Property bubbles have burst, credit availability is curbed and unemployment is rising. As a result, customers are cautious.
Many are cutting back on non-discretionary spend and trading down. Switching has reached endemic proportions and the discounter format is thriving.
Across the EU we are now witnessing the fightback. Over recent months major grocery players have extended their private label proposition as a response to the discounter threat.
In the UK we know about Tesco’s Discounter range. In France, Carrefour is reportedly preparing the launch of a new 400 SKU-value private label. The updated proposition is expected to replace its existing range, which suffers from low price perception compared with Lidl. In Germany it is much the same story. Metro’s hypermarket fascia Real has launched a new private-label range, clearly structured in value, mid-range and premium price points to counter the discounters’ might.
As a result of the private-label launch and an extensive ad campaign, Real’s customer traffic has improved.
In response to the discount threat, launching, innovating and extending private-label ranges is usually the first course of action. The thinking is clear: retailers try to keep customers in stores at whatever cost and take reduced top-line sales, margins and cannibalisation effects of branded products in their stride in the hope that once the economy improves these customers can be traded up again.
In the current climate, keeping customers in stores is the most important factor for any retailer. Once customers have deserted and become accustomed to the discounter model, it is hard to entice them back.
While innovating and relaunch-ing the private-label proposition is right, it will probably not be enough. Past experience from other EU markets suggests the discounters will continue to thrive. Their model of retailing is not necessarily conceived to be a one-stop shopping destination. The likes of Aldi and Lidl are content with picking up top-up buys from hypermarket shoppers and have been very successful with this approach. Arguably Tesco’s doing the right thing by focusing on the winning model and launching a small-store discount format – its Aldi Version 2.0 so to speak – in the world’s biggest grocery market.
Fresh & Easy can become a US success, given the right time and financial backing, but the market will be hotly contested.
As the discounters continue to prosper, full-blown price wars will come next across much of EU grocery. However, we believe that this tactic will not yield the expected results. One cannot defeat the discounters with price wars, as price clearly is their territory and main strength.