The Grocery Wars: How to build immunity against low-cost competitors

BY Jeff Campbell

The grocery wars have been on for some time, but things are heating up. Last week, discount grocer Aldi announced plans to open 900 additional stores in the U.S., while low-cost grocery store Lidl made its stateside debut. Highlighting the damage this could inflict on incumbent grocery players, a recent report from Oliver Wyman shows that 39% of respondents, all based in the geographies where Lidl is opening its first U.S. stores, said they would shop at Lidl once a week or more in the future — even though they have never before stepped into one of their stores.

Aldi's expansion and the entrance of Lidl into the U.S. market pose a threat not only to traditional grocers, but other retailers with grocery offerings, including big-box retailers and convenience stores. While these players have already been eating into the market share of traditional grocery stores, offering shoppers the opportunity to split their trips and pick up food essentials while shopping for other items, even they are not safe from the tantalizingly low prices of the encroaching discount grocers.

Many grocers have been proactively refining their business strategies for some time in order to remain competitive. It is more important now than ever that they continue to innovate, trying out new programs on a smaller scale and investing in those that prove to be the most successful.

So how can current food retailers build immunity against these new, low-cost grocery players? As incumbent grocery chains brainstorm new ideas across their businesses, here are three key strategies they can leverage now to help strengthen their defenses against these latest competitive incursions:

• Quality private labels

While many grocers – and other retailers that sell food, like Amazon– have developed their own private label offerings, a major draw of Aldi and Lidl is their wide of assortment of affordable, private label products. As other grocery players roll out private label offerings of their own, it is no longer enough to ensure they are low cost. They must invest in bolstering their quality and taste, particularly as a response to consumer demand for healthier and fresher food options.

One approach grocers can take to ensure they deliver the right private label assortment to the right markets and consumers is to trial variations of different offerings in different stores.

For example, consider a grocer that wanted to launch a line of private label organic offerings. By deploying these items in some stores and not others, the chain could determine which items sell best, where, and roll them out only in the stores where they will be most profitable. This approach would enable the grocer to invest intelligently, and only in the high-quality private label items that are most in-demand, and avoid expensive new product introductions that could fail.

• Enhanced delivery options

With increased competition from online food retailers and third party grocery delivery services, leading traditional grocers across the industry have already been actively establishing or enhancing their delivery programs. This response is especially valuable as it allows grocers to position themselves closer to the consumer by enabling them to stock up on groceries without even leaving their homes.

The key to effectively leveraging a delivery program as a differentiator against Aldi and Lidl involves two key considerations: First, carefully managing delivery fees; and second, rolling out the program in territories where it is viable.

Determining the right threshold for delivery fees – high enough that the grocer is not losing money on its delivery service, without being so high that the expense deters consumers from ordering – can also be solved by testing different delivery charge amounts. By deploying different iterations of the delivery program with different levels of delivery fees, grocers can pinpoint which number is right.

Similarly, a one-size fits all delivery program across the store network is likely to be too expensive. Testing the program in some areas and not others will help the grocer figure out where it is viable.

• Bulk merchandise and membership

One group of consumers that low-cost grocers may have more difficulty wooing away are those that like to buy in bulk. Incumbent grocery players can capitalize on this consumer preference in several ways.

First, they can offer a wider assortment of bulk merchandise, trialing different arrays of items in different locations to determine the right offerings – and the right sizes – for different markets. And in the fashion of members-only retailers, grocery chains should also consider membership club and loyalty strategies to reward consumers for purchasing in high volumes. More broadly, now is the time for grocers and retailers with food offerings to test the introduction of a loyalty program, if they have not already.

As the industry landscape becomes even more competitive and margins grow even tighter with the arrival of Lidl and expansion of Aldi, all food retailers must capitalize on and refine every strategy in their innovation toolbox to build their immunity and defend themselves against the low-cost grocery threat. In the grocery war, those that quickly and strategically invest in the right new programs and avoid the temptation of making quick but unprofitable decisions will be the victors.

Jeff Campbell is a VP at Applied Predictive Technologies (APT), a provider of business analytics software.


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