Mikey Vu: Getting Ready to Battle Grocery's Hard Discounters

Read the transcript below.

MIKEY VU: Hard discounters like Aldi and Lidl are going to make a really aggressive push into the US. Aldi's been here for decades but they plan on really making a concerted effort to open up 100 to 200 stores this year.

Lidl is coming in as well this summer. They're going to open up 50 stores by the end of the year as well. And Aldi said that they're going to invest $1.6 billion into improving the aesthetic of all their stores in the US: sleeker finishes, more signage, more space to fresh.

We anticipate that hard discounters will grow between 8% and 10% per year between now and 2020. That's five times the amount of growth that we anticipate traditional grocers will have in that same time frame. So the question is, will those incumbent traditional grocers be ready for this onslaught of the hard discounters?

We believe that there are some common myths about hard discount shoppers and traditional grocery shoppers that leave many of these incumbent grocers unprepared for the entry. Some of these myths include things like, hard discount shoppers are low-income and low-education only. Number two, my shoppers don't like private label. Number three, my shoppers also don't like the look, feel or experience of a hard discounter, so they won't really try it.

We did a survey of over 2,800 US shoppers, and we found that those three things just aren't true. The average Aldi shopper, in aggregate, looks very similar demographically to your traditional grocery shopper. In addition, over 85% of traditional grocery shoppers say that they're willing to try private label.

70% of them also say that they believe that Aldi products specifically are just as good, if not better, than national name brand products. When they think about what's important in their purchase criteria and when they're selecting a grocery store, they say that good value and low prices are the top two considerations.

Even people who primarily shop at traditional grocery stores say that Aldi does better at both of those things than most traditional grocers.

70% of traditional grocery shoppers who have never tried a hard discounter before say that they are very open to trying one. When shoppers defect from traditional grocery stores to hard discounters, we see a fairly predictable pattern.

They'll visit an Aldi and they'll try a couple of categories, and usually those categories are milk, eggs and other canned foods. They'll take that home, they'll try it out, they'll actually find that the quality is reasonable. This will increase their trust in the hard discounter and they'll come back for a second visit, and they'll start adding categories to their basket.

Aldi is also starting to make products in other categories like health and beauty, baby and organic produce. This is going to continue to provide shoppers with more reasons to defect from a traditional grocer.

So the question is, what do you do about it? We think that all retailers should follow five simple rules.

Number one, use your private label. Turn it into a brand with a distinct identity. Drive customer loyalty because they can only get your brand at your store.

Number two, invest in fresh food. It's a really good way to drive traffic and increase your overall quality perception.

Number three, don't just tweak your cost structure, really transform it. It's going to be hard to compete with a hard discounter because they have a completely different business model than you do. But can you zero-base your costs? Can you find the funding to invest in these initiatives and invest in pricing, so you can compete better?

Number four, find ways to simulate increasing convenience. Real estate strategy is hard. You can open new stores to increase convenience, but if you don't have the capex for that, what are other ways you can do it? Can you create better layouts, can you have faster checkouts? Can you use omnichannel to help your customers save time?

Number five, use advanced analytics to mine your customer purchase data so that you can simplify your assortment and provide customers with very specific promotions to drive them back into your store. Hard discounters are going to get very, very aggressive. They're here to stay and they're going to steal share. You just need to make sure it's not yours.

Read the Bain Brief: Getting Ready to Battle Grocery’s Hard Discounters