The emergence of the hard discount format in Europe led by Aldi and Lidl has been a dramatic change in the retail landscape. Hard discounters are defined as grocery offering a simple presentation, low prices, and with private labels dominating the product range. Aldiâ€™s assortment typically tends to be 90% plus private label while Lidl tends to average 70% private label. Hard discounters also carry only a restricted assortment of basic products (below 1,000 stock keeping units or SKUs). They have small stores (less than 1,000 square meters) and staffing levels.
The hard discounters have grabbed more than 10% of the European market. While they have been most successful in Germany, where the market share of hard and soft (slightly larger stores of 1,500 square meters and 1,400-1,700 SKUs) discounters is 40% they have now spread to Australia, the UK and the US. In the US, discounters, like Dollar General (7,000stores), Dollar Tree (2700 stores), Family Dollar (5,500 stores) and Save-A- lot (1,200 stores), who are referred to as dollar stores, are somewhat less private label focused but still growing at 14-17% per annum, and expected to reach sales exceeding $40 billion before the end of this decade.
There is a role for manufacturer brands: As hard discounters are growing their share, they are increasingly recognizing that brands have a complementary, albeit limited role to play in their product mix. Having a balanced offering of both store and manufacturer brands may enhance that discounterâ€™s performance, since manufacturer brands are known to be major traffic builders. In addition, in many categories, there is a segment of consumers who prefer manufacturer brands. Without some manufacturer brands, it is impossible to attract these customer. In fact, manufacturer brands are currently a major engine of Lidlâ€™s continued growth. In 2004-2005, brand sales grew by 16%, versus 9% growth in Lidlâ€™s private labels.
Maintain a large, but optimal price gap:
We found that almost one-quarter of all manufacturersâ€™ branded goods sold at discounters were considered to be successful by both the manufacturer and the retailer. In these cases, there was a large price difference between the manufacturer brand and the discounterâ€™s private label variant. A large price gap helps signal that they are not mere substitutes, but rather that the manufacturer brand and the private label are targeted at different consumer segments or purchase occasions. Of course, the optimal price gap will differ across categories, but we found that the optimal price gap is in the range of the manufacturer brand being between 75% and 150% more expensive than the private label. Above the 150% range, chances of a win-win decline significantly.
Develop attractive outer cases:
Our research also demonstrated the striking finding that win-win situation occurred significantly more often when the manufacturer brand was presented in a nice outer case. To save costs, discounters usually do not unpack the outer-case boxes when displaying the products in their stores. Forty-one percent of manufacturer brands were packed in an outer-case box. Thus far, few manufacturers implement this box as a marketing tool; only 14% of the outer cases presented in the shops were nicely decorated and designed attractively. Manufacturers should invest in creating attractive, nicely designed outer-case boxes for their brands shipped to discounters.