WHY ARE LOW-END RETAILERS (LERs) SUCCESSFUL AND HOW COULD CONSUMER PACKAGED GOODS (CPG) BRANDS AND RETAILERS FIGHT BACK? WHY LOW-END RETAILERS (LERS) ARE 1 BECOMING MORE AND MORE IMPORTANT Low-End Retail is a huge success in Europe and BeLux. In Belgium it represents a 1% market share of all FMCG, increasing to 2.1% when looking only at home & personal care based on the IN THIS (1) GfK definition of Low-End Retail . PAPER, WE OTHER INTERESTING FINDINGS IN THE STUDY WILL: ARE (GFK MAT Q2 2016) AS FOLLOWS: Clarify the key drivers enabling these players to grow so fast in the LER has a 70% of LER shoppers 7.1 trips on average across saturated Belgian market and what penetration of bought a home and all FMCG (+7% versus MAT 1their possible future could be. 40.6%, with almost personal care product from Q2 2015) as a benchmark, 2 million households a LER the shopping frequency at buying from LERs at drugstores is on average We describe the evolution of 5 Low- least once a year 5 trips per year End Retailers and what the future might bring. We organised a price 2comparison in Belgium of 6 products The growing market share The average basket value is €18.5 monitored at Action, Trafic, of LER is driven by more (FMCG products only, +8% versus MAT Q2 2015) – Colruyt, Delhaize supermarket and shoppers, buying more for home and personal care only the average basket Carrefour Market. often and with bigger size is €7.5 baskets Last but not least, we elaborate on how CPG companies and retailers can react to this evolution. We LER is taking value The top 20% greatest LER shoppers : will analyse the potential steps from all actors in the -Go 18.1 times per year- 3 (food) retail market -Spend on average €24.3 per visit- that could be taken in the fields -Are mainly low-income households with children, of pricing, category management, 2-person low-income households and singles assortment and strategy. In between 40 and 65 years of age- September 2016, we launched an online questionnaire for top managers of retailers and brands This 1% MS (market share) for LER in FMCG The scope of this paper will focus on 5 retailers in BeLux. We got 99 responses, is equal to the market share of FMCG in (Action, Big Bazar, Extra, Flying Tiger and providing a good representation e-commerce in Belgium (source: GfK). Trafic) who are re-inventing the existing retail of the opinions of the retailers and So why do we pay so much attention to online business in Europe. This is not an exhaustive the brands. We use the findings of developments, whilst placing less importance list of retailers but represents a strong idea this online questionnaire, as well as on Low-End Retailers, despite the fact that they and insights into how this market could evolve. some in depth interviews with key have a huge economic impact? Online shopping Other retailers like Wibra, Zeeman, Hema, stakeholders. is hip and trendy but another worthwhile Blokker and even Ikea could be added to make explanation is that Low-End Retailers prefer the list complete, but experts believe this would In this white paper we used 3 kind of to stay under the radar. With this strategy, not change fundamentally the view on this new sources: a consumer panel (B2C), a Low-End Retailers are following the strategy way of doing business. panel of c-level in retail & FMCG (B2B adopted by Aldi and Lidl. panel) and market data (all sources are The Retail Academy unless specifically mentioned) (1)GfK definition is the FMCG part of Action, Zeeman, Blokker, Trafic, Ikea, Big Bazar, Wibra and Hema - GfK data, MAT Q2 2016. 2 WHO ARE THE MAJOR 2 LOW-END RETAILERS? It is hard to define Low-End DEFINITION OF LOW-END RETAIL Retail as there is no general agreement on which players PRICE PRODUCT PLACE PROMOTION STRATEGY should be included. However, Action, Trafic, Extra, Flying Focus on very low Huge amount Mainly positioned None or limited Main focus on Tiger and Big Bazar all have the price/dumping of obsoletes at b-locations Mainly use growth (number prices (margin is from brands No franchise folders of stores), following characteristics. purchase driven) in personal/ followed by value home care and (high basket size) food (at least 3 Turnover mainly food categories realised by mono- selling branded channel retail products) (brick & mortar Fast changing shops) assortment Some call No local products themselves Limited number ‘value retail’ as of categories or they have a high limited offer in ‘price/value’ each category perception Quality is a huge topic of (2) Whether the products offered by discussion (2) Low-End Retailers offer good quality remains a huge topic of discussion. The product is not always the same. Jef Colruyt has a clear opinion and believes products at Action, for EVOLUTION TURNOVER IN MIO € instance, do not have the same high quality (De Tijd, January 30th 2016). 800€ On the left: Fanta at Colruyt +21,6% On the right: Fanta at Action 700€ +21,8% 600€ 500€ 400€ 300€ 200€ 100€ 0€ 2013 2014 2015 ACTION TRAFIC EXTRA BIG BAZAR FLYING TIGER 3 When benchmarking this evolution with the of comparison, US value retail has achieved 3 main food retailers (Colruyt, Delhaize and a 10% CAGR (category growth) for the past Carrefour), they grow with 5%, while Aldi and 12 years and the UK 18.6% in 2010-15. This Lidl grow nearly 1%. Smaller retailers are is for the total segment, with some players losing 3%. achieving even higher growth for extended periods of 5 years and more. On a global scale, Low-End Retail has a very high level of growth historically (and one that More details on each retailer can be found in is expected to continue in Europe). By way Appendix. POSITIONING IN THE MARKET Price & service perception service en advantages balance RELATIVE HIGH ADVANTAGE Low-End Retail RELATIVE LOW RELATIVE HIGH SERVICE SERVICE RELATIVE LOW ADVANTAGE Source: GfK (2013) - Low-End Retail position estimated by The Retail Academy Experts 4 Entry Phase Low margin Low prices 3 Vulnerability Phase Limited or THE SUCCESS no services High prices Low-end facilities OF LOW- Luxurious facilities THE Excellent services END RETAIL and amenities WHEEL OF EXPLAINED RETAILING ON THE THEORETICAL FOUNDATIONS Trading-up Phase Moderate prices OF ‘THE WHEEL Better facilities Some services OF RETAILING’ Increased quality merchandise Source : Pearson Education, Inc. Publishing as Prentice Hall LOW-END RETAIL IS AT THE ENTRY PHASE Although often cited in many marketing Most of the Low-End Retailers have huge Low-End Retail is ‘offer-based’ and not journals worldwide, it is important to remain distribution centres where they can stock customer centric. The growth per store quickly cautious in explaining all of the success products for a long period. Their negotiation reaches a peak, and that is why the main way to of these Low-End Retail chains using this power is based on the large quantities they create growth is by opening a new store. theoretical model alone. purchase. Part of their inventory also comes The average turnover per store is €1 million to from parallel trade and acquiring cheap stock 3.5 million. This is in line with homing and DIY THESE 7 PARAMETERS DEFINE lots, leaving the local CPG companies in the stores where the average turnover per store THE SUCCESS OF LOW-END cold. Local CPG companies have limited or no varies between €900k and €4.4 million. RETAILERS impact on this. The purchase is driven essentially by 1 LOW PRICES 2 LOW MARGIN impulse-based shopper attitude, although Prices at Low-End Retailers are very low The margin will depend on how well there is a destination element to it as well. and thanks to the price/promotion focus of they negotiate the purchase price and on As mentioned before, GfK data illustrates customers probably the biggest success factor efficient low-cost operation more than that 70% of LER shoppers buy home where Low-End Retailers are concerned. on the added value they can create. The and/or personal care products. The Action, for example, manages to offer operating profit of Action, for instance, is changing assortment is also an important A-brands at the lowest price on the market. around 11% of sales. It is not uncommon driver in attracting their shoppers every This chain can afford this thanks to low-gross for Low-End Retailers to operate at a profit week and making them come back margins and limited or no services. margin (EBITDA) of above 10%. every week. 5 There are initial indications to show that LER market. From a LER perspective, it makes Most respondents (90.2%) agreed that is also working on category management. sense to quickly ‘capture’ a country by price is the main driver where LER is The shopping route becomes more logical. covering it with stores (supplied from a concerned and 39.4% of the respondents In some categories there is a vast basic & single DC). The next wave of growth will agreed that LER products are of a much logical assortment, the more ‘expensive’ probably be found in the next country, lower quality than similar non-LER products are in the most visible spots rather than further optimising the stores products. and promotions are displayed at a in the first country. This implies that there gondola head. will be a ‘ceiling’ to the market share of LER (similar to discounter supermarkets).