This document summarizes a keynote speech given by Prof. Jan-Benedict Steenkamp on the rise of hard discount retailers like Aldi and Lidl in Europe and its implications. Some key points: - Hard discounters have been very successful in Europe due to their extremely low prices while maintaining quality. Their market share is growing. - This poses challenges for mainstream retailers who cannot match hard discounter prices while remaining profitable. They need to focus on quality and finding the right balance between private labels and national brands. - Brand manufacturers are also impacted and need to strengthen their brands through differentiation, innovation, advertising and potentially selling in hard discounters under the right conditions. - Both retailers

1. © Prof. J-B.E.M. Steenkamp
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Jan-Benedict E.M. Steenkamp
C. Knox Massey Distinguished Professor
of Marketing, Marketing Area Chairman &
Executive Director AiMark
The Rise of the Hard Discounters:
Implications for Mainstream
Retailers and Brand Manufacturers
Keynote speech at the annual EFMI National
Private Label Congress,
Netherlands, March 2016

2. © Prof. J-B.E.M. Steenkamp
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Setting the scene:
SB share in different European countries

3. © Prof. J-B.E.M. Steenkamp
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Hard discounter share in European countries

4. © Prof. J-B.E.M. Steenkamp
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Hard discounter growth in the Netherlands

5. © Prof. J-B.E.M. Steenkamp
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Why are hard discounters successful?
• Price, price, price

6. © Prof. J-B.E.M. Steenkamp
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Price of basket of own SB products
Retailer 2013 2015 % change Index
Aldi €42.95 €41.05 -4.4% 100
Lidl €42.57 €43.74 +2.7% 107
Jumbo €54.45 €51.31 -5.8% 125
Plus €55.66 €52.11 -6.4% 127
AH €56.72 €54.44 -2.2% 133
C1000 €54.65 €55.52 +1.6% 135
Source: Kassa/Vara

7. © Prof. J-B.E.M. Steenkamp
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86.6
86.7
92.8
98.8
105.3
106.7
107.5
108.4
118.6
80 85 90 95 100 105 110 115 120 125
Perceptions count too!
Stel dat een volle boodschappenkar bij de gemiddelde Nederlandse supermarkt 100 euro kost.
Sommige supermarkten zijn echter duurder, andere goedkoper. Wat kost die volle boodschappenkar
volgens u bij de volgende supermarkten (schatting)?
Source: EFMI Shopper Monitor, July 2015

8. © Prof. J-B.E.M. Steenkamp
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Why are hard discounters successful?
• Price, price, price
• Quality

9. © Prof. J-B.E.M. Steenkamp
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What’s
going on
here??
Consumentengids (January 2016)

10. © Prof. J-B.E.M. Steenkamp
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Why are hard discounters successful?
• Price, price, price
• Quality
• Ich bin doch nicht blöd

11. s (11)
Smart shopping as mega trend

12. © Prof. J-B.E.M. Steenkamp
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What does the rise of hard discounters
mean for mainstream retailers?
• Ensure you have a quality edge – you cannot match
their prices and be profitable

13. © Prof. J-B.E.M. Steenkamp
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Quality-oriented households are less attracted to
(hard) discounters – The German experience
Source: GfK

14. © Prof. J-B.E.M. Steenkamp
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What does the rise of hard discounters
mean for mainstream retailers?
• Ensure you have a quality edge – you cannot match
their prices and be profitable
• Rethink private label proliferation

15. © Prof. J-B.E.M. Steenkamp
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SB proliferation – from 2 to 3 tiersPRICE
QUALITY
Standard
SB
Economy
PL
Premium
SB
Value 2.0
PL

16. © Prof. J-B.E.M. Steenkamp
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SB proliferation – Beyond the three-tiers
PRICE
QUALITY
Standard
SB
Economy
PL
Premium
SB
Value 2.0
SB
Specialty
SB
Super
premium
SB
Source: PlanetRetail

17. © Prof. J-B.E.M. Steenkamp
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Specialty SBs
Healthy Eating
Regional
Special Diet
Kids
Ethical
Age Segmentation
Organic
Eco-Friendly
Ethnic
Source: PlanetRetail

18. © Prof. J-B.E.M. Steenkamp
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Source: IGD
Value 2.0 –
Discount brand products at Tesco
 Using fancy labels (copying Aldi).
 Priced below Tesco Standard.
 Priced on average 50% above Tesco Value.

19. Source: PlanetRetail; own research
Value
£0.27
Standard
£0.56
Finest
£1.01
Brand
Leader
£0.67
Discount
Brand
£0.46
Lindt
Excellence
£1.49
Tesco’s SB portfolio in practice: Chocolate (100g)
Milka
£0.97
Finest Fair
Trade
Organic
£2.04
© Prof. J-B.E.M. Steenkamp
Not to be used or reproduced without permission

20. © Prof. J-B.E.M. Steenkamp
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What does the rise of hard discounters
mean for mainstream retailers?
• Ensure you have a quality edge – you cannot match
their prices and be profitable
• Rethink private label proliferation
• Find a balance between NBs and SBs

21. © Prof. J-B.E.M. Steenkamp
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Overemphasis of your SBs hurts
share-of-wallet
5.5
28.0
47.0 46.8
38.6
22.8
18.5
0
5
10
15
20
25
30
35
40
45
50
0% 0-20% 20-30% 30-40% 40-60% 60-80% 80-100%
AH’s
SOW
(%)
Store brand buying as % of shoppers’ total expenditure at AH
Source: Own research

22. © Prof. J-B.E.M. Steenkamp
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Overemphasis on SBs may even hurt profitability
Mean value over 6-month period for
consumers whose store brand share in total
purchases at CVS is:
0-10% 10-20% 20-35% > 35%
Total sales $ 251 $ 263 $ 216 $ 129
Gross margin 30.3% 32.1% 34.7% 36.8%
Total gross margin
dollars
$ 77 $ 85 $70 $ 48
Source: Ailawadi and Harlam

23. © Prof. J-B.E.M. Steenkamp
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What does the rise of hard discounters
mean for mainstream retailers?
• Ensure you have a quality edge – you cannot match
their prices and be profitable
• Rethink private label proliferation
• Find a balance between manufacturer brands and
store brands
• More effectively leverage your store size

24. © Prof. J-B.E.M. Steenkamp
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Trend towards one-stop shopping particularly
beneficial for full-range supermarkets - Germany
Source: GfK

25. © Prof. J-B.E.M. Steenkamp
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Time pressure
Source: GfK

26. • Tesco has opened a New York-style diner
called Fred’s Food Construction at an Extra
store in West London.
• The move follows Tesco’s acquisitions and
investments in Harris+Hoole, Giraffe and
Euphorium. Tesco is also trialling a
restaurant called Decks at an Extra store
in Coventry.
• 7-Eleven Japan has rolled out instore frying
equipment to all its outlets. The products
prepared instore have higher gross profit
margins at around 50% versus 31-32% for
already prepared items.
Foodservice and grocery retail channels are blurring.
Grocers plan to integrate best practice elements.
An increasing number of grocery retailers
are testing restaurant elements.
UK: Harris+Hoole café at
Tesco Watford. The shift
towards foodservice goes
hand in hand with the
company’s strategy of
becoming a leisure
destination.
Japan: 7-Eleven’s
instore fried food.
Using time pressure to your advantage
Blurring the distinction between supermarkets and
restaurants
Source: PlanetRetail

27. © Prof. J-B.E.M. Steenkamp
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Blurring the distinction between supermarkets
and restaurants – Whole Foods

28. Jumbo Supermarkten has brought event shopping to the Netherlands with its
Food Markt concept. Its first flagship is also the largest grocery store in the
country (size: 6,000 square meters).
JUMBO Supermarkten’s Food Markt
private label. The sauce is produced
instore by the store’s chefs.
A shop assistant preparing salads
directly on the sales floor.
Instore bistro selling
freshly made pizza.
Jumbo Food Markt offers ready-to-eat
food at various locations instore. Shop
assistants cook in front of shoppers.
Blurring the distinction between supermarkets and
restaurants
Source: PlanetRetail

29. © Prof. J-B.E.M. Steenkamp
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What can brand manufacturers do?
• Understand what’s at stake for you vs. the
mainstream retailer
Jumbo’s loss (€50.00)Coca Cola’s loss (€1.50)

30. © Prof. J-B.E.M. Steenkamp
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This is at stake for mainstream retailers –
Share price of Tesco, Sainsbury’s & Morrisons
Sainsbury‘s
Morrisons
Tesco
January
2014
January
2015
January
2015

31. © Prof. J-B.E.M. Steenkamp
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What can brand manufacturers do?
• Understand what’s at stake
• Strengthen their own hand
Increase the appeal of your brand – what has proven to
be successful in fighting SB success?
• Which factors affect consumers’ willingness to pay a price
premium for manufacturer brands
• Which factors have proven to be effective in reducing SB
share in a category?

32. © Prof. J-B.E.M. Steenkamp
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Key factors in consumer willingness to pay a
price premium for manufacturer brands
Factor Relative
importance
Strong belief that “you get what you pay for” 22%
Large perceived quality gap with SBs 16%
High involvement with the category 14%
Distinctive packaging 13%
Heavy advertising for MBs 13%
Innovation by MBs 9%
High difficulty of making a high quality product 7%
Assurance of not doing SB production 6%
Source: Own research

33. © Prof. J-B.E.M. Steenkamp
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Key factors in boosting manufacturer brands’
market share versus SB share
Driver Relative
importance
Small price gap with SBs 31%
Innovation by MBs 22%
Heavy advertising for MBs 14%
Large perceived quality gap with SBs 14%
Distinctive packaging 13%
Heavy price promotion 6%
Source: Own research

34. © Prof. J-B.E.M. Steenkamp
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Are these price gaps OK?

35. © Prof. J-B.E.M. Steenkamp
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Maintain the quality edge!
I hope Coca Cola does taste better!

36. © Prof. J-B.E.M. Steenkamp
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Maintain
the quality
edge!
Consumentengids (January 2016)

37. © Prof. J-B.E.M. Steenkamp
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Unilever emphasizes the quality difference

38. © Prof. J-B.E.M. Steenkamp
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Innovation as barrier to store brand success
Index of
SB
Share
Low High
100
(average)
NB innovation activity in the category
134
86
An industry study conducted by Deloitte shows that only 4 out of 10 CPG
companies are investing more in product research than they were 10 years ago.
Even P&G’s vaunted innovation machine has been criticized as not keeping up the
innovation effort.
Source: Own research

39. Differentiate the brand through advertising:
The role of ad content
“New. Garnier Ambre Solaire Clear
protect. The first transparent
sun protection with high sun
protection factor. Protects and
isn’t sticky or oily.”
“Underarm skin is particularly delicate
and can be damaged with each shave.
Dove deodorant contains 1/4 moisturising
cream which gently nourishes your skin,
protecting against the damage caused by
shaving.”
Advertise new benefit Explain existing benefit
Source: GfK

40. © Prof. J-B.E.M. Steenkamp
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Create differentiation through distinctive packaging
P&G’s pushes design in brand-building strategy
• Differentiates the product
• Influences choice at point of
purchase
• Stimulates new product
awareness
• Difficult for some SBs to copy –
they strive to unify the range
• Sue for package infringement

41. © Prof. J-B.E.M. Steenkamp
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Package Copycatting is Rampant
Do You See the Difference?

42. © Prof. J-B.E.M. Steenkamp
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Low High
ASSIMILATION:
Brand associations activated by package similarity
are assimilated into the representation of the
copycat SB
Contrast:
High package similarity is perceived as
intentional ploy to mislead consumers and
highlights copycat as “cheap imitation” of NB
There is evidence that SBs can shoot themselves in the foot
Source: Own research

43. © Prof. J-B.E.M. Steenkamp
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What can brand manufacturers do?
• Understand what’s at stake
• Strengthen your own hand
• Sell your brand at hard discounters

44. © Prof. J-B.E.M. Steenkamp
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Selling in Aldi –
where do your sales come from?
Source: GfK

45. © Prof. J-B.E.M. Steenkamp
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When is a win-win more likely?
• Small price gap between brand at hard discounter and
mainstream retailer
• List a brand that has relatively low penetration
• List a brand that commands high loyalty
• Design attractive outercases
Source: Own research

46. © Prof. J-B.E.M. Steenkamp
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Designed & Claim Brand Name (Claim) Plain Brown American
0
The role of shelf-ready outercases
  

47. © Prof. J-B.E.M. Steenkamp
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Does SB Manufacturing Help NBs Gain Access
to Hard Discounter Shelves?
Evidence from Aldi in Germany
14%
42%
0%
10%
20%
30%
40%
50%
No Yes
Likelihood of
being included
in Aldi
assortment
Store Brand Manufacturing for Aldi?
Source: Ter Braak et al.

48. © Prof. J-B.E.M. Steenkamp
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Key takeaways
The last decades have seen a dramatic rise of hard
discounters.
In the German homeland, sales have plateaued – to pursue growth, they have
set their sights on other countries – NL, UK, Australia, U.S.,…
Mainstream retailers need to do several things:
 Reduce the price gap – your store brands are too expensive
 Simplify your SB offering; the standard SB still does the heavy lifting
 People want choice – do not push SBs above approx. 40% of total sales
 Improve the quality of the standard SB beyond that of HDs; you will never be able to
match HDs price-quality position with your economy line
 Let your larger store space work for you; blurring of supermarket and restaurant is
where HDs cannot go.
Manufacturers should do the following:
 Realize what is at stake – perhaps the time of playing nice could be over?
 Strengthen the equity of your brand; Strong “old-fashioned” marketing resonates
even in 2016!
 Consider selling at hard discounters. Under specific conditions, it is a win-win