Jim Jefcoate did a great job moderating our “Fast Forward to 2029” panel at the Global Grape Summit earlier this year in London. So, we asked him to come to New York and bring his crystal ball with him to discuss one of the most crucial issues in the produce industry — the rise of discount retailing.
Retailers look to the UK and Ireland, see market share numbers of 10 percent plus and wonder if the big UK supermarket chains, knowing what they know now, would handle the entry of Aldi and Lidl into the market any differently.
Put another way, was the loss of market share to discounters inevitable or was it an outcome that better strategy could have avoided?
The very week that The New York Produce Show and Conference was held, Lidl opened a new store on Long Island signifying its expansion into the New York Market following its earlier acquisition of 27 Best Market stores.
Aldi is in the midst of a five-year $5.3 billion dollar investment plan in the United States.
Other types of discounters are also growing; for example, Dollar General just announced it will open 1,000 new stores in the U.S. next year.
Now all this must be kept in perspective. The U.S. is a big market and these are small stores. We would estimate that those 1,000 new Dollar General stores won’t, collectively, account for a quarter of 1% of the U.S. Grocery Market.
But growth is growth, and retailers need strategies to make sure they don’t lose market share. Growers and shippers need to develop a strategy to capitalize on these growing markets.
Jefcoate, having working on the buy and sell side, is ideally situated to use the UK and Ireland as a case study on what may happen in America and how both competitors and suppliers can act to improve their situation. We asked Gill McShane, Contributing Editor at ProduceBusinessUK.com to find out more:
Jim Jefcoate
Director
Hurdletree Associates
(Former Senior Director of Fresh Food and Manufacturing for Walmart)
Spalding, Lincolnshire, UK
Q: Jim, you’re well-known within UK fresh produce circles for being a fresh food supply chain specialist, with over 30 years experience in procurement, supply chain and quality management strategies. During that time, you’ve held senior technical positions at Asda, Fesa UK, Del Monte Fresh Produce (UK), International Produce Limited (IPL) and Walmart. For the purpose of introducing you to any of our US or international readers who may be unfamiliar with yourself, could you quickly summarise your produce career and retail experience?
A: Over the years, I’ve been hopping from retail into the vendor side and back again. I started off with Asda in mid- to late-1980s, working as a quality inspector in their fresh produce depot, before Asda had general centralised distribution. Then, I became Asda’s first produce technologist, focusing on food safety and compliance.
Eight years later, I jumped the fence to what was then a small fruit importer called Fesa UK. I was the technical manager, again looking after the same areas, plus I was the technical contact for all the retailers. After that, I moved to Del Monte Fresh Produce in the UK to work in a similar role as the interface for the retailers but also the interface for Del Monte’s production side.
In 2005, I moved to IPL, which at the time was independent of Asda and Walmart. When they took the option to buy IPL in 2009 I became part of the Asda and Walmart family. Around 2011, I spent 15 months in the Asda team as their technical director.
Subsequently, I came back to IPL for three years as group technical director before moving into what Walmart calls ‘upstreaming’, looking after manufacturing sites as the senior director of upstreaming, and, later, as the senior director of fresh food and manufacturing.
Q: It’s fair to say that you have a very good grasp on the UK retail market and its mechanics.
A: Yes, what I’ve always found quite interesting is looking at the retailer relationship with public perception and the media. The tabloids in the UK are probably as aggressive as any media in the world, so looking at the stories coming out while having a better understanding of what’s going on in retail is always interesting. Also, I’ve watched the rise of the discounters, and witnessed the reaction at Asda, as part of the Big Four, along with Tesco, Sainsbury’s and Morrisons.
Q: Can you describe what has happened in the UK with regards to discount retailing, and why?
A: There have been all sorts of things written about why the discounters, Aldi and Lidl, have been in ascendency in the UK, and some of it is very valid but there are other factors that tend to be overlooked. A lot has been about price, coupled with quality, and value. But I think it goes a lot deeper into the customer psyche than that. I think a lot is around trust.
If you go back to the turn of the millennium, the British public was becoming more and more disillusioned with figureheads in British society. There was the perception of being deceived by politicians, with scandals like the claim about the existence of weapons of mass destruction in Iraq and the misuse of expenses among some Members of Parliament. Then there was the banking crisis, so the British public very much fell out of love with the financiers, as newspaper stories in 2010 reported on bankers awarding themselves bonuses again.
The Big Four retailers [Tesco, Sainsbury’s, Asda and Morrisons] got caught up in that too. There was the horse meat crisis in 2013, reports of people trafficking, and supplier abuse (which led to the Groceries Supply Code of Practice or GSCOP being set up) and, obviously, a very aggressive media reporting on all of this.
Generally, I believe the British public were just waiting for politicians and bankers to get a kicking, and, latterly, the Big Four retailers too. In the meantime, the discounters were steadily rising, and building more stores. I think a number of planets came into alignment… One of these was the issue of trust. The British public was waiting to lay into the Big Four retailers. Secondly, in the media there was a rise of reports about how to be thrifty with your money. Websites emerged like comparethemarket.com, and people like Martin Lewis of MoneySavingExpert.com fame were very much in ascendency, telling consumers to shop around, and, for example, to change their energy company for a better deal. The discounters were very nicely placed for this idea of: ’Let’s shop around for bargain’, and ‘Let’s stop ourselves from being overcharged’.
As this was happening, the Big Four retailers were taking a big hit on trust. Meanwhile, stories about the discounters in the British media were concentrating more on the bargain benefits to a more cost-conscious society, rather than on any horse meat or people-trafficking issues that the discounters may or may not have had in their supply chains.
Q: That’s an eye-opening analysis of the influencing factors at the time that contributed to the attraction of the discounters among British shoppers. Do you think Aldi and Lidl did anything in particular to further drive that interest?
A: Marketing has been genius by the discounters. Numerous television adverts have been extremely influential on shoppers by driving home the message that the branded products they already love are great, but the discounters’ products are just as good, plus they’re cheaper. There are three key elements to their ads; firstly, humour, which Aldi is very good at; secondly, they get the price message over to shoppers; and, thirdly, they get the quality message over. Then they keep repeating it for whichever product it might be.
Q: Do you think the emergence of heavily competitive discount retailers is a pattern that is happening, or will happen globally? Already, Aldi and Lidl have set up shop in the US… What trends in the UK are resonating elsewhere, or are likely to translate internationally?
A: There are a number of aspects in the retailer model that have allowed the discounters to be where they are, so retailers need to look at their model, starting with their corporate structure. They’re all privately owned, and this is very apparent in the UK. This means the discounters have been able to take the long view, more so than the others. Tesco, Sainsbury’s and Morrisons are all listed on the London Stock Exchange; they all have shareholders screaming about return on investment. Asda is a little different as they don’t get the hit from shareholders, although they do get it from Walmart executives, so the pressures are similar.
Retail traders prioritise three things on a continuous basis: like-for-like sales, market share and gross margin. The annualisation of these metrics is a huge focus for them because it’s a huge focus for City [of London] analysts, and, therefore, their larger shareholders. This means it’s a significant challenge for them to look much beyond 12 months, and to take the longer view that the discounters can.
Also, if you compare the Big Four to the discounters, their operating models are obviously different. On average, a UK discount store has 1,500 SKUs. The average Big Four store carries 35,000 SKUs, while the largest can carry 90,000 SKUs. So, just one SKU in a discount store equates to around 60 SKUs in the largest Big Four format. When you’ve got 60 times as many SKUs, it’s 60 times more difficult to maintain your availability, so actually getting the products on shelves. Then customers become disappointed with the range they were promised versus what is available on shelf. A lot of economies are gained in how the discounters operate their stores, and much of that is because they have a reduced range. You need fewer staff disproportionately to fill shelves with a smaller range because the SKUs do not get lost in the store back-up. In their supply chain, meanwhile, the discounters ask vendors for a really great price, with no extra requirements, so it’s very low maintenance.
The other factor is marketing. The discounters are pushing continuously the link between the quality and price of their products to improve the value perception, whereas I don’t believe that the Big Four’s advertising is as effective at linking the two. I think that this can be addressed easily by retailers in the US.
Q: What can retailers in the U.S. and, indeed, worldwide learn from the developments in the UK in terms of competing more effectively with the discounters?
A: One thing is to look at smaller stores, and a lot of retailers are doing this now. But global retailers must remain very in tune with their customers. British shoppers have become more promiscuous. So, the question is: ‘Have, say, US customers become as promiscuous?’. Equally, you’ve got to bear in mind that the top nine supermarkets account for over 95% of the grocery shop in the UK. In the US, meanwhile, the top ten supermarkets account for only 52% of the grocery shop. There is a lot more headroom for growth in the US.
Additionally, I don’t believe that the Big Four’s strategy of using a lower tier (e.g. ‘Sainsbury’s Basics’ or ‘Asda Smart Price’) to compete with the discounters on price has been particularly effective. The three-tier proposition has been presented to the customer on the basis of ‘Good, Better, Best’. However, I believe that when a discount retail customer benchmarks these tiers against the single discounter tier, they perceive them as ‘Worse, Same, Better’. Even though blind taste panels repeatedly have put both mid- and entry-tier products from the Big Four ahead of the discounter equivalent on quality, the customer does not perceive this to be the case.
Q: To get a sense of how the discount channel operates, let’s look at their approach when it comes to fresh produce. How do discounters think about their fresh fruit and veg offering? Do they have lower quality standards, for instance?
A: Again the big differentiator is the range. I don’t think the discounters have a different approach on produce quality specifications; they just carry a smaller range. Although they’ve not got a massive fresh produce range, they concentrate on doing it really well. What they don’t do is try to go for a Class 2 product. The discounters very much procure to compete. But it’s easier to compete on quality and availability when you’ve got a narrow range. It’s also worth mentioning that fresh produce studies have shown that availability has a bigger impact on quality perception than it does in other categories.
Q: Do the discounters have lower food safety, sustainability, or traceability standards?
A: They tend to outsource the management of those standards. So, they’ll give food safety to a laboratory or certification body to manage. As the discounters get bigger, I’m not sure exactly how sustainable that will become. By comparison, the Big Four rely on significant in-house teams, as well as certification bodies who audit standards like the GFSI, GlobalGAP and Red Tractor.
Q: Are discounters more flexible about buying produce? For example, will they accept different sizes, or not carry an item if it’s scarce?
A: It doesn’t become as big an issue because their range is so narrow. Discounters are not under that availability pressure because they haven’t got eight different variants of carrots, for example. However, having spoken to a number of discounter vendors, they have said that the discounters tend to be more flexible on attributes such as size, but not to a significantly different extent to the Big Four.
Q: How do discounters feel about branding? Do they stock brands, or do they insist on private label?
A: Both Aldi and Lidl have exclusive brands, which, unlike the Big Four, do not carry the retailer’s name. We used to call these ‘tertiary brands’, rather than ‘own brands’. However, around 90% of the discounters’ range is covered by these brands.
In the UK, there are few fresh produce brands, such as: Florette and Rooster Potatoes, whereas in the US produce brands are a lot more recognised. Again, that’s one area where the US market is different. Where there is brand loyalty in fresh produce that may offer the retailers and those brands some protection against the discounters.
Q: How do discounters think about their vendor relationships; are these transactional, long-term, etc.?
A: They are no shorter-term than the Big Four. All the retailers try to develop strong partnerships with their vendors. But because the discounters’ ranges are narrower, they concentrate supply into a very small number of vendors. The big selling point for vendors into Aldi and Lidl is the simplicity of the relationship; you don’t need armies of agronomists and specialists.
Q: In what ways do Aldi and Lidl differ in their approach in the UK?
A: There is not a great difference between the two in the UK. Aldi, possibly, has a slightly higher percentage of own label. The one thing to mention, and, probably, it’s not as pertinent to produce, is we mustn’t forget that the discounters are backed up by very big organisations in Europe. They’re not just UK operations; they have German buying power behind them. I don’t think that translates into produce as much but, certainly, for their bargain aisle; that’s how they get some of their crazy deals.
Q: Can we expect mainstream retailers to enter the discount space? For instance, a year ago Tesco in the UK launched its own discount retail brand called Jack’s? Do you think it will be successful, given that fewer stores have opened than expected (only 10), and one store has already been axed?
A: What I believe Tesco is doing is piloting the concept. It’s too soon to say whether it will succeed or not. Tesco will keep trying things to see what works, and what they can learn. The millstone in the UK for the Big Four is that their largest formats (where they are seeing the biggest decline in customer traffic) are the most profitable. As you come down the scale to their convenience stores, they become progressively more margin diluting, with online being the least profitable. This is another planet that has come into alignment. The size of the discounters’ stores has appeared just as it became ideal for the change in British shopping habits.
One of the things that mainstream retailers are doing is cutting down the size of their stores, and franchising out floor space to make it more of a destination space (e.g. Argos in Sainsbury’s stores). The retailers will be doing more of that because there’s too much floor space. I think there will be some fairly tough questions around how much the Big Four are prepared to re-cut their models. They will have quite a challenge in selling a long-term plan to the City in order to convince analysts that they are turning around their ships.
Q: Can companies such as Walmart, Costco and Asda compete with discounters on price?
A: I believe that there’s scope for them to get closer on price, by looking at efficiencies in their store operations, and focusing the price match on the 1,500 SKUs that are equivalent to the discounters’ SKUs. Also, I think they need to look at how many tiers they should be using to compete. In their supply chains, they need to ensure that the discounters are not leveraging their volume. Some 94% of discounter shoppers also frequent other supermarkets. The Big Four need to work out how to recapture these customers. Shouting about their greater range and better quality, I believe, would have an impact, as well as improving availability through range rationalisation.
Q: In what ways have the discounters evolved since they set up shop in the UK, and where does this leave the mainstream retailers in terms of improving their competitiveness?
A: Aldi and Lidl haven’t changed much from their original model, which is very much their strength. However, both the founders of Aldi and Lidl have since passed away, which means that maintaining the ‘Founder’s Mentality’ becomes an ever increasing challenge, particularly as their size increases. Walmart has found the same challenge as the credo of the genius that was Sam Walton becomes an ever more distant memory. If the discounters start to stray too far from their founders’ model it could start impacting their growth. As an example, if discounters start opening up in-store bakeries, fish or deli counters on a wide scale, their operational costs are going to start going up. As the range increases, and the costs rise they could start to lose their point of difference against the Big Four.
Q: Is the success of the discounters likely to continue? I read that the German discounters are both opening roughly a store a week in the UK… What else can the Big Four do in the meantime?
A: Aldi is looking at operating 1,200 stores by 2025. Their increase in market share appears to be through store openings, rather than like-for-like growth, although we cannot be sure since Aldi is a Private Company. The discounters are growing into a market that has very little headspace, so something is going to have to give somewhere, whether one of the Big Four, or other supermarkets, fall by the wayside. Obviously, Asda and Sainsbury’s tried to resolve that [with their proposed merger] but they weren’t allowed. Personally, I think the discounters are going to hit a ceiling in the UK but I haven’t a clue where that ceiling is. It will be interesting to see the success that they have with their ambitious move inside the M25 [the London Orbital Motorway is a major road encircling almost all of Greater London].
I believe that British shopping habits have not finished evolving yet either. Don’t forget that the Big Four’s large store formats are not only losing ground to the discounters, but also to online shopping, even if it’s their own online service. I believe that online shopping will continue to eat into bricks and mortar market share, which could be the factor that curtails the discounters’ growth. Also, the one unknown, that I have avoided mentioning deliberately, is Brexit. Who knows how that is going to affect the dice roll…
*****
Jim doesn’t know it, but he is echoing another ex-Walmart guy, Bruce Peterson, in pointing out the enormous difference in the behavior of public and private companies.
We wrote a lot of Tesco coming to America as Fresh & Easy, and it is fair to say that whatever the errors and whatever the problems, if Dieter Schwarz, the German owner of the Schwarz–Gruppe, which owns Lidl, had decided the group needed a US presence for strategic reasons, the company would not have quit. They would have regrouped, retried, relaunched until they found a successful formula.
Yet blaming The City or Wall Street strikes me as a bit of a cop-out. Many of our biggest companies, such as Amazon.com, have enormous stock market valuations despite little or no profitability. So, when it is said that the shareholders and analysts put pressure on companies to show short term profits, that is not exactly true. It is more that they put pressure on companies to have a believable strategy for success.
One thing that Jim reminds us of is that discount retail is in a sense more a procurer like foodservice than conventional retail. In foodservice, the purchases are highly concentrated on a few items — Potatoes, Onions, Tomatoes and Lettuce — so the challenge for most of the rest of the industry is to get on the menu. In a sense, the challenge for small store deep discounters is to get on the buy list.
The produce industry is extremely bad at this. The tendency is to sell what we have to sell rather than to engage in longer term efforts to get on the menu. One wonders how sales teams need to be reconfigured if many items are to get shelf space at these smaller format stores.
We remember when Dick Spezzano toured us through the new Vons Pavilions concept in 1985. (Now, among other things, he runs the student program at The New York Produce Show and Conference.) He explained to us the philosophy that the cornucopia of assortment the store offered in produce was a massive draw. While many of those items sold very little, it positioned the store as the place you could get everything, and it provided a halo effect of freshness and variety.
The philosophy has been falling out of favor for years with SKU rationalization ascendant. For better or worse, though, the hard-discount, small-store combination makes the variety strategy problematic.
By focusing competitive pressure on pricing of the high volume SKUs, it leaves little room for conventional supermarkets to burden those items with costs due to shrink and handling of a large variety.
Retailers have scrambled for answers, but our experience is that the multi-tier strategy that Jefcoate critiques doesn’t work for two reasons: First, retailers are so afraid their good customers will trade down that they either don’t stock the low cost range or design the packaging to intentionally look bad or otherwise don’t actually want to sell the product.
Second, there is a psychology that is hard to beat. When one buys at Aldi or Lidl, one is buying whatever brand they sell. Everyone is equal. But when one buys the deep discount brand at a conventional supermarket, one is buying the “cheap-o” product, regardless of quality. Maybe self-conscious people think a neighbor will notice — at the store or even when they see the label in the house — or the cashier looks at them differently.
It seems like there is a tipping point. If a discount concept is seen as cheap, it may not be socially acceptable for many people to shop there, but at some point, things pivot and they become smart places to shop. Being seen as stupid and overpaying for things is not socially acceptable either!
In any case, the rise of discounters and what it means both for competitors and the supply chain is a very important issue.
