Trading with the Hard Discounters
by Nick Ryan, Acumen

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As the hard discounters forge ahead with their aggressive geographic expansion strategy across Europe, it is becoming harder for branded goods manufacturers to shun this rapidly growing channel of trade.

The Hard Discount channel is the fastest growing channel in European grocery retailing with retailers such as Aldi and Lidl having already established a strong foothold in many Western European markets.  The flexibility of the small store format, and local value offering means that they are well suited to open stores in urban neighbourhoods.  This has enabled them to expand in Western Europe while pushing ahead into virgin territory in Eastern Europe and entering the consolidated Scandinavian markets, traditionally dominated by Soft Discounters.

It is important to distinguish between the Hard Discounter and the Soft Discounter.  The distinction lies in the product offering: Hard Discounters are characterised by a predominance of low price own label (Aldi, Lidl) while Soft Discounters will stock mostly brands and carry fresh food (e.g. Kwiksave, Penny Market).

The arrival of the Hard Discounters in a market re-focuses the competitive battle onto the price / value offering. Recent experience of Aldi in the Republic of Ireland and Australia plays testament to this.

As the Hard Discount channel continues to grow, and account for an increasing share of the grocery market, branded goods manufacturers are taking another look at the opportunity that this channel represents, and venturing to go where they have never previously dared to tread.  Many manufacturers in the UK shunned these retailers when they arrived on British soil in the early 1990s for fear of the reaction from the rest of the trade.  10 years on, the EDLP concept is firmly established in the UK and manufacturers are re-appraising their position.

The primary consideration for branded goods manufacturers is that the discounters will expect to sell at the lowest retail price in the market.  The pre-requisite for engaging in a dialogue with Hard Discounters is a well thought through pack / pricing strategy to avoid compromising your pricing & promotional strategy across the market (and a dearth of phone calls from irate buyers every Monday morning!).  Branded manufacturers have been able to differentiate their offering by developing specific packs for their Hard Discount customers (where volumes and scale of operations warrants this).  Bulk packs and extra weight are two popular approaches. 

The days of being able to pass Hard Discounters off with secondary brands are gone, and they will be looking for the leading brands by segment.  Do not underestimate how well informed these retailers are regarding brand performance and their competitors assortment and pricing, as they conduct exhaustive competitor pricing audits on a weekly basis.

In the spirit of true EDLP, Hard Discounters expect all investment to be factored into net net price.  Unlike some EDLP retailers who accept reduced margin in order to offer attractive consumer prices, Hard Discounters have expectations of high percentage margins often resulting in protracted price negotiations with suppliers.

When setting your negotiating parameters around net net price, remember to take account of the relative ease and efficiency of trading with these retailers.  The efficiencies are significant: full pallets, full loads, no merchandising costs, no POS / display materials, and a minimal account management commitment. When assessing customer profitability, take account of the minimum sales overhead attributable to running these customers.

Hard Discounters use a tactic of dissecting the proposed price for a branded product into its component elements.  They are able to do this from their detailed knowledge of ingredient, packaging, labelling, manufacturing, warehousing & transport costs from their own label business.  This tactic is used during the price negotiation to undermine the value of your brand and drive your prices down.

It is possible to strike local deals for your market, but the Hard Discounters like to buy centrally with the bigger branded manufacturers.  Much business is done remotely, with proposals requested by fax, and dealings done by phone, they like to keep face-to-face meetings to a minimum, an indication of the pressures that their “light” buying organisations are operating under.  Don’t expect to be given an appointment if you make a speculative approach, it is unlikely that the switchboard will even put you through if you are a not an existing supplier!

The benefits of trading with these retailers can be significant, given their scale and the significant market shares that they control (average of 11% of food sales across Western & Central Europe – M&M Planet Retail) but ensure that your negotiation skills are up to scratch or you will be on a hiding to nothing…………………!

For further details or to discuss this topic further please contact Nick Ryan, Acumen on Tel. 01932 220933
Email: nick_ryan@acumen-int.co.uk

Date article published: 15/01/2004