How to compete with the discounters in tough times
Retailers can successfully compete with discounters, using their own strategies as well as serving emerging health, local, convenience and social shopper trends.
As the macroeconomic outlook has darkened considerably once again, product centric operators such as the hard discounters stand to gain and be extremely successful in coming years. Shoppers will increasingly seek out the cheapest products and the discounters with their integrated models geared towards delivering low price really stand to benefit, writes Daniel Lucht of ResearchFarm.
Aldi and Lidl’s operating principle is to keep processes as simple as possible, the smaller the SKU range, the lower the costs in production, the leaner the supply chain, the tighter the selling space, the lower the costs for property and staff requirements etc. The business model is focused on driving efficiencies through the organisation to lower price and has been fine-tuned over decades – by concentrating on one format in which all business processes are relentlessly optimised. Combined with the immense international scale these players have the business model enables the discounters to continuously drive down price and to become more efficient. As a consequence it is very hard for other retailers to compete with the discounters on price.
The one tactic that really works in fending off the discounters’ encroachment is a strong private label proposition, as Mercadona in Spain, Migros in Switzerland or Asda and Waitrose in the UK demonstrate. Indeed, going forward the competitive battle will be decided by private label success, whether the proposition will tie loyal shoppers to the stores or the multichannel proposition or not.
In effect there are only a few products that retailers need to get absolutely right for shoppers to return – they will return just to buy these unique footfall generating products, such as a specific, dietary-need line for example – and customers are then more likely to complete the rest of their shopping in the same store. In this sense private label can become more of a purchase decision driver than price or location strategy – but the private label proposition needs to be executed in exactly the right way.
As retailers’ private label ranges become unique differentiators from the competition and increasingly footfall drivers, more activity and focus will be concentrated on the creation of new ranges and new product developments. This means that one sector especially stands to find life tougher going forward, the branded goods manufacturers.
After all when compared to the FMCG industry, retailers benefit from the perfect conditions for introducing new products. All retailers need to do is pick a store, put a few prototypes on shelves and find out exactly how much was sold on any given day. There is no need for big bang national introductions, there are no listing fees to pay, no feasibility analysis or focus groups to run beforehand and if the product is introduced under an existing private label umbrella range, then no marketing costs are involved either - even though brand familiarity has already been established with the retailer.
These conditions enable the softest launches possible and are a fertile breeding ground for innovation, as retailers do not have to commit to huge factory runs and have much cheaper and quicker ways of testing product innovations than the FMCG industry. Moreover for a retailer the P&L calculations do not have to be carried out on every single SKU line (as the FMCG industry necessarily has to do), but new introductions can be assessed under the performance of the whole range and can take into account loyalty or footfall generation as well.
All these factors point to the growing influence of private label and explain why they are so successful - the pure margin question aside.
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