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Discount Stores: Why We Love Them and What Retailers Can Learn

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Despite the competitive pricing of online retailers like Amazon, brick-and-mortar discount stores are asserting market dominance and growing rapidly. According to Barron’s, discounters, which have roughly 31% of the $811 billion grocery segment, garnered 40% of the growth in that sector. Top players responsible for this outsize share growth are Walmart, Costco, Aldi, and Kroger, but the trend is also promising for dollar store chains and other discount retailers.

Discounters’ current success is largely due to their agile approach and determination to evolve with the times. Boston Consulting Group (BCG) reports that discounters grew rapidly between 2000-2015 in many Western countries, a trend that continues even as household incomes have risen. Across the globe, discounters are slated to increase their number of store locations by 4.4% through 2020, compared to just 2.9% for mainstream supermarkets and 1.6% for superstores and hypermarkets.

Read on to learn what’s driving discounters’ success and how discount stores are continuing to innovate in a highly competitive landscape.

 

Private Label Products

Discount grocers have long been making their own private label goods to compete with big brands. Take, for instance, Trader Joe’s answer to Cheerios: Joe’s O’s. Products like this one, created by third party manufacturers, cost substantially less than that of their name brand competitors and speak to the expectations of today’s consumers, according to a recent Nielsen report. And while interest in competitively priced private label goods may peak during economic downturns, consumers remain loyal to the same private label products even after the depression ends.

The trick to private label success isn’t necessarily offering the lowest prices, but also in the producing high-quality goods. Nielsen’s research indicates that the most successful private label products boast a point of differentiation. Millennials, in particular, want products that do more, provide more convenience, and offer a variety of lifestyle options. For instance, organic, natural, and gluten-free foods are emerging trends that private labels are increasingly embracing. If discount stores can meet these criteria for less, Millennials are happy to give their private label products a try, understanding that they don’t have to pay more for quality.

One example of a successful private label is Costco’s Kirkland brand. Kirkland accounts for a whopping 25% of the Costco’s sales, notably greater than the industry average of 17%. According to Forbes, private labels like Costco’s reinforce brick-and-mortar brand identity. The customers associate the private label product with what the retailer means to them, thus enforcing customers’ retailer loyalty.

 

Expansion Into New Categories

Discount stores are strategically expanding into new categories to drive sales. Nielsen’s research finds that fresh departments (i.e. bakery, deli, meat, produce, and seafood) are increasingly popular at discount and convenience stores. Furthermore, discount stores now sell consumer packaged goods in areas previously dominated by name brands, such as baby food, pet food, and personal care and beauty products.

It’s not what discounters are selling, but how they’re designing and packaging what they sell. BCG reports that discounters are raising their quality standards with appealing packaging and sleek designs to elevate their private label goods. And impressively, they’re not sacrificing price for style. In fact, discounters continue to see success by keeping their private label prices 15% lower than the private label goods from established grocers, and up to 200% lower than branded products at traditional groceries. It’s no wonder that customers keep coming back for more.

 

Improved Shopping Experience

Beyond selling a wider range of products of private label goods, innovative discount stores are increasingly focused on the shopping experience. According to BCG, unlike the “stripped-down, no-frills stores” of yore, today’s discount stores have wider aisles, bright lights, and strategic layouts. These updates attract more shoppers and keep them in the store longer. To that end, discount stores have increased in size by 16% over the past ten years, allowing discounters to sell the wider range of products previously mentioned.

One major motivator in inspiring discount stores to pay more attention to store design is Amazon and its e-commerce counterparts. According to Fortune, traditional retailers understand that their physical stores are their best assets in competing against online giants. While some big discount retailers (e.g. Kohl’s) are improving the in-store experience with high tech solutions like apps and in-store digital presentations, others are taking a critical eye at store planning to ensure shopping environments are satisfying and enjoyable for customers.

One of the most potent examples of discounters’ focus on store layouts is discount grocery chain Aldi. Recently, the German discounter took its store designs to a new level, rolling out plans for stores that look “almost identical” to Whole Foods’ lower-priced chain of stores, 365 by Whole Foods. The new Aldi stores are already outperforming traditional Aldi locations, with softer lighting, larger produce sections, wider aisles, and electronic displays on the walls. Where Aldi traditionally displays goods in cardboard boxes, the new stores feature permanent eye-level shelving. Business Insider reports that Aldi, which now has 1,600 US stores total, plans to grow rapidly and add another 500+ stores by 2020. 30% cheaper than Walmart, Aldi is bringing the competition, and will be an important discounter to watch in years to come.

 

The Future of Discount Stores

It’s clear that discounters aren’t resting on competitive pricing as they evolve in the digital age, and this is giving them a strong competitive edge. Given as much, it’s unsurprising that online-only discounters are experimenting with discount brick-and-mortar stores. Take, for example, Amazon Go stores, which Amazon plans to expand to 3,000 locations nationwide. The e-commerce giant clearly sees big value in connecting with customers in physical spaces.

By the same token, retailers that traditionally weren’t discount-driven, such as Macy’s, are expanding their retail presence to include sister stores with discount-heavy messaging. Macy’s Backstage targets fashion-savvy bargain hunters and boasts an “open, airy, convenient shopping environment,” alluding to their understanding of the needs and priorities of today’s discount shoppers. It will be interesting to see how successful these ventures are for retailers experimenting with discount brick-and-mortar destinations.

Despite the competitive eye on the discount space, established discounters may have the competitive edge. A report from AT Kearney, points out that discounters’ efficiency advantage is “based on built-in structural differences” that will likely make it impossible for traditional retailers to fully close the gap. Likewise, e-commerce retailers opening brick-and-mortar doors have a lot to learn in the way of in-person customer service and in-store expectations. Nonetheless, savvy discounters will continue to innovate shopping experiences while keeping an eye on omni-channel tools to compete in the age of technology.

 

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