THE PHENOMENON OF HARD DISCOUNT

What do Lidl, Aldi, Biedronka, and Trader Joe's have in common? They are all examples of hard discount, a concept in the food retail industry that offers quality products at low prices.

According to a recent study by Kantar Worldpanel, hard discount grew an impressive 4.1% in Portugal in 2022, while the total Portuguese market grew by only 1.4%. But how do these players manage to compete with industry giants and begin to win over consumer preferences? Let's delve deeper into the key characteristics and advantages of this business model that is transforming the retail world.

Competitive Prices for Private Label Products

One of the most distinguishing characteristics of hard discount is the competitiveness of its prices. The products offered by these chains are generally more affordable than those of their competitors. Several factors contribute to this difference, but one of the most crucial is the limited assortment of products.

Even with a substantially smaller market share compared to the industry leaders, by maintaining a limited selection of items, these retailers can, as a result, achieve a higher volume of sales per SKU (Stock Keeping Unit). This, in turn, enables them to negotiate better purchase conditions with suppliers. This benefit is then passed on to end customers in the form of lower prices, making hard discount an attractive choice for consumers' wallets.

Furthermore, a hard discount chain typically operates with a significantly lower gross margin, around 18% to 20%, compared to the 26% to 28% of traditional chains. However, this significant loss in gross margin is offset by cost savings in store operations and the central structure (salaries, rents, logistics, marketing, among others), something that will be further explored later. This allows them to achieve higher EBITDA figures, even while working with lower prices!

Credible Private Label Brand as a Loyalty Key

The emphasis on private label brands is another distinctive feature of hard discount, representing in many cases over 90% of sales for these retailers (compared to an average variation of 10% to 30% in the traditional channel).

The private label products of these chains are typically perceived as having superior quality compared to competitors, even with lower prices. This results in strong customer loyalty, as consumers come to trust the private label of these chains. Furthermore, the limited product selection allows for an enhanced focus on quality and consistency, building a solid reputation over time.

Operational Efficiency Reduces Costs and Prices

Operational simplicity is a fundamental characteristic of the hard discount model. This simplicity translates into a considerably lower cost structure compared to other supermarket models. With less complexity and fewer staff, these retailers can maintain low prices.

Operational efficiency is also reflected in inventory management and the optimization of the supply chain, allowing for a reduction in waste and additional costs throughout the chain.

In addition, hard discount chains invest significantly less than their competitors in marketing and advertising activities.

Simple and Quick Shopping Experience

From the customer's perspective, the shopping experience in the hard discount format is simple, fast, and intuitive. Stores are organized efficiently, allowing consumers to easily find what they need. This direct approach attracts a large segment of customers who want to shop quickly and efficiently, without the distractions of a traditional supermarket. And don't think that these stores are cold and outdated because most of these players, such as Lidl and Aldi, have been renovating and remodeling their stores to make the customer's journey even more comfortable and enjoyable.

However, those who think that these stores offer the same products day after day are mistaken. To introduce new items and not offer the same products to customers all the time, hard discount players invest heavily in innovation. This may involve launching new product categories, introducing new private label items, or even collaborating with new suppliers. These initiatives keep the product offerings fresh and appealing to customers, all while maintaining affordable prices.

The Response of Traditional Players Will Shape the Future of Retail

Hard discount is a retail concept that continues to gain ground worldwide, thanks to its proven ability to offer quality products at affordable prices. This business model is based on factors such as a limited assortment, a strong private label brand, operational efficiency, a simplified shopping experience, and a continuous commitment to innovation.

However, the question that remains is whether hard discount can maintain its competitive advantage in the future and how other players will adapt to this new reality. The answer to this question will shape the landscape of the food retail industry in the coming years, as consumers continue to seek quality and savings in their shopping.