The Pillars of The Hard Discounter Business Model

To set the scene, in terms of the pillars of a hard discount business model and, I suppose, we could relate it, specifically, to Lidl, could you take us through, on a strategic level, on an operational level, what really constitutes the core of these businesses?

The discount format is already quite old, if you look at it in terms of how quickly retail and grocery retail is developing. In Germany, it is more than 100 years, since some members of the Aldi family and the Lidl family started. The core and the key difference to the standard retailers, which you maybe know, is that this is a model where you are happy with less range in a store. You are probably dealing with 10% of the normal range of a hypermarket. But the key driver to get customers in, has always been the price message. The discounters are proud of themselves for offering all the products required for weekly or daily needs, but at the lowest price in the market.

One thing which, in my view, has been mistaken in a few countries, was that the assumption was that the products are so cheap because the discounters are selling poor quality. The opposite is the case. The discounters pride themselves on putting very high quality of product – I’m not saying always the top, highest quality – on their shelves, at the lowest price in the market and that allows them, really, the success that they’ve seen, over the last couple of years, in particular.

We have this high volume per SKU model, we have this pillar of attractive value for money, for the customer. To get into a bit more detail on this low SKU count and what that actually does for the model and maybe, how customer understanding has developed? It seems that we’re pushing a lot of sales volume through a very small number of products.

If you take a customer in the UK, 10 years ago, the assumption, aside from the quality assumption, would have been, I cannot do my weekly shop in a Lidl or an Aldi store. The reason was that they don’t have everything. Maybe they don’t have all the brands and the discounters would, usually, stock much fewer brands. They pride themselves on putting the high quality into their private label. 80% is private label. To give an example, I keep asking people how many different types of water do you stock at home? Most people answer, maximum one or two different types of water, which they buy. They have it at home if they don’t drink just tap water. If you look into a hypermarket, you maybe find 40 or 50 different types of water. The same water, from the same brand, sometimes in four or five different sizes, with the yellow top, with the pink top or whatever.

The point is, that the extra space this needs, the extra negotiation, the extra people this requires, in terms of negotiating that. The extra space, not just in the store, but in the warehouse. All of that adds to the cost. If you are not prepared to pay for the choice of someone else, then the discounter says, listen, we have five or six different types of water. We have a sparkling water, we have a lightly sparkling water, and we have a still water. They leave it there and just simply say, this is all you need and, trust me, with those types of water, you will survive, but it’s maybe not the feelgood factor for everyone and maybe not for your neighbor. But if you’re not prepared to pay for your neighbor’s choice, then this is the cheapest way of getting the products, because the discounters are saving on all those little steps I’ve described, on the supply chain, from the negotiations, through the warehouse, into the stores. You can actually put a pallet out of the product, because they are selling so fast, rather than one case of the one-liter pink lid bottle. The discounters are putting a Euro-pallet out and it sells much, much faster and it’s obviously more efficient to put a pallet out, than individual cases. This is a huge cost saving and that adds to the point that they can allow themselves to sell the product so cheaply and by no means, in that instance, are they selling a cheaper quality.

In terms of pricing, this fundamental pillar of being very attractive, in terms of value for money. How does a discounter look at a price gap, versus a mainstream retailer?

Firstly, you would say, the bigger the price gap, the more advantage for the discounter. Full stop. That’s self-explanatory. The discounters would be looking at that, not in a sense of, we need to have that percentage price gap and they just apply that across all the categories, across all the products. It’s rather more, individual product, by individual product.