This is the fifth 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.
Hard discounters have a better business model than conventional grocery stores with higher EBITDA and EBIT. How is this possible? What are the advantages of their business model?
They begin with a simple business design and execute it with precision. They know who they are and the value proposition they offer. While some may call it unsophisticated, their business design works and delivers value to their customers and throws off cash for continued investment. The key aspects are:
Private label performance > Hard discounters are masters of creating products that consumers prefer, exemplified by their recent top awards position in the UK, where they won more awards than all other competitors combined. Delivering on GMO free, additive free, and organic, keeps them on-trend and fresh.
Store efficiency > Through streamlining, hard discounters reduce their labor requirements, often running stores with four people. Product packaging is designed for easy stocking, such as mixed selection of yogurt in each case. Scan codes are on every product face reducing checkout times and cart heights are matched to conveyors for fast bag loading.
Store location > By co-locating with a major player, either a mainstream supermarket or hypermarket, they have a natural built-in traffic flow. Their “convenience” makes it attractive for their customers to split their shopping between the discounter and the incumbent.
Hard discounters have engineered strong performance into their business design. Our next item in the series will investigate we will investigate, How much of a threat do hard discounters pose to incumbent grocers?