April, 2017

Fruits of Thought

Deja Vu Retailing On A Different Scale

It is worth paying attention to Yogi Berra, whose biographer, Allen Barra, explained had “the winningest career in American sports.” Yogi had ten World Series rings, more than anyone else, was named MVP more times than any baseball player, save the drug-discredited Barry Bonds, and he has a panoply of other wins to his credit. Yet he is famous as much for his “Yogisms” as his athletic performance. Many are useful in business:

“When you come to a fork in the road … take it” – good advice for business executives on the necessity of making choices.

“You can observe a lot by watching” – yet an awful lot of executives don’t bother to get out and see things beyond their immediate interests.

“It's deja vu all over again” – comes to mind as we look at the situation with Aldi and Lidl.

These so called “deep discounters” seem by every predictable metric to likely be the growth story of the next decade, maybe two. Aldi is already the fastest growing food chain in America, and Lidl is about to burst out and likely take that title away from Aldi, as Lidl starts with a smaller base. With more than 1,600 U.S. stores, Aldi already has some critical mass, and Lidl has announced plans to open 100 stores along the East Coast – but with 10,000 stores across Europe, the potential in the United States seems vast.

Although discount prices are a calling card for these concepts, in places such as the United Kingdom the stores have evolved to be attractive to a more upscale demographic – maybe not for all purchases but, certainly, a key to success has been making sure shoppers are not embarrassed to say they bought items at these stores.

Though private label is dominant, Aldi produce departments often have the most prominent brands in the USA displayed openly.

In its leaks to journalists and public pronouncements, Lidl is trying to align itself with the product quality and trendy edge of Trader Joe’s. But that may be to avoid direct comparisons with Aldi.

Compact footprints allow for many conveniently located stores. And the limited assortment not only keeps costs down, but speeds shopping trips.

The threat to conventional retailers is obvious. With market shares over 10 percent in the United Kingdom and Ireland, the discounters have dealt a body blow to mainstream conventional supermarkets. These deep discounters count for less than 1 percent of the U.S. market – but for how long? And retailers have high fixed costs and are likely to be severely impacted if this new class of trade takes 10 percent of sales away – which seems quite possible, maybe even probable, in time.

What is quite odd is the way old patterns are repeated. When Wal-Mart started its rollout of supercenters across the country, supermarkets, of course, responded. Indeed consultants made a living for a long time teaching supermarkets how to compete with Wal-Mart. The plan? Become the anti-Wal-Mart – emphasize high service, fresh product, and organics, wherever Wal-Mart was weak.

In the end, though, these efforts, even when successful, did not much help retailers compete with Wal-Mart. The efforts basically instructed retailers how to get out of Wal-Mart’s way and still survive.

In the United Kingdom, efforts by the “Big 4” to compete with Aldi, Lidl and similar concepts were, at first, stymied because the retailers were unwilling to take the margin hit necessary to be competitive. This led to a lot of elaborate tiered private label schemes with torturous efforts made to offer prices comparable to the discounters, but only on products made sufficiently unattractive that traditional shoppers would not opt for them. This type of effort to segregate customers worked well in airlines where Saturday night stays could easily distinguish between business and leisure travelers. But it has limited success in food, especially when store managers have compensation schemes tied not to total profit but to margin percentages.

These discount stores have pros and cons like all concepts. But they are right for many shoppers. Some need to save money and like to not be singled out by the tier of product in their shopping carts. Others have plenty of money but like the self-esteem boost that comes from buying smart.

What is interesting is virtually no mainstream retailers are rolling out divisions with these types of deep discount concepts. They just seem prepared to watch while 10 percent of their business goes away. In this, retailers are echoing the response to Wal-Mart’s rollout. It was clear supercenters were a big part of the future and hardly anyone rolled out competitive concepts.

At least with supercenters, competing with them involved selling more non-food products – and supermarkets didn’t have that expertise. But the response to Aldi and Lidl requires only evaluating and adjusting assortment.

It is more a lack of imagination and an unwillingness to change one's self-identification. Retailers need to be concept-neutral – prepared to sell their food in small, medium and large stores; sell it online and sell it with heart. Retailers need to not think of themselves as prisoners of their historical business.                                                        pb