Counter the discounter
Elsevier Food International Vol.8, No.1, February 2005
Pascal Kuipers
Grocery retailers in the US are increasingly under pressure to find the right answers to the question of how to compete with efficient, price-aggressive formats such as supercentres, wholesale clubs, limited-assortment stores and dollar stores. This is a topical question not only in the US but also in Europe, where similar challenging formats are named differently: compact hypermarkets and hard discounters.
The challengers are commonly named ‘value retailers’ and have one thing in common: an efficient, low-cost operation that enables them to be price aggressive without hurting their operational margin. The challenged are the ‘traditional retailers’, or the ‘mainstream companies’, and have the opposite in common. They depend on capital-intensive formats such as supermarkets, superstores and large hypermarkets. Often, they have high debt levels resulting from mergers and acquisitions in the recent past. This is an additional burden when seeking the right answers to counter the discount challenge.
Transforming competition
“Many mainstream companies now face steep cost disadvantages and lack the product and service superiority that once set them apart from low priced competitors,” reads an article in The McKinsey Quarterly number 1 (2004). “Value players change the nature of competition by transforming consumer attitudes about trade offs between price and quality.”
“Customers perceive that discount retailers provide better value than traditional formats, and price image is a crucial part of that view,” a recent article in another consultant’s publication, Mercer Management Journal, reads. “These retailers have an everyday-low-pricing strategy, consistently offering products and services of comparable quality and scope at prices far below of that of traditional retailing formats.”
With their efficient and low-cost business models, discounters are closing the quality gap, urging traditional retailers to reposition themselves. According to McKinsey research, consumers in some US markets think that Wal-Mart has ‘comparable-quality fresh foods’ and ‘good store brands’. Increasingly lacking such USPs, traditional retailers must be anxious for new ideas while streamlining their organisations to optimise cost efficiency.
The latter is about divesting underperforming and non-core assets, cutting jobs and allocating investments more efficiently (see 'keeping cost in line' in the 'routes to counter the discounter' below). New, differentiating ideas however, are not so easy to find.
Transforming positioning
“Differentiation becomes less about the abstract goal of rising above competitive clutter and more about identifying opportunities left open by the value players’ business models,” reads McKinsey’s article, referring to Walgreens’ focus on convenience across all elements of its business (easy parking, and in-store an easy shopping layout) and Tesco leveraging its customer relationships by moving into new areas such as insurance, services, telecommunications, travel and utilities and energy.
Delhaize USA’s newly developed Bloom concept and Bristol Farms – an 11-store gourmet chain in California, acquired by Albertsons – are exceptions to this rule that due to the discounter’s strengths only their weaknesses leave room for traditional retailers’ differentiation activities.
Transforming profitability
Apart from cutting costs and searching for differentiation, there is another way to counter the discount challenge: transforming profitability without transforming the enterprise, infrastructure or underlying strategy. McKinsey calls this effective pricing (“waging a transaction-by-transaction perception battle to win over consumers predisposed to believe that value-oriented competitors are always cheaper”) while Mercer Management Consultants labels this as value engineering (“reallocating investments toward those areas with the greatest return, both financially and in terms of value perception”).
According to Mercer, an EDLP-retailer invests in value through a single lever: price. Other factors, however, also play a role in the value perception of any offer to consumers, such as promotions, marketing messages, store outfit and the range architecture. Mercer says that certain categories are highly influential in driving value perception, with products that are frequently purchased, directly comparable and important to the consumer or the buying occasion (e.g. instance toiletries and hair care products in a drug store). These ranges should include lower-end, entry-level products to support a positive value perception. French retailers in particular have been active in effectively managing prices (see ‘managing prices effectively’ in the 'routes to counter the discounter' below), especially by developing hybrid formats such as discount supermarkets and discount hypermarkets.
Routes to counter the discounter
Keeping costs in line
• In April 2004, US retailer Winn-Dixie decided to divest 156 stores that are either outside the retailer’s ‘designated market areas’ or underperforming. It also closed or sold four distribution centres and divested several of its manufacturing operations. In October 2004, Winn-Dixie said it had reduced its workforce by 4,700 positions. The target is a reduction of 10,000 positions.
• In December 2003, Carrefour said it would continue its programme of divesting non-core assets by selling 20 shopping malls in five countries (France, Spain, Italy, Greece, Portugal) for a total amount of €230 million. Carrefour also disposed of its subsidiary in Chile (seven hypermarkets), which was sold for €100 million (over 60 per cent of estimated 2004 sales).
• In October 2004, UK retailer Sainsbury’s announced to cut the number of HQ staff by 750, while hiring 3,000 store employees to improve customer service.
• In May and October 2004, French retailer Auchan opened a second and a third ‘Les Halles d’Auchan’. This is a discount-oriented small hypermarket that has been tested by Auchan since the first store opening in May 1999. Kaufland – the rapidly expanding low-cost compact hypermarket concept of German retailer Schwarz – may well have inspired Auchan. Similar compact hypers have been opened by Tesco and Ahold in central and eastern Europe.
Finding sources of differentiation
• In May 2004, Food Lion in the US unveiled Bloom, A Food Lion Market. This is a new retail brand that emphasises prepared foods, convenience items and a hassle-free shopping experience. According to parent company Delhaize, Group Bloom is “a non-traditional format” that offers a full range of groceries at great prices, additional services and technology-based shopping ease.
• In December 2004, French retailer Intermarché opened a new generation of its supermarket concept, with a new store design, a dedicated area for ‘green products’, expanded non-food ranges, an in-store restaurant and services like photocopying, photo-processing and ticket sales.
• In September 2004, US retailer Albertsons announced the acquisition of Bristol Farms. This 11-store gourmet retailer in California will become an independently managed subsidiary. On this occasion Albertsons’ president and CEO Larry Johnston referred to “[…] our dedication to diversify into new formats that can accelerate growth, tap into new customer segments and maximise return on invested capital.”
• In October 2004, US retailer Winn-Dixies said it had completed store upgrades of 28 stores out of the 92 stores targeted in its lead-market in Miami, Florida. Winn-Dixie will be repositioned as a neighbourhood grocer competing on a combination of convenience, quality and price.
Managing prices effectively
• In November 2004, Kroger’s CEO David B. Dillon stated that the retailer’s costs savings would be partially re-invested in lower prices. Other beneficiaries from cost savings he mentioned are service, variety and assortment (private labels and perishables).
• In September 2004, the French trade publication LSA reported that Carrefour is discretely testing discount hypermarkets with reduced numbers of items and employees and a dominance of private label – especially Carrefour’s Number 1 value line – on its shelves.
• In October 2003, French retailer Auchan opened ‘Au Marché Vrac’ (‘In the Bulk Market’). This is a ‘neighbourhood hard discount store’ measuring less than 400 m² and therefore not subject to legislation. Auchan has been testing this concept as a separate in-store department of its hypermarkets since September 2002.
• In September 2004, Carrefour started to test a discount concept of its supermarket banner Champion. This is done in-store, in one of its Champion Hyper Superstores. The discount format of Champion will have a reduced assortment of 9,000 items.
• In September 2004, French retailer Casino converted two of its Casino supermarkets into a Discount Casino test format. According to M+M Planet Retail, these 800 m² stores feature branded products, Casino own label and the retailer’s economy products lines.
Other…
• In December 2003, Carrefour did a sale and lease back of 14 new hypermarkets, raising €355mn.
• In July 2004, Sir Peter Davis, Sainsbury’s chief executive, was the victim of a shareholder revolt after he received £2.3 million performance bonus for his efforts. He was succeeded by Justin King (former executive at Asda and Marks & Spencer) who, in November 2004, unfolded a turnaround strategy costing £550 million.
• In December 2004, Winn-Dixie announced the replacement – effective immediately – of Frank Lazaran by Peter L. Lynch (former president and COO of Albertsons) as the company’s new president and CEO.
• In November 2004, US retailers Kmart and Sears announced their intention to merge. This has been frowned upon by industry observers who scarcely believe that a healthy company could emerge from this ‘merger of the ill’.
In the late 1990's and the first years of this decade, retailers drastically increased their debt levels, mainly due to the M&A frenzy of these years. This led to an increase of net interest expenses which are affordable as interest levels are still at a record low. But what if interest levels go up? This is an unhealthy situation, with discounters eroding traditional retailers' margins. Therefore reducing debt levels has become a key interest for retailers.
.jpg)
