Kent Knudson: How Grocers Can Succeed Against Hard Discounters

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KENT KNUDSON: Hard discounters like Aldi and Lidl will continue to grow aggressively in the US over the next five years. We believe their annual growth rate will be in the range of 8% to 10%, which is about five times faster than the growth of traditional grocery.

We believe a number of incumbent grocers are ill-prepared to deal with the increased threat from hard discounter growth, in part, because they continue to believe in a number of myths about the hard discount customer. For example, they believe that the [hard discount customer] is low income or they believe that their own customers are either too loyal or disinterested in private label products and, therefore, will not try the hard discounter.

Bain recently completed a study of 2,800 consumers in the US grocery market and it shows a different reality. Today, the income profile of the Aldi shopper is similar to that of a traditional [grocery shopper]. 85% of consumers are interested in private label products and already use them, and that penetration will increase. And 70% of consumers are interested in trying Lidl when Lidl opens stores in their area.

We believe that many incumbent grocers will seek to compete with hard discounters on price, and while price reduction is likely an important part of a competitive strategy, we do not believe it's sufficient to win in an increased hard discounter environment. We believe there are five rules that incumbent grocers must follow in order to succeed in their efforts to compete against Aldi and Lidl.

One, they need to transform their cost structure in order to generate dollars that they can invest in other parts of their business. Two, they need to double down on their private label offering. Three, they need to invest in their fresh food quality to maintain differentiation versus hard discounters. Four, they need to look at becoming more convenient, either through digital options or potentially store growth. And five, they need to use advanced analytics to both improve their assortment and to better understand their customers.

We believe that the grocers who pursue these rules will ultimately be the ones that are successful, not only in maintaining their share against hard discounters, but stealing it from their weaker competitors.

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