Retailing in the (Half) Week Ahead, Week 1 2019

One of the top questions asked by FMCG suppliers when it comes to listing with grocery discounters is: “How do I manage the reaction from the rest of the trade?” This is an excellent question, but very few suppliers ask the more important question, which precedes this question: “How do grocery discounters change the trade when they first arrive?”

This year I’ve had the chance to closely observe Lidl’s arrival in two different countries – the USA and Serbia – and I have seen the transformation that the rest-of-the-trade undergoes prior to Lidl’s arrival, during Lidl’s first months of trading and, in other countries, after Lidl tweaks its model to local conditions.

Two markets forced to adapt to Lidl's expansionist ambitions: at left, the USA, and, at right, Serbia. (Source: Lidl US, Lidl Srbija)

Let me share a few observations on these moments in time with you in this week’s piece. However, I should warn that this will be a light touch review. I would encourage you to think more broadly in 2019 about what this all means, particularly in markets such as Germany where grocery discounters, specifically Aldi Nord, are facing challenging times and are likely to wage more aggressive war in 2019.

Pre-Opening Day

In both the USA and in Serbia I have observed two types of preparation for Lidl’s arrival prior to opening day. The first is obvious and almost universal – a sharpening of price points and price communication. Most suppliers know how to manage this reaction so nothing more to be said here. However, the second preparation is more complex and very specific – a change of store design and assortment. I call this second preparation undergoing a ‘discounter facelift’.

In the second transformation, my casual observation is that two things are true. First, the retailers that undergo a ‘facelift’ have already competed head-to-head with Lidl in another country. Second, that retailers tend to do a "three F” facelift:  Fresh, Frozen and Fun.

  • Fresh. The fresh facelift normally entails giving up more floor space to fresh categories such as fruits, vegetables, fish and meats. Even if space is not expanded, the categories are presented differently, and assortments move to more premium positions with a wider range of organic, bio and local options.
  • Frozen. Lidl stores typically make use of fog-resistant and high visibility frozen displays, making Lidl’s frozen ranges look superior to what most consumers have grown accustomed to seeing when shopping. The frozen facelift normally entails large investments in new frozen displays to upgrade them to a standard similar to Lidl’s.
  • Fun. Lidl typically offers non-food treasure hunt promotions on items like clothing, electronics, gardening, hardware, toys, home goods, and so on. The ‘fun’ facelift entails adding these categories to the store – sometime as temporary or seasonal space, but more often as permanent space.

Post-Opening Day. 

I should remark that it has only been a few months since Lidl opened in Serbia while in the USA it has been well over a year. That said, we see similar changes in both countries when it comes to ‘the trade’ and how they operate when competing directly with Lidl. This can be detailed by a mnemonic called LATE. In addition to deploying the ‘3F’s, retailers that were originally reluctant to change store design begin to do the following.

  • (L)ine Pricing. Many grocery operators switch to line pricing in categories where they have lost share to Lidl. This might mean having a sugar/sweets section in store where everything is sold for $1 (in the USA) or 99 dinars (in Serbia). They often create ‘discounter’ aisles or promotional walls.
  • (A)ggresive Item Matching. Nearly all grocers move to an item-by-item price-matching policy where, if an item is listed at Lidl, the grocer will list the same item at the same price and advertise these items in above-the-line marketing. These go in multiple placements across the store, even in unrelated categories.
  • (T)wofors. Many grocers create new merchandising bundles, taking two distinct items and listing them for a combined price. This is often using an item that still sells well and is not listed a Lidl with an item selling well at Lidl.
  • (E)xclusive. Finally, many grocers try to list exclusive items with distinct or new features. They often give lots of floor and promotional space to these items.

Tweaks Over Time

It is still too early to observe what American and Serbian grocers will do over the long run in competing head-to-head with Lidl, but we can imagine what might happen based on what we have observed in other countries. Generally, we see the following personality changes, easiest to see in grid format:

Personality Characteristic

Before Lidl

After Lidl

Types of shopping basketS

Big basket weekend stock-up; entire operation geared to being in stock on weekends

Small basket, daily fill-in or top-up shopping, with new items featured for mid-week breakfast, lunch or supper

Private label types

Simple trade-down PL

Complex PL architecture

Promotions

Large number of SKUs featured in flyers/leaflets with multiple suppliers, mostly branded

Simplified flyers/leaflets and higher percentage of private label items featured

Discounter stores

Retailers would never consider running their own ‘discount’ format

Retailers experiment with having ‘discount’ formats or having multiple store assortments with some stores designated discount and others premium

 

Implications for Suppliers in 2019

If there is anything we may have learned about the ‘reaction from the trade’ is that they struggle to do the 3Fs well and they are often L.A.T.E. The result is that, over time, many grocers become more difficult as partners. Rather than having a clear set of shopper missions backed by good merchandising and marketing principles, they develop more complex and confusing positions.

Suppliers working with the trade to cope with Lidl’s arrival or, for that matter, Aldi’s arrival or any other grocery discounter, should remain focused on fundamentals of 52- week retailing. Think carefully about items that are routinely purchased and how they are purchased and compare that to items that are more seasonal or impulse and how they are purchased. Then work very hard to help grocers rotate their assortments throughout the 52-week cycle without having too many logistical failures.

Remarkably, using just 3,000 or fewer SKUs, Lidl can create weekly, even daily, excitement for consumers, encouraging them to shop often and across a wide range of categories. Suppliers can do the same thing for full assortment grocers but need to put time and effort into mapping how the category will change each week to create energy and excitement for shoppers throughout the year.

There will never be an easy or perfect solution to ‘managing the trade’ but understanding how the trade changes before they begin SKU rationalisation programmes may be essential in a deeper understanding of how to work with the trade in a different way than in the past.

Here are links to great pieces of work we published on Retail IQ in Week 52:

When you get a chance, please share your thoughts or questions on ‘Facelift’, or any other topic.  Good luck in the week ahead. 

Regards,

Ray Gaul – Ray.Gaul@KantarConsulting.com and @KantarConsulting or @RayGaul on Twitter plus LinkedIn.

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