Discount retailers

know how to

deliver the goods

literally. Traditional

retailers can share

in discounters

success by replicat-

ing some key

elements of supply

chain efficiency.

What Traditional Retailers Can Learn from the DiscountersThe secret is in lean supply chains

The discount channel has been suc-cessful throughout Europe, dominated by German players such as Aldi (Sd and Nord), Lidl, Netto and Penny. Analysts expect discounters to continue outperforming traditional channels in grocery retailing and to increase their market share from 16.2 percent in 2010 to 17.4 percent by 2014 (see figure 1 on the following page). With that in mind, discounters success is highly dependent on each countrys culture of consumer spending, historic footprint and acceptance of the discount scene. Today, the boundaries between discount and non-discount are blurring as both sides apply each others best strategies. For example, traditional retailers are taking a page from the discounters playbook by rethinking their ever-expanding assortments, which not only put off customers frustrated by too much choice and cannibalize exist-ing products, but also reduce inventory turnover, increase stock-out risks and

optimize store operations. Mean-while, discounters are copying some traditional retail practices, gradually expanding their assortments within tra-ditional categories to include green, fresh meat and fresh bakery products, while also developing offerings in new segments such as travel, photo process-ing and pre-paid mobile phone cards (see figure 2 on the following page).

Five Elements of the Discounter AdvantageDiscounters attribute their strong performance to a highly efficient supply chain with both structural and non-structural advantages. Structural advantages include a focused assort-ment and standardized outlets, which culminate in high-density networks. Non-structural advantages include an efficient replenishment process, a consistent no-frills approach, and smart innovations and investments. The following offers details about each.

For years, discount retailers have outperformed traditional retailers,

culminating last year in a 16.2 percent market share in EU-27

grocery retailing.1 This trend is expected to continue for the foresee-

able future. What do discount retailers have that traditional retailers

dont? For one thing, lean supply chains. Discount retailers know

how to deliver the goodsliterallyand have won a competitive

advantage because of it. Traditional retailers can share in discounters

success by replicating some key elements of supply chain efficiency.

1 Refers to 27 countries in the European Union.

Focused assortment. Limiting the number of SKUs is the best way to maintain an efficient supply chainand is a key feature of the discount model. Unlike traditional supermarkets with an average product range of 10,000 food and non-food items, or hyper-markets with as many as 50,000 items, discounters offer between 1,000 and 3,000 products. And they provide

a reasonable assortmentespecially in daily, fast-moving categorieswith about 80 percent of their sales from private labels compared with usually less than 20 percent in traditional stores. There are several advantages to this strategy. Within production and purchasing, the biggest advantages are lower manufacturing costs due to larger volumes, more buying power

per SKU, and smaller procurement and logistics teams. In- and out-bound logistics are characterized by the likelihood of full truckloads, more cross-docking and full pallets, and the need for fewer delivery win-dows. In distribution, commissioning and re-palleting are less necessary, thus reducing the many complex- ities in storage and warehouse man-agement. The in-store advantages include increased productivity of workers (through more efficient stock-ing methods), better use of space as inventory turns faster, and less need for backroom storage. Standardized outlets. All top discounters have grown significantly over the past two decades, and that growth has led to more dense distribu-tion networks and, in turn, shorter distances for store replenishment. Discounters stores are standardized not only in neighboring markets, but worldwide, which allows for efficient in-store processes. For example, Aldi and Lidl, Europes top two discounters, have

FIGURE 1: Development of discount format in EU-27

2006 2008 2010 2012F 2014F

191,521169,768

150,730143,295124,802

Sources: Planet Retail; A.T. Kearney analysis

14.8% 15.8% 16.2% 16.8% 17.4%

23,573 26,01828,752

31,68734,744

Discount sales (euro millions) Sales space (thousand m2) Discount share (total %)S

FIGURE 2: Range extensions: Examples of two discounters

1999

Freshmilk

Bio products(milk, potatoes)

Fresh meat,tobacco1

Holidaypackages

Onlineretail

Ready-to-serve salad,incontinence

products

Bio products(tea, cheese,margarine)

Photos, pre-paidphone cards(Aldi Talk)

Newspapers,magazines

In storebake-offs

In storebake-offs

Freshpoultry

Wellnessproducts

Freshmeat

Rail tickets(Lidl Ticket)

Onlineretail

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

LIDL

ALDI

1Aldi Sd (Aldi Nord sells tobacco since split of two companies) Source: A.T. Kearney analysis

Fresh B produc sh mea oliday Online

p y

2002 2003 2004 2005 2008 2011

unique supply-chain characteristics. Aldi (Sd and Nord) serves its nearly 8,000 stores through 125 regional headquarters, each with one regional distribution center. Every distribution center replenishes about 60 stores, mostly in-house; however, every region makes its own make-or-buy decisions. Lidls supply-chain infrastructure is similarly organized with roughly 105 regional distribution centers supply-ing 10,000 stores; transportation is usually outsourced. Efficient replenishment. Efficiency is the focal point for discounters package-design and replenishment processes. Shelf-ready packaging (SRP) reduces handling and waste and has a positive impact on brandingnearly 100 percent of discounters products use it, compared with only about 40 percent of non-discounters. All new suppliers offer SRP as a base require-ment. Using mixed cases and pallets with different product variants in a single case allows for a wider product range without increasing handling costs or shelf space. And a new trend is emerging: cross-category mixing, such as salad dressing and vanilla sauce. Product presentation also is highly logistics driven. Products are often displayed on the floor on pallets and retail-ready; half-sized pallets are used to further optimize floor space. Improving presentation and replenish-ment can lead to significant cost savings because shelf-refill costs differ depend-ing on product presentation and retail formats. With canned foods, for exam-ple, shelf-refill costs are about 3 percent of net sales for single article displays, about 2 percent for shelf-ready packag-ing, and about 1 percent for pallet displays (see figure 3).

Consistent no-frills approach. Discounters apply their no-frills approach throughout the entire supply chainoften against conventional wisdom. In warehousing, for example, the discounters approach contradicts common practices of traditional retail-ers. Discounters build large distribu-tion centers with lots of floor space and loading bays relative to volume. Although this ties up capital and requires longer distances for picking, it eliminates waiting times and the

need for detailed timing of deliveries. It also leaves room for expansion without jeopardizing efficiency. And discounters single-story distribution centers help avoid pallet-stacking, which reduces complexity and increases safety. The large floor space allows for the use of specially designed forklifts that can take three pallets at a time. This is con-trary to the traditional retailers viewthat building high is more cost efficient and that no stacking implies more time to replace empty pallets.

FIGURE 3: Comparison of retail channel performance

Supermarkets Soft discount Hard discount

7,3005,030

3,670Sales density( per sqm)

Personnel cost(% of sales)

Real estate cost(% of sales)

Inventoryturnover

Sources: EHI Retail Institute; A.T. Kearney analysis

6.16.813.7

3.94.36.5

36

2213

Example: Germany

Unlike traditional supermarkets with

an average of 10,000 food and non-food

products, or hypermarkets with 50,000,

discounters offer just 1,000 to 3,000 items.

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Additionally, discounters integrate logistics, store operations and sales, with only one person responsible for stores logistics and bottom-lines for a whole region, and end-to-end supply-chain integration. Traditional retailers, on the other hand, argue that store operations require managers with totally different skill sets than distribution-center managers. Smart innovations and invest-ments. Contrary to popular belief, discounters use innovative concepts to streamline store operations, ware-housing and distribution. Discounters refrain from introducing new features and product ranges that require special investment. Once an investment deci-sion is made, however, they rapidly pursue a professional approach. Multi-labeling and multi-trip produce trays are examples. Multi-labeling ensures an optimal check-out by forc-ing suppliers to print several EAN8 bar codes on private-label packaging. Certain discounters invested heavily

in reusable trays for fresh products, replacing one-way cardboard boxes. In warehousing, a scenario of high- versus low-tech investments and inno-vations is unfolding. Lidl, for example, is selectively installing fully automated technology for the picking and pack-ing of all ambient food in distribution centers. Aldi is avoiding potentially painfuland costlyinjuries to ware- house workers by using ergonomics.

In one instance, workers wrists are connected to cranes to help them lift large packages.

Adopting Discounter EfficienciesLarge discounters supply chains are significantly more cost-efficient than those of most traditional retailers, particularly in their main markets. A major share of this efficiency advan-tage is based on built-in structural dif-ferences, so it will be difficult, if not impossible, for traditional retailers to close the gap fully. Nevertheless, meth-ods used by discounters to increase supply-chain efficiency can be a source of inspiration to traditional retailers. In adopting discounter efficien-cies, however, traditional retailers must be careful not to blur the differences. The best competitive strategy tradi-tional retailers have is differentiation and upgradingso lean supply-chain principles should be applied in areas that wont be obvious to customers.

Authors

Mirko Warschun is a partner in the consumer products and retail practice. Based in the Munich office, he can be reached at mirko.warschun@atkearney.com.

Peter Schmidt is a consultant in the Munich office. He can be reached at peter.schmidt@atkearney.com.

Discounters apply

their no-frills

approach through-

out the entire supply

chainoften against

conventional wisdom.