Supermarkets that lower prices as a means to compete against hard discounters such as Aldi and Lidl are fighting a losing battle that will erode their profits. Instead, retailers should leverage their weekly specials and loyalty data to provide deeper discounts on items their shoppers care about most, according to Bill Bishop, chief architect of Brick Meets Click, the Barrington, Ill.-based consultancy.
“Supermarkets must stop lowering their prices and eroding margins in response to hard discounters—it’s a price battle they just can’t win,” Bishop said.
Bishop presented this and other tips to compete with discounters at the National Grocers Association Show in San Diego last month. His presentation highlighted the unique advantages of players in the hard-discount channel, including highly productive supply chains, low operating costs and a reliance on private brands as well as a new emphasis on premium offerings that are helping to build profits.
Aldi’s Specially Selected line, for example, typically carries twice the penny profit per ounce as its standard offering, Bishop said.
This approach supports pricing 30% to 40% below the regular price of branded products sold in supermarkets, but supermarkets are not configured to replicate the model, Bishop said, so lowering prices alone won’t overcome their disadvantages. However, he said, “Supermarkets already have the necessary tools in their arsenal in the form of loyalty data and the weekly circular. By combining them in the right way, they now have the opportunity to win the shopper and the sale—without destroying their margins and their profitability.”
Accompanying price data collected by Circular Logic LLC showed that a supermarket’s weekly advertised prices are frequently lower than everyday prices offered by Aldi or Lidl. For example, based on one week in February, a retailer in the Southeast had the price advantage for eight out of 11 front-page features based on comparable or same items.
Photograph by WGB Staff
Bishop recommended that grocers use loyalty data to identify items and prices that are most meaningful to shoppers, then “personalizing” the weekly ad though email communication with shoppers. This will help to improve a retailer’s price perception and generate more sales without costing margin.
Bishop called the circular “a secret weapon for supermarkets that’s an often overlooked source of price advantage.”
“Grocers have to adapt to Aldi and Lidl’s impact on pricing in the market, but lowering prices to fight the competition on general price reputation is counterproductive,” he added. “Shifting the goal to winning the individual shopper can be a much more effective and profitable strategy, and the good news is that now there’s a way to do it.”