Brick Meets Click Guest Blog: What if a hard discounter like Aldi enters online grocery in the US?

It’s clear that the growing number of online grocery options available to US consumers will only further fragment the market for grocery spending, but will the growth of online shopping also accelerate fundamental changes in the competitive marketplace? What if small, high productivity hard-discount retailers like Aldi could use online grocery in the US to generate additional growth?

The better question is why not?  

What we know:

• The world’s two leading hard discounters are well resourced, and they are projected to grow by more than 40% by 2020. Schwartz group (which owns Lidl) is the third-largest food retailer in the world; Aldi is seventh-largest.

• Last month, Aldi UK began selling wine online by the case (which it’s been doing since 2013 in Australia). Many believe this will increase their appeal to middle income shoppers and function as an on-ramp for other grocery products.  Lidl may make a similar move.

• Both Aldi and Lidl are adding more SKUs in fresh food to broaden their appeal while maintaining strong price advantage for their own-brand products (30% to 50% vs. competitive branded products).

• Aldi has over 1,500 stores across 32 states in the US, and plans to increase its store count to 1,800 in the near future. Lidl will open stores in the US by 2018, and has just submitted plans for an Eason, PA store to be located across from an Aldi.

What would it look like?

On the surface, online grocery services don’t fit the hard discount business model, but there’s a scenario in which these aggressive competitors could leverage their appeal to advantage. Here’s what that might look like:

Hard discounters decide to leverage the appeal of their low price reputation for high quality own-brand products, by building a network of dark stores and pickup locations for online grocery orders in markets where they have significant penetration. 

They capture a significant number of consumers who are willing to swap traditional brands for 30% to 50% savings and guaranteed product satisfaction, and who want to enjoy the added convenience of online shopping for a small service fee ($3.50 to $4.99).

How could it work?

Counter to conventional wisdom, I offer up that this can be a viable business model for hard discounters because: 

1. The dark stores would inventory less than 2,000 items, and they would be set up to operate with order selection productivity and labor efficiency that approaches the efficiency of Aldi’s US stores.
2. Orders and payment would be handled via mobile app.
3. Some pickup costs would shift to consumers. For instance: Customers would carry the assembled orders from the store to their vehicles and pay a deposit for the reusable containers used to transport orders.
4. Greater participation by customers who otherwise wouldn’t buy from these outlets would drive higher profit contribution from incremental sales.

Implications – unfortunately, not a win/win

In this picture, hard discounters would benefit by leveraging their brand equity for value shopping across a broader segment of the market and creating incremental growth opportunities for branded product suppliers who can operate within the hard discount model.

Nearby grocery retailers, however, could experience shrinking sales potential as more dollars shifted to the hard discounters. These retailers would be challenged with some hard choices: Expand their own low-price product offering to narrow the price gap, and/or capture sales from other retailers to maintain the profitability of existing stores, and finally, where necessary, close units that weren’t profitable.

Bill Bishop is Chief Architect at Brick Meets Click. Bill has been recognized as one of the ten thought and research leaders “driving the future of consumer intelligence” by American Demographics Magazine.  He’s worked on food retailing since 1971 and led major studies on new store format, pricing strategy, direct store delivery, and loyalty marketing.