Lidl will soon arrive in the US, raising many questions for retailers and manufacturers: How big will be they be? What are their strengths? How will others react to them?
Checking out a “Lidl of the Future” store in the UK can fill in some of those blanks – and also begin to show why the growing ranks of hard discounters like Aldi and Lidl represent something more than just another source of competition for grocery retailers.
Based on the video below and my recent visit to the UK, Bill Bishop and I see their next-generation stores, branded “Lidl of the Future,” moving away from an essentially functional experience, and toward one that is quite welcoming and showcases fresh food. This transformation broadens Lidl’s appeal and likely accelerates their growth.
We wanted to call out two areas in the “Lidl of the Future” store format:
Greater emphasis on fresh items
- A fresh bakery counter greets shoppers at the front of the first aisle, selling breads, rolls, and croissants from open baskets at prices typically 50% less than surrounding supermarkets.
- The rest of the first aisle features fresh produce, meat, and chilled items that merchandise locally sourced items and a large selection of Lidl’s own premium brand items.
Treasure hunt appeal from in & out general merchandise
- The back section of the store features a wide range of general merchandise items that turn very quickly and enhance the store’s gross margin. When Bill visited the UK in early February 2017, the items ranged from watches, to pajamas, to hardware supplies, and they were displayed in adjustable height wire baskets and shelves, or directly on pallets.
- All of the general merchandise items move through the store on a two-week cycle in which the markdown signs begin clearance in the second week.
POV – Bishop/Bolton
Lidl and Aldi are different from today’s US supermarkets in ways that go beyond just pricing. These hard discounters are increasingly focused on delivering their own unique in-store shopping experience, one that can be described as contemporary, comfortable, and enjoyable.
This focus on an improved shopping experience makes them an attractive shopping alternative, broadens their appeal, and likely accelerates their growth.
The growth of Aldi and Lidl will require existing US grocery retailers to start asking themselves how they can do things differently to control costs – from marketing and merchandising to operations and logistics.
This post was originally published March 9, 2017 on brickmeetsclick.com.
The original version of this article was published on brickmeetsclick.com on June 20, 2016
Sure, Aldi started as an ELDP retailer that offered an extremely limited assortment at extremely low prices, but – that’s not how the retailer is operating today. Aldi has evolved into a promotional merchant with a strong price reputation which makes it an increasingly formidable grocery competitor.
The net result is an extremely disruptive force in an increasingly competitive landscape in which the traditional grocery players are being squeezed between two growing pressures – how to pay for additional services like online grocery and how to match low prices.
1. Changing product mix
The change in Aldi’s product mix shows up clearly in the physical layout of their stores. The space allocation of five to ten years ago has been completely revised.
Aldi now has a full-scale produce department that is approaching 100 items. They’ve done extensive work in pre-packaged meats and expanded in dairy. They’ve also done extensive work with frozen foods. They even stock wine and beer in some locations.
Aldi has also replaced almost an entire aisle of groceries in the center of the store with general merchandise, and increased their attention to the first aisle. And, they’ve expanded their specialty/premium product lines that allow shoppers to trade up.
2. Shift to gross margin strategy
Aldi continues to practice aggressive cost management and still has only a fraction of the assortment a traditional supermarket offers. They now manage their merchandising mix in a different way.
- Aldi generates gross profit from the first aisle, general merchandise, perimeter and premium products – this allows them to reach some of their really aggressive price points and deliver them even more effectively.
- They are generating profit reserves early in the month on sales of higher-margin products that they use to drive traffic in weeks 3 and 4 with lower-price, lower-margin products as consumer spending slows down.
You can see this play out in their ad circulars – the number of pages changes depending on which week of the month it is. At the beginning of the month there’s plenty of money in the consumer market, but by the end it runs out and retailers have to fight for their share of trips and spending.
So, at the beginning of the month when Aldi is trying to make sure it gets a bigger basket, the circulars are 12 pages, and they promote a lot of higher margin items and general merchandise. By the end of the month, the circulars are down to 8 pages, and they promote the lowest prices of the month, especially on staples. For example, milk at $1.49 per gallon will generate traffic, but Aldi doesn’t offer that at the beginning of the month because they don’t need to.
3. Reinforcing the low price reputation
Aldi reinforces their low price reputation by combining aggressive promotional pricing with strong shelf pricing for basic staples.
For example, they’ll promote milk, eggs, bananas, avocados, and meat, which are highly consumable products that have recognizable price points. No customer has 5,000 price points in their head, but they probably have these. And, Aldi is very sensitive to the local competition’s prices on these products. It looks like the store manager has the discretion to price eggs, milk, bananas, and maybe some of their meat products so that they can beat the competition.
Aldi also reinforces their everyday low price reputation by focusing on certain staple grocery items that are often on the shopping list like flour, sugar, etc.
4. Promotional capabilities & total store merchandising
Promotional retailers typically chart out traffic and ticket sizes for each week and market to themes to accomplish their objectives over the course of, say, a month, by driving traffic to certain areas.
When it comes to promotional themes and merchandising, Aldi seems to do a very natural job of mixing different types of products across what would be departments in a traditional grocery. The merchandising themes in their ads are more about communicating with the customer about what’s important to them and less about allocating space among departments.
For example, take Mother’s Day – they started with one page in the circular several weeks in advance, and as the day approached they introduced other themes, including treating mom to breakfast in bed. Eventually several pages of the circular were devoted to it. We saw a similar build-up to Father’s Day.
Aldi is becoming more and more sophisticated as a total store merchandising team, as opposed to the old-style grocery merchandising, and it’s having a profound impact. It doesn’t look like they are organized the way that grocery stores usually are, with their silos of meat departments, produce departments, grocery departments, wine and beer departments, etc. The traditional supermarket circular is all about dividing up the space between departments – look through Aldi’s flyer, and you’ll see they don’t follow those “rules.”
5. Strong communications with shoppers
Aldi is really good at communicating and connecting with shoppers. Plus, they’re not constrained by the departmental silos. They can orchestrate across the entire store without worrying about whether the deli department will support the idea or the produce person will give the additional space. Total store merchandising is something that traditional retailers are trying to do, but the territorial nature of the departments limits what they can achieve.
When you visit as many stores as we have in the past weeks, you can see the different ways that retailers use their stores to talk to customers and Aldi stands out as doing a really effective job. Throughout the entire Aldi shopping experience there are messages that explain what Aldi is doing that is of benefit to their shoppers. In contrast, some retailers talk about item and price and that’s all. Others explain how they do what they do (like grinding beef every 3 hours.
Aldi is also focusing on on-trend products. For example, they’re carving out a strong position around the theme of feel good and healthy, focusing on fresh, sustainability, organics, no trans fats, no MSG, no hormones, no artificial colorings. They are using their advertising, signage and even a free lifestyle magazine with healthy recipes and articles by dieticians to give their customers info they might otherwise get from a Whole Foods, Stop & Shop, or Lunds & Byerlys.
What’s ahead? Disruption and more fragmentation on the price dimension
- In addition to the changes discussed above, Aldi is also attracting more shoppers and more spending by expanding the number of stores, accepting credit/debit cards, and even selling bags to those who want them.
- While Amazon gets credit as a significant disruptor, Aldi is creating and will continue to create potentially even more disruption by blending their highly efficient cost control strategies with some softer selling and merchandising techniques.
- When the opening price points in a market are owned by Aldi, it leaves everyone else in the market trying to figure out how to respond.
This is why it is important to mind the gap between the old Aldi and the new Aldi. Disruption in the grocery industry is coming from many directions – and it includes Aldi as well as Amazon.
This Q&A was originally posted as a brickmeetsclick.com. blog on March 29, 2016.
I recently had the opportunity to be interviewed by Bill Bishop of Brick Meets Click. We had a wide-ranging conversation that explored formulas for success, where to start a strategic approach, why food retailers need to challenge current practices, how to stay focused on profitability, and the importance of the balance sheet.
Here’s the interview, I hope you’ll come away with a solid framework for the transition to omnichannel retailing.
BISHOP: How has your thinking on what it takes to be successful in food retailing evolved? How do you approach that question today?
BOLTON: I’ve been a big reader, especially in management books and management theory. I think we’ve all heard of or read In Search of Excellence and the Good to Great books. As I was recovering from flunking my retirement, I learned about the book What Really Works, written by Nitin Nohria, who is now currently the dean of the Harvard Business School, and William Joyce and Bruce Robertson.
They came up with a study of 200 different management practices and then studied these practices over ten years at 160 companies. What they developed was basically a formula, a very simple formula: four plus two equals success. I’ve used that article and this criteria to look at and evaluate companies not only in the retail and supermarket sectors, but also other companies and organizations.
BISHOP: What does four plus two equals success mean?
BOLTON: Nohria, Joyce, and Robertson identified eight key management practices from the successful companies – four primary practices and four secondary practices. The four primary practices are strategy, execution, culture and structure, and the four secondary practices are talent (which I like to personalize as “people”), innovation, leadership, and mergers and partnerships.
The premise is that successful companies excel at all four primary practices and two of the secondary practices. Hence, four plus two equals success.
BISHOP: So if you found yourself sitting with a management team that needed to come up with an entirely new strategic approach, where would you start?
BOLTON: I always start with the customer. I believe that’s what you build your strategy and your formula around. The key is to listen to the customer – to not be defensive, and to listen in various forms. I had a vice president that sat down at the customer service desk for two days and listened to the calls from the customers. It was very, very revealing.
Listen through your market research, get regular updates, quarterly updates. Listen to the customer in relation to specific companies, and listen to the customer in general. There’s a lot of talk about Millennials these days, but I believe there are more generations that you need to listen to.
The other key is to observe the customer. One of the practices I’ve done over the years is to just stand in the store for a couple of hours and watch what the customers do. See if the research correlates to what the customer is doing.
In e-commerce you have to analyze the trends, because you obviously can’t observe the customer, but you can see what is going on in the trends and the data. The point is the same – that you really have to understand the customer. Translate the data into information, and then translate the information into knowledge.
That’s the fun part of being a retailer – when you really understand the customer, you can anticipate their needs and you will be successful.
BISHOP: What else do you need to focus on as you translate knowledge into action?
BOLTON: A retailer has to continuously challenge current practices and procedures. It’s really good to be disruptive in your thinking. I encourage people, especially in the supermarket industry, to embrace new thinking.
For example, I think the process of the weekly circular has to be understood or challenged by supermarket operators today. Is it effective? It is worth it? Consider print and social media and look at how your messages get out.
Category management was in vogue 25 years ago, but what is category management today? We need to start to challenge and understand those assumptions. When is it time to make changes to category management?
The supply chain is the other area I would look at. I was struck by the recent announcement that UPS is investing in a start-up called Deliv (based out of San Francisco) because they want to understand the last mile – and especially for e-commerce.
How does the supply chain work for supermarkets? And can we take another look at that?
- There’s a company called Modalyst; it’s an e-commerce drop shipper and they basically eliminate the risk of inventory.
- An American retailer, a merchandiser actually, went on a trip to India. It was very interesting to see that a prominent retailer would be stretching their minds and looking at the practices in India.
- I encourage people to look again at Target. They are doing an awful lot of different thinking, especially in food, and especially in fulfillment of their e-commerce sites.
- Just recently there’s been a turnaround at JCPenney, and they’re looking at their inventory terms and their supply chain.
Overall, I think we can learn an awful lot as a supermarket industry by focusing on other industries and viewing the world as a materials handler would, and thinking about reverse engineering and employing industrial engineers. Consider that a checker is very similar in an operation to a factory work station. These are the kinds of places where we need to look for competitive advantage.
BISHOP: How do you factor competition into this process?
BOLTON: I always like competition. I think when a team is developing the strategy, the one big question that they need to ask is: What is the enterprise’s sustainable competitive advantage? They have to lead with that advantage, to demonstrate that advantage, and act as a leader. Even though they might not be the biggest in terms of market share, they need to be biggest in terms of ideas and thoughts, and execute the strategy.
At the same time, however, they should not ignore the competition – which includes any format, whether it’s a supermarket, food store, restaurant, or convenience store. We’ve already been talking about e-commerce. Even health clubs are a threat to share of wallet; they are where a lot of disposable income goes, so I think we need to think about them in terms of competition.
BISHOP: In addition to doing all these things, how do you stay focused on profitability?
BOLTON: I think of this in terms of creating enterprise value. Whether it’s retail or e-commerce, the basic goal is not only to drive sales but to understand sales.
- In retail, analyze your trips to the store – per ticket or per capita.
- In e-commerce, understand it’s going to be a different set of analysis – where the clicks are as opposed to the trips to the store, the size of the order and the complexity of the order or the simplification of the order.
BISHOP: Some retailers are extraordinarily effective at driving the operation statement to ensure that the mix of sales is as rich as it can be, but frequently that depth of expertise doesn’t extend to the balance sheet. Is there a need to ensure that both financial instruments are fine tuned?
BOLTON: A lot of people with my experience, and people coming up in the industry too, are very knowledgeable on the income statement. The balance sheet, however, is left to accountants who are financial people. I think the balance sheet should be introduced earlier in a lot of operating people’s careers.
When you think in terms of sales and productivity, every cost is manageable, and if people are oriented to the income statement as opposed to the balance sheet, some costs are hidden.
Occupancy, for example. A colleague of mine said that typically we just look at fixed cost and variable expenses – but when you think about occupancy as a cost, you are disruptive in your thinking, and challenging your thinking. I ran across a company in the UK called We Are Popup (it’s now also in NYC). They’re putting different retail concepts into existing retailers and then evaluating them as opposed to committing to a five- or ten-year lease. What an interesting approach to productivity and managing expense.
The cost of capital is also hidden if you focus only on the income statement. If you go out to borrow money, you have to factor that cost of capital into your balance sheet. I’m a believer in self-funding, so I think retained earnings over the years are important.
How you make retail profitable is a broader question that has to include these balance sheet components as well as four plus two thinking.
For ecommerce and omni-channel, just putting a weekly ad on the website won’t do it. You have to think differently about both the enterprise and your investment. I would say you have to develop a new four plus two formula for success.