Insights

Why do incumbents fail to defend their markets?

Thinking Retail: A Hard Discounting Journey (Part 3)

This is the third of our series Thinking Retail: A Hard Discounting Journey. This Oliver Wyman series presents a monthly snack-sized idea related to the overall theme of hard discounting in the US.

The hard discounter movie has played in over 20 countries and surprisingly with the same storyline ending of incumbent grocers losing significant market share. Why does the threat go unheeded? What causes the complacency?

We have identified three common reasons.

Denial > The image of customers bending over to pick up products from crates in a dimly store located in a sketchy neighborhood, supports the often heard comment in the grocery industry, “my customers wouldn’t shop there”. Yet, as shown in the first edition in this series, shoppers are splitting their baskets, with over 50% of a regional supermarket chain’s primary customers also shopping at Aldi.

We sell national brands and they don’t > To a large extent, this is true, however, the power of this argument is being challenged in the marketplace. Aldi and Lidl consistently win awards for quality going head-to-head with national brands; and Aldi and Lidl do sell select national brands, eroding the basis of the claim.

Our promotional prices are as low as theirs > Our research shows shoppers strongly prefer EDLP to high-low pricing schemes, putting pressure on highly promotional business designs. While some grocery executives argue their promotional prices are lower than Aldi’s, many other executives have said they “can’t compete with hard discounters on price."   Either way, customers know there is a significant price gap.

In discussions with North American senior grocery executives, we observe they are either ignoring the threat or in some cases, building arguments as to why hard discounters are not a threat. The movie, repeated in many countries around the globe, augurs hard discounters are a serious threat.

By not defending their territory against hard discounters, incumbent grocers open the opportunity for them, which we will explore in the next installment, Why do Hard Discounters attract customers?


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