Discount Retailers: Pile it High, Sell it Cheap

Discount Retailers: Pile it High, Sell it Cheap
June 2, 2017 Mark Richards

Discount Retailers: Pile it High, Sell it Cheap

Discount retailers in the UK have enjoyed rapid growth over recent years: but are there other reasons for their success apart from ‘pile it high and sell it cheap?’

Are you a grocer? In which case you will know that the last three months have been good to you. Despite rising prices – grocery inflation hit 2.9% for the period – sales have been up. The tills have been ringing – or beeping as they do these days…

In the 12 weeks to May 21st, grocery sales in the UK climbed 3.8% – the best performance from the tea bags, kitchen rolls and dog treats sector since September 2013.

All the UK’s ten leading grocery chains recorded growth in those 12 weeks: but the ‘big four’ – Tesco, Sainsbury’s, Asda and Morrisons – saw average sales rise by just 1.6%.

So where did the growth come from? The answer is simple: discount retailers like Aldi and Lidl.

Despite passing on the price rises to their customers, the two discount retailers had a near 20% increase in their sales in the three month period to May 21st. Aldi sales were up by 19.8% and Lidl by 18.3% – rates of growth which the major supermarket chains cannot even dream about.

Some of the growth has come from new store openings, but as Chris Hayward, consumer specialist at industry analysts Kantar Worldpanel, said,

“Their rapid growth is also the effect of more of the UK population shopping in more of their stores more often.”

Why are we increasingly shopping at Aldi and Lidl?

62% of the UK population shopped in Aldi or Lidl in the 12 weeks to May 21st – compared to just 58% in the same period in 2016. It is easy to think ‘that is only a 4% increase’ but it equates to 1.1m extra households visiting the stores.

Were they just drawn by the lower prices? Yes, that is a significant part of the reason.

“Consumers are starting to feel the pinch as prices continue to rise,” said Chris Hayward.

“The average household spent an extra £27 on groceries over the last 12 weeks: that may not sound like much, but if inflation continues at its current rate that would an extra £119 over the course of a year.”

However, it is not simply about lower prices. Both Aldi and Lidl have developed very successful own label brands which,  says Hayward,

“Play well to customers’ desire for value while also encouraging them to trade up to more expensive products.”

Maureen Hinton, global research director for research firm Conlumino suggests that there is another reason: the UK population has become better at shopping.

“Habits born out of necessity in the recession have now become entrenched,” she says. “People realise they don’t have to pay a lot to get good quality products.”

It is not just groceries…

It's not just about groceries

Another big success story has been the discount chain B&M Retail which has just announced plans to expand to 950 stores in the UK, up from the 850 it had originally aimed for.

Currently, the chain has 537 stores – mostly on retail parks – and the expansion could create up to 5,000 jobs. The chairman of B&M is Sir Terry Leahy, the former boss of Tesco: he said,

“[Our] offer resonates well with consumers during a period of economic uncertainty and profound structural change in retailing.”

We have written previously about the ‘profound structural change’ in retailing and the effect it is having on the national high street, but B&M – like Aldi and Lidl – is bucking that trend. Discounting, it seems, is the way to go. Simon Arora, CEO of B&M said,

“In an environment of rising prices, we think that consumers become ever more receptive to discount propositions.”

That appears to be a philosophy that works outside the UK as well: B&M plans to open 15 new stores in Germany this year, where it already has 75 outlets under its Jawoll brand.

The biggest discounter of them all

Of course, if you are as old as I am you will remember the days when every British high street had a Woolworth’s. Today many of those stores are home to Poundland, arguably the biggest discount retailers in the country and – despite its cheap and cheerful image – a very tightly managed business. According to former CEO Jim McCarthy, the chain sold a product at a loss just three times in his nine years in charge – with one of those being the 250m chocolate selection boxes they bought when ‘Woolies’ went bust.

Overall the discount retailers sector is growing at a much faster rate than the traditional supermarkets – 48% over the past five years compared to 33% for the ‘big four’ according to research from the Local Data Company, with the sector opening new shops twice as quickly as its traditional rivals.

The attitude of the customers

We have already quoted Maureen Hinton on our better shopping habits. She says customers also like the simple pricing of the discounters, compared to the “opaque” pricing of their bigger rivals.

“There is a genuine honesty with pound stores. People have discovered they can buy good stuff at low prices, so why pay more?”

Poundland’s own data backs this up. And far from being a shop just for those that are struggling to make ends meet it claims to have successfully converted the middle class, with a quarter of its customers now from the ‘AB’ demographic – the wealthier end of the population.

Psychology plays its part with discount retailers

It seems that psychology has also played its part in the success of the discount retailers. According to Dimitros Tsivrikos, a consumer psychologist at University College London, they are seen as a welcome outsider, challenging the status quo and more established rivals on behalf of the consumer. Given that we are in General Election week I cannot resist the obvious comparison with that other outsider challenging the status quo and the accepted way of doing things…

But there may be even more primitive forces at play in the success of Aldi, Lidl and Poundland. Low pricing, says, Tsivrikos,

“Creates a feeling of euphoria and excitement. We are hard-wired to feel euphoric. The hunter-gatherer instinct pushes us to buy, with our shopping driven by a fear of missing out.”

Hunter-gatherers? I thought was all about collecting berries and hunting wild animals? Oh well, I will see you at Aldi over the weekend: the mastodon steaks are on special offer…

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