The rise of non-food discounters puts brand under pressure

Dear consumer enthusiasts. It took a while but here is our next newsletter.

From now on it will be a coproduction of Tjeerd van der Zee and myself under the umbrella of our newly founded strategy firm NET4BOARDS GmbH .

Both in Germany and the rest of the Western world, non-food discounters are growing faster than ever before.  Over the last ten years, Retailers such as Dollar Tree, Action, Tedi and Woolworth have enjoyed incredible growth rates - leaving the rest of the market far behind. We are all watching in amazement as the middle market segment rapidly shrinks.  This phenomenon is not new and has existed in food retail for decades; Just think of the incredible rise of Aldi and Lidl to become global power retailers. However, new dynamics have now emerged that are reinforcing and accelerating the triumph of the non-food discounters.  Not only will these continue to profoundly change the retail landscape, but more importantly, they now pose a real and immediate threat to traditional consumer brands!

In this article, we first describe the factors and trends that underlie this new dynamic.  We also make some clear predictions for the future and finally explain how brand manufacturers should respond in order to ensure their long-term relevance and success.

Non-food discounters have traditionally focused on on-demand items that require regular replenishment and offered these at unbeatably low prices.  Quality played a secondary role - with value for money clearly taking center stage. The product range is limited but diverse and includes textiles, household goods, decorative items, small electronic goods and much more. Customer proximity is ensured by a dense network of stores, even in small towns and outlying locations, with a relatively simple but customer-friendly store design. This diversity enables customers to find basically everything they need in their daily lives in one store. Simplicity is the keyword here. At the same time, seasonal items, often for less than one euro, satisfy customers' hunting instincts.

But that's not all. Non-food discounters have rapidly developed in terms of content. They have entered a new growth phase as a result of the

1. Professionalization of their business model

2. Changes in the macroeconomic environment

3. Increased credibility and acceptance of Chinese products and brands in many product categories  

4. Technological innovation

In more detail:

1. Professionalization of the Business Model

In addition to fierce price competition, non-food retailers are increasingly focusing on improving value for money by closing the quality gap with traditional consumer brands or even offering perceived better quality, as exemplified by Aldi and Lidl in the food retail sector.  This is directly linked to the successful introduction of private labels.  Own-brand products are naturally much cheaper than branded products and customers can choose them as a less expensive alternative without having to compromise on perceived quality, as they have learned to do in food retailing.  This applies in particular to convenience products that are bought regularly. In addition, non-food discounters have invested heavily in information technology and automation to manage their supply chain and business operations.  These efficiencies allow them to control costs, reduce overheads and pass on savings directly to consumers through lower prices.  They also enable them to increase like-for-like sales, as the availability of individual items in stores and customer service increases significantly. Seasonal items in particular are more targeted in stores.

2. A new Macroeconomic Environment

The prices of houses and rental apartments have continuously skyrocketed over the last 15 years. In addition, post-Corona consumers are facing high and persistent inflation rates, especially for food, energy and tourism.  Low-income households now often have negative savings rates, and even middle-income households are now under severe financial pressure.  The traditional German middle class is shrinking. Households are therefore being forced to cut back on regular consumption and are switching to discount stores. This switch is made easy by the low prices and higher quality of the discounters' products, as well as by wider consumer acceptance of products manufactured in Asia, particularly in China. In this sense the massive switch from "branded products" to "private labels" is a logical result. 

Large consumer goods companies in particular have drastically increased their prices in the last three years and may have exaggerated here.  This was not only at the expense of their quantitative market share but also damaged their reputation in politics and society.

3. Credibility of Chinese products and brands

China is the largest manufacturer in the world, but it is no longer just a simple workbench.  The image of its products has improved incredibly in recent years, as many innovative products and services as well as the most advanced technologies now come predominantly from China - in addition to the USA. Brands such as BYD, NIO, TikTok, Huawei, Tencent and Baidu come to mind in this context.  This naturally has a spillover effect on ordinary, everyday products and services that are normally "Made in China" and offered by discounters.

4. Technological innovation

Thanks to technological innovation in many areas (increasing connectivity, online shopping, social media influence, supply chain automation, AI, etc.), it is relatively easy to build new brands, go global and distribute worldwide via e-commerce.  This is leading to unprecedented growth rates for companies, especially Asian ones.  Chinese companies such as Shein and Temu are sweeping the German market like a tsunami and pushing up the market share of discounters in the overall landscape.

These 4 trends are interlinked, build on each other and reinforce each other.  The fact is that customer loyalty as a result has already changed dramatically.  In the 21st century, loyalty often just means the lack of a better alternative for most products and services.  Customers have become volatile, opportunistic and curious. They are constantly on the lookout for new, better and, above all, cheaper products.  They are constantly informing themselves via social media and forums, and are increasingly influenced by bloggers and influencers. Their purchasing behavior is no longer oligopolistic.  The long-term bond between brand and individual customer is melting away - especially in the case of needs-oriented products.  The luxury market is exempt from this trend - at least for the time being. 

As these trends and factors represent the new reality, we’d like to make the following 3 predictions:

1. We are entering a period of long-term stagflation, purchasing power per capita will steadily decline, driving consumers to non-food discounters.  Consumers will no longer be prepared to pay a premium for B and C brands, as the price difference will increase and the quality differences to private labels will disappear. Branded products will lose significant market share.

2. Non-food discounters will continue to invest their profit margins in expanding across different channels and markets and in optimizing their business model. Generated cash flows will be systematically reinvested in lower prices. They will become more and more professional and will increasingly displace branded products.

3. Asian products will flood our market even more in this segment, both invisibly through private labels and visibly through their power brands such as Shein and Temu.  As a result, the market share of the non-food discount sector will continue to grow.

How should brand manufacturers react?

In the short term, the main focus should be on increasing sales growth by recovering sales volumes.  This priority is a direct result of the over-reliance on price-driven growth over the last four years. This must go hand in hand with increased investment in brand marketing and commercial support for retailers. This is where we see good progress being made as demonstrated by the presentations from the leading consumer brand manufacturers at the CAGNY Conference in February.

 However, to be successful in the long term, brand manufacturers need to recognize that the landscape is changing dramatically and at an accelerating pace: They must accept the market dynamics and anticipate these trends! To do this, they need to be bold and take a long-term perspective. We missed statements on this at the conference.

The question is, what will possible shopping worlds look like in 10 years' time?  From there, they can work their way back from "tomorrow" to "today" and develop a strategy that ensures long-term success.  This certainly includes portfolio management and the separation of many B and C brand products.

We also believe that they need to get closer to the consumer again and create intimacy. Initial approaches to this are still stuck in their infancy stage. In addition to technology, we believe that companies need a cultural shift towards a serious customer-oriented attitude. Brands can only win through the emotionality of their products. It is important to create worlds of experience for every customer, to bring their brand world to life, to develop new and unique products for them - the more personal, the better. The sales channels must ensure that future consumers can be reached anytime and anywhere. They must deliver on the brand promise at the point of sale. Social media and AI have the potential to do this. Extensive cooperation with specialist retailers is also required. If this is successful, brand fans will be willing to pay a premium for these brand products.