Supermarket wars

The local supermarket industry has experienced disruptive change. The status quo has been challenged and I suspect the losers are the incumbents and the gainers the new entrants. I would even go as far as to say that the new entrants have altered the industry boundaries and changed the competition game to their advantage and a war of supremacy looms (if it hasn't already started).

In few words, two factors seem to be altering the competition game: First, the trend is for multi-stores under one brand (such as Scotts Supermarket, Price Chopper Supermarkets or Arcadia) to carve out greater market share at the expense of single-store operators. Thus, the one-store family-run supermarket (such as Lasco, Carters, Tower Supermarket, etc.) will continue to lose their competitive position unless they change their strategy.

Second, the industry has also witnessed the introduction of hard-discount stores (such as Lidl) which employ a different business model to incumbent supermarkets. In fact, Lidl, as a new entrant, is arguably changing the industry structure, customer shopping habits and pushing prices down. The losers being the incumbent supermarkets but also (possibly) agents and distributors of premium branded products.

Let's define what a hard-discount store is and how it differs from the traditional supermarket business model which some of us might be more accustomed to. I think we all know what a supermarket is, so I won't waste time defining it but a hard-discount store is something different: it is a minimally decorated outlet that sells a smaller assortment of foodstuffs and house goods, with lower staffing levels, an extremely efficient supply-chain, a private label focus and a preference not to be located on (costly) prime-real estate.

It must be highlighted, that a hard-discount store predominantly sells its own private labelled products at a price point which is significantly below that of branded products (research shows some 50 per cent less).

I know what some of you might be saying. Hard-discount stores all over Europe, not just Malta, such as Aldi or Lidl, are only performing well because of the recession. The raison d'être being that all customers tend to become more price-conscious in a recession, even the high-income segments, but soon migrate back to traditional supermarkets and branded products. But this is precisely the point I am trying to highlight. The entrance of Lidl in the local market place has changed the industry and customers' buying psychology. Hard-discount stores actually sell products that cost less but fare just as well (in terms of quality or product performance) as their more expensive and branded equivalents.

Market research in Germany, for example, shows that 81 per cent of Aldi's private labels were rated as excellent or good compared to 74 per cent of branded products. In addition, business research confirms the prevalence of "smart shopping". Customers across all segments (low-middle-and-high income) choose carefully where they do their shopping. They are less brand-loyal and more inclined to shop "smartly" from both traditional supermarkets and hard-discount stores.

So hard-discount stores are not "just for the poor", they sell quality products at price points which are sometimes 50 per cent less than their branded competitor products and industry experts forecast existing growth levels to continue even after the recession (Malta being no exception to this trend).

I think local, incumbent, supermarket operators cannot afford a price war with hard-discount stores given the competitive advantage international operators such as Lidl have in their supply chain, economies of scale and geographical reach. They also stand to lose more market share as hard-discount stores cleverly mix their own (cheaper) private-labels with branded products; a tactic which generates greater incoming traffic of customers.

For example, some 30 per cent of Lidl's offerings are manufacturers' brands (such as Nescafe, Kit-Kat and Weetabix). By doing so, they cleverly attract the other customer segments who feel more comfortable seeing branded products they are familiar with on the shelves but who will at some point in the future try a private-label product and presumably learn the art of "smart shopping"; perhaps realising that the price-premium for branded products is more due to expensive marketing and advertising than anything else.

I also think that the time has come for one-store operators (such as Lasco, Carters and Tower Supermarket) to change their business model and consolidate so as to operate multi-stores across Malta under a brand. I say this because the industry is increasingly characterised by excess supply, cut-throat competition and low-profit margins and consolidation is the logical next step. I would imagine that Malta could easily handle three big super market brands with multiple stores located all over Malta.

From a strategic perspective, therefore, each and every supermarket needs to understand how the competition game is changing. By doing so, it can start to think of how to align a value proposition that attracts buyers, a profit proposition that enables the company to make money out of the value proposition and a people proposition that motivates its own to execute the strategy. Thus, one hypothetical supermarket chain could target the customer segment that values "customer service" above everything else even if at a higher price point, the second could target the customer segment that values convenience (such as time and location) even if product variety is limited. Whereas the third hypothetical supermarket chain could pursue a low-cost strategy, but each supermarket chain would be pursuing its own resource-specific strategy without the need of starting or entering a supermarket war.

In conclusion, I think that the new entrants (the hard-discount stores) have outperformed the incumbents by breaking the existing value-cost trade-off and should a price-war begin (or perhaps just escalate since the war may have already started) there can only be one winner. So if you are a single store supermarket operator, think strategically before entering a supermarket war, since the competition game has changed and customer shopping psychology has changed too!

Mr Fenech is managing director of Fenci Consulting Ltd.

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