The U.S. Grocery Market: Is it Just One Cent at Stake?
There are high stakes in the battle for the future of the U.S. grocery market, but it should not be determined by a one-cent difference.
The whole retail and business world is watching the battle of the giants that is happening now in various parts of the United States, where Lidl is rolling out its operations. Plans are quite aggressive: Lidl is planning up to 100 stores by next summer, and Aldi plan up to an additional 900 in the next 5 years.
Media are busy with obsessive score keeping: Lidl is one cent cheaper on mustard, Aldi beat them by one cent on milk, Walmart and Kroger are not more than one cent away from the “leader” of the race, and local players are just trying to keep up.
How long can this go on? Do we need a crystal ball to predict what will be the end state of this power game? I believe there are some insights from other markets that we can use, adjusting and extrapolating them to understand the future of the U.S. grocery market.
Insights from Other Markets
In every country there is a segment of consumers who will routinely shop in 5-6 grocery locations, cherry-picking the deals. But if a retailer makes price matching the only – or even the core – pillar of their commercial pricing strategy, they risk losing out on the other shopper segments. Other segments of shoppers who look for a fair price, who appreciate convenience and are ready to pay more for a specific shopping occasion, shoppers who value brands for their innovation and emotional appeal, shoppers who go for a high-quality private label, shoppers who enjoy shopping in a friendly store or who use a home delivery when needed.
Instead of a crystal ball, let’s look at some European markets where the – already legendary – German discounters Aldi and Lidl made their entrance some time ago. Let’s take the UK and Benelux markets, for example. In both geographies, the discounters made their initial entrance more than two decades ago, in the beginning of the 1990’s in Benelux and in 1994 in the UK. In Benelux, they currently have a larger share than in the UK, at 18% vs 12%. But unlike the Benelux situation, in the UK they have taken this share from the “Big 4”, i.e., supermarket chains who have – in my humble opinion – indulged too much in playing the “price match” game and not enough in playing on their own field.
Healthy Scenario for U.S. Grocery Market
So, is there a healthy scenario for grocery market developments in the U.S.? I believe, yes, and not only is it possible, but also very probable. It will be largely determined by the position that the current main players take. We all know “demand creates supply”, but it is valid the other way around as well. Supermarkets and convenience chains should not give up creating a quality value proposition to their core segment only because of the “angst” of seeing German discounters coming.
A healthy U.S. grocery scenario can have several elements, and it will be influenced not only by Aldi and Lidl. They will, hopefully, put some pressure – long term, not short term – on creative, good value propositions in private labels. Attention to Key Value Items (KVIs) must be sharpened even more, and pricing the rest of the assortment according to the specific shopper insights of each individual retailer will grow in relative importance as well. Retailers will need to become more surgical not only in the types of promotional offers they produce, but which communication channels and vehicles they use to communicate. The latest factor, the recent announcement of Amazon’s intent to acquire Whole Foods, will not only put pressure on the overall price levels in grocery, but even more so increase the importance of how comprehensive the omnichannel proposition of each retailer is.
All of these elements of shopping experience need to be properly priced – or have a proper data-driven perspective on pricing. Only then will the equation make sense not only for consumers but also to your CFO and shareholders. If U.S. retailers want to play smart, they must focus each and every day on how to leverage technology and data science to create a value equation that is not only compelling to the consumer, but also profitable for the retailer.