Growth of Discount Grocers

Successful global giants in the grocery market, including the European companies ALDI and Lidl, continue to emerge in America, bringing with them lower prices, more jobs and stiff competition. While it may seem like a new trend, discount retailing has been in practice for centuries. Dating back to the early 1900s, “undersellers” sold merchandise such as apparel at a lower cost than mainstream stores. After the Great Depression, discount operations opened more frequently, selling a wider variety of goods.

But it wasn’t until the end of World War II when discount merchandising truly took off, fueled largely by consumers seeking bargains in the face of rising prices and demand for goods after wartime shortages. In the 1960s, four major players entered the space and would continue to dominate for decades: Kmart, Woolco, Target and Walmart.

While these discount retailers are viewed more as department stores, food-specific discount operations have emerged and generally fall into two categories: box stores, which sell few perishables and a limited amount of brands and product lines; and warehouse, which sell the manufacturer’s brands at discount wholesale, a moderate amount of product lines but few assortments of goods. Both of these models offer very low prices,few services and a bare-bones atmosphere.

Today, many communities have a mix of grocery store models, from upscale establishments with onsite bars, cafes and restaurants to deeply discounted retailers from all over the world. With all these retailers selling similar foods, more or less, competition is fierce.

According to a 2015 Retail Industry Report by Mazzone & Associates, supercenters, dollar stores and warehouse clubs gained a greater share of the food retailing market as consumers sought out convenience, lower cost and the ability to buy in bulk. In addition, lower-income consumers are forgoing premium goods and stock up on discounted foods instead.

Another way discount retailers win over shoppers is by offering store brands, aka private labels, which help keep cost down. German retailer Lidl found a way to also satisfy consumer demand for healthful, fresh foods, organic produce and all-natural products; its private-label items are free from MSG, trans fat and synthetic colors, and it includes a variety of organic and gluten-free options, such as produce, meat, dairy and packaged goods.

How Supermarkets are Competing

In an attempt to attract new customers, retain existing customers and foster loyalty, many supermarket chains offer discounts and promotions, such as coupons and weekly sales. Some also offer on-site amenities, such as cash machines, movie rentals and coffee shops. However, these tactics may ultimately cause profits to idle or fall.

Generic or off-brand products that were once seen as subpar by some now present an opportunity for retailers to provide value and quality at a lower cost. In 2016, the retailers Costco, Kroger and Trader Joe’s were among the top five vendors of private-label food and beverages in the United States. Customers view these “store brands” as valuable and trusted alternatives to more expensive national brands.

Another attempt to compete is through mergers and acquisitions. Top retail operators buy smaller competitors or merge with larger supermarket chains, which allows the companies to maintain profitability while lowering per-unit costs. On June 16, 2017, Amazon made headlines around the world for its $13.7 billion purchase of Whole Foods Market, an acquisition that caused other grocery chains’ stocks to plunge as much as 17 percent that day.

In the increasingly cutthroat grocery industry, some retailers have saved money and cut costs by keeping employee wages low through salary freezing. Other vendors have implemented self-checkout aisles to reduce their number of employees altogether.

The Future Landscape of Grocery Shopping

Discount retail locations may be smaller than traditional grocery stores, with fewer aisles and a more minimal design, but their competitive edge and consumer appeal are undeniable. Mainstream supermarkets may need to close stores, restructure, cut costs and reallocate dollars to remain viable.

In addition, the world continues to shift to a more technological society, with robust e-commerce and digital grocery stores like AmazonFresh. Online grocery sales are estimated to reach $100 billion by 2025, so innovation is necessary. Supermarkets may introduce mobile apps and advanced point of sale systems, such as self-checkout kiosks, to replace workers and cut wage costs.

Despite the fact that only 40 percent of households shopped at deep-discount retailers in 2016, which is much lower than supermarkets and mass merchandisers, the amount of trips to these retailers rose by 2.8 percent. This indicates there are significant opportunities for discount retailing to continue growing in years to come.