“In my opinion, mainstream retailers would do better to highlight their strengths: the wide choice, the nice assortment, the service… Competing on price is futile. By the way, the same applies to manufacturers: the business model of a brand manufacturer is also completely different from that of a private label manufacturer. You should not start making private labels as a brand manufacturer, and vice versa. That does not work, even if it sounds tempting.”
Copycat behaviour
However, what Lidl is doing with Parkside looks suspiciously like a full-fledged brand strategy, doesn’t it?
“While mainstream retailers usually put their own name on their private brands, discounters opt for category-specific brands. That is what Lidl is doing with Parkside. They have also been investing heavily in sports sponsorships lately. I did find it remarkable to see those kids walking onto the pitch in Lidl colours during the European Football Championships.”
At the same time, Lidl is looking for the edge, most recently with the introduction of new packaging for Freeway soft drinks, which closely resemble those of Coca-Cola and Fanta?
“Yes, discounters are very consciously ‘copycatting’. They get as close as possible to the A-brand with their packaging design. That gets them quite a bit of publicity too.”
And what about A-brands on the shelves at hard discounters?
“In Germany, we see that trend reversing a bit: Aldi has significantly reduced the presence of brands. But you simply have to have some iconic brands, otherwise customers will run to the big supermarket anyway. Moreover, brands also help to show the huge price gap with the private brand next to it in the shelve.”
The 280-page reference book The Power of Private Label analyses the private label strategies of hard discounters, mainstream retailers as well as manufacturers in Europe from different angles. The book is only available online, via this link.
