What Traditional Retailers
Can Learn from the Discounters
The secret is in lean supply chains
For years, discount retailers have outperformed traditional retailers,
culminating last year in a 16.2 percent market share in EU-27
grocery retailing.1 This trend is expected to continue for the foreseeable future. What do discount retailers have that traditional retailers
don’t? For one thing, lean supply chains. Discount retailers know
how to deliver the goods — literally — and have won a competitive
advantage because of it. Traditional retailers can share in discounters’
success by replicating some key elements of supply chain efficiency.
The discount channel has been successful throughout Europe, dominated
by German players such as Aldi (Süd
and Nord), Lidl, Netto and Penny.
Analysts expect discounters to continue
outperforming traditional channels in
grocery retailing and to increase their
market share from 16.2 percent in 2010
to 17.4 percent by 2014 (see figure 1
on the following page). With that in
mind, discounters’ success is highly
dependent on each country’s culture of
consumer spending, historic footprint
and acceptance of the discount scene.
Today, the boundaries between
discount and non-discount are blurring
as both sides apply each other’s best
strategies. For example, traditional
retailers are taking a page from the
discounters’ playbook by rethinking
their ever-expanding assortments, which
not only put off customers frustrated by
too much choice and cannibalize existing products, but also reduce inventory
turnover, increase stock-out risks and
1
Refers to 27 countries in the European Union.
optimize store operations. Meanwhile, discounters are copying some
traditional retail practices, gradually
expanding their assortments within traditional categories to include “green,”
fresh meat and fresh bakery products,
while also developing offerings in new
segments such as travel, photo processing and pre-paid mobile phone cards
(see figure 2 on the following page).
Five Elements of the
Discounter Advantage
Discounters attribute their strong
performance to a highly efficient
supply chain with both structural and
non-structural advantages. Structural
advantages include a focused assortment and standardized outlets, which
culminate in high-density networks.
Non-structural advantages include
an efficient replenishment process,
a consistent no-frills approach, and
smart innovations and investments.
The following offers details about each.
Discount retailers
know how to
deliver the goods—
literally. Traditional
retailers can share
in discounters’
success by replicating some key
elements of supply
chain efficiency.
FIGURE 1: Development of discount format in EU-27
14.8%
15.8%
16.2%
16.8%
per SKU, and smaller procurement
and logistics teams. In- and outbound logistics are characterized by
the likelihood of full truckloads,
more cross-docking and full pallets,
and the need for fewer delivery windows. In distribution, commissioning
and re-palleting are less necessary,
thus reducing the many complexities in storage and warehouse management. The in-store advantages
include increased productivity of
workers (through more efficient stocking methods), better use of space as
inventory turns faster, and less need
for backroom storage.
Standardized outlets. All top
discounters have grown significantly
over the past two decades, and that
growth has led to more dense distribution networks and, in turn, shorter
distances for store replenishment.
Discounters’ stores are standardized
not only in neighboring markets, but
worldwide, which allows for efficient
in-store processes.
For example, Aldi and Lidl,
Europe’s top two discounters, have
17.4%
191,521
169,768
150,730
143,295
124,802
26,018
23,573
2006
2008
2010
Discount sales (euro millions)
34,744
31,687
28,752
2012F
Sales
S
space (thousand m2)
2014F
Discount share (total %)
Sources: Planet Retail; A.T. Kearney analysis
Focused assortment. Limiting the
number of SKUs is the best way
to maintain an efficient supply chain—
and is a key feature of the discount
model. Unlike traditional supermarkets
with an average product range of 10,000
food and non-food items, or hypermarkets with as many as 50,000 items,
discounters offer between 1,000 and
3,000 products. And they provide
a reasonable assortment—especially
in daily, fast-moving categories—with
about 80 percent of their sales from
private labels compared with usually
less than 20 percent in traditional stores.
There are several advantages to
this strategy. Within production and
purchasing, the biggest advantages are
lower manufacturing costs due to
larger volumes, more buying power
FIGURE 2: Range extensions: Examples of two discounters
Fresh
meat
LIDL
Fresh
poultry
p
y
1999
Fresh
milk
ALDI
1
2000
2001
Ready-toserve salad,
incontinence
products
Wellness
products
2002
B
Bio produc
products
(milk, potatoes)
Rail tickets
(”Lidl Ticket”)
2003
2004
Online
retail
2005
2006
Fresh
sh mea
meat,
tobacco1
Bio products
(tea, cheese,
margarine)
Aldi Süd (Aldi Nord sells tobacco since split of two companies)
2007
2008
Holiday
oliday
packages
Photos, pre-paid
phone cards
(”Aldi Talk”)
Newspapers,
magazines
In store
bake-offs
2009
2010
2011
Online
retail
In store
bake-offs
Source: A.T. Kearney analysis
unique supply-chain characteristics.
Aldi (Süd and Nord) serves its nearly
8,000 stores through 125 regional
headquarters, each with one regional
distribution center. Every distribution
center replenishes about 60 stores,
mostly in-house; however, every region
makes its own make-or-buy decisions.
Lidl’s supply-chain infrastructure is
similarly organized with roughly 105
regional distribution centers supplying 10,000 stores; transportation is
usually outsourced.
Efficient replenishment. Efficiency
is the focal point for discounters’
package-design and replenishment
processes. Shelf-ready packaging (SRP)
reduces handling and waste and has
a positive impact on branding—nearly
100 percent of discounters’ products
use it, compared with only about 40
percent of non-discounters’. All new
suppliers offer SRP as a base requirement. Using mixed cases and pallets
with different product variants in
a single case allows for a wider product
range without increasing handling
costs or shelf space. And a new trend is
emerging: cross-category “mixing,”
such as salad dressing and vanilla sauce.
Product presentation also is highly
logistics driven. Products are often
displayed on the floor on pallets and
retail-ready; half-sized pallets are used
to further optimize floor space.
Improving presentation and replenishment can lead to significant cost savings
because shelf-refill costs differ depending on product presentation and retail
formats. With canned foods, for example, shelf-refill costs are about 3 percent
of net sales for single article displays,
about 2 percent for shelf-ready packaging, and about 1 percent for pallet
displays (see figure 3).
Unlike traditional supermarkets with
an average of 10,000 food and non-food
products, or hypermarkets with 50,000,
discounters offer just 1,000 to 3,000 items.
Consistent no-frills approach.
Discounters apply their no-frills
approach throughout the entire supply
chain — often against conventional
wisdom. In warehousing, for example,
the discounters’ approach contradicts
common practices of traditional retailers. Discounters build large distribution centers with lots of floor space
and loading bays relative to volume.
Although this ties up capital and
requires longer distances for picking,
it eliminates waiting times and the
need for detailed timing of deliveries. It
also leaves room for expansion without
jeopardizing efficiency. And discounters’
single-story distribution centers help
avoid pallet-stacking, which reduces
complexity and increases safety. The
large floor space allows for the use of
specially designed forklifts that can
take three pallets at a time. This is contrary to the traditional retailer’s view—
that building high is more cost efficient
and that no stacking implies more
time to replace empty pallets.
FIGURE 3: Comparison of retail channel performance
Sales density
(€ per sqm)
Personnel cost
(% of sales)
Real estate cost
(% of sales)
3,670
13.7
6.5
5,030
Example: Germany
7,300
6.8
6.1
4.3
3.9
36
Inventory
turnover
13
Supermarkets
Sources: EHI Retail Institute; A.T. Kearney analysis
22
Soft discount
Hard discount
Additionally, discounters integrate
logistics, store operations and sales,
with only one person responsible for
stores’ logistics and bottom-lines for
a whole region, and end-to-end supplychain integration. Traditional retailers,
on the other hand, argue that store
operations require managers with totally
different skill sets than distributioncenter managers.
Smart innovations and investments. Contrary to popular belief,
discounters use innovative concepts
to streamline store operations, warehousing and distribution. Discounters
refrain from introducing new features
and product ranges that require special
investment. Once an investment decision is made, however, they rapidly
pursue a professional approach.
Multi-labeling and multi-trip produce
trays are examples. Multi-labeling
ensures an optimal check-out by forcing suppliers to print several EAN8
bar codes on private-label packaging.
Certain discounters invested heavily
Discounters apply
their no-frills
approach throughout the entire supply
chain—often against
conventional wisdom.
in reusable trays for fresh products,
replacing one-way cardboard boxes.
In warehousing, a scenario of highversus low-tech investments and innovations is unfolding. Lidl, for example,
is selectively installing fully automated
technology for the picking and packing of all ambient food in distribution
centers. Aldi is avoiding potentially
painful—and costly—injuries to warehouse workers by using ergonomics.
In one instance, workers’ wrists are
connected to cranes to help them lift
large packages.
Adopting Discounter
Efficiencies
Large discounters’ supply chains
are significantly more cost-efficient
than those of most traditional retailers,
particularly in their main markets.
A major share of this efficiency advantage is based on built-in structural differences, so it will be difficult, if not
impossible, for traditional retailers to
close the gap fully. Nevertheless, methods used by discounters to increase
supply-chain efficiency can be a source
of inspiration to traditional retailers.
In adopting discounter efficiencies, however, traditional retailers must
be careful not to blur the differences.
The best competitive strategy traditional retailers have is differentiation
and upgrading—so lean supply-chain
principles should be applied in areas
that won’t be obvious to customers.
Authors
Mirko Warschun is a partner in the consumer products and retail practice. Based in the Munich office, he can be reached
at [email protected].
Peter Schmidt is a consultant in the Munich office. He can be reached at [email protected].
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