By Marcel Corstjens & Rajiv Lal
The US grocery industry has reached an interesting and uncertain crossroads. In 2017 German discount grocery retailers Aldi and Lidl announced plans to open hundreds of new stores across the United States.
One does not have to look very far to recognize the threat posed to competitors like Wal-mart, Target, Costco and Kroger by the German hard discounters. The UK grocery market shows what could happen: Aldi and Lidl have 13.1 percent market share in the UK today, having grown more than 50 percent over the last five years.
Will US grocers fare any better? The answer may lie in whether they learn from the experience of the French grocers. In France hard discounters have a 12-percent share of the grocery market, almost as much as they do in the UK. However, in the UK, the market share of Aldi and Lidl is expected to continue to grow, whereas in France, it’s already declining.
How did smaller French retailers fight them off? Through the savvy use of private-label products (also called white-label goods or store-brand products).
Private-label products are essential to the profit margins of hard discounters. The advantages are threefold: cheap products, good quality and customer convenience; a shopper can get what they need in under 30 minutes. The downside is that there is less choice, little customer service to speak of and less-attractive stores and displays. Hard discounters win by only stocking products with a very high rotation.
To fight back against the hard discounters, French grocers realized they would have to improve their use of private-label products. This meant that they had to cut prices while improving quality—not an easy task. Yet by offering affordable goods of reasonable quality, French supermarkets have been able to regain market share.
US retailers are far behind in terms of their private-label product offerings, which will be a huge challenge in the fight against Aldi and Lidl. To catch up, US grocers will have to quickly make up for lost time. Supermarkets will have to change the way they display, promote and merchandise private-label goods. They will also have to commit to this private-label strategy in an increasingly uncertain food retail business.
The experience of French grocers shows that it’s not impossible to beat hard discounters at their own game. But it also is noteworthy that France’s experience is the exception, not the rule.
Marcel Corstjens is a professor of marketing at Insead. Rajiv Lal is a professor of retailing at Harvard Business School.