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While "hard discounters" like Aldi and Lidl can pose a serious threat to traditional supermarkets, the most effective response strategy seems not one of heads-on competition, but rather the improvement of each format's unique strengths, according to the American Marketing Association’s (AMA) “Journal of Marketing Research.”
Hard discounters have already taken Europe by storm, and now experience rapid growth in the U.S. as well. These hard discounters are strikingly different from "large" discounters such as Walmart -- assortments are limited in size and dominated by private label products, while investments in store atmosphere and service remain minimal. At the same time, this leads hard discounters to beat "regular" grocery prices by even greater margins than Walmart, making them a force to be reckoned with.
The study, which examines the competitive impact of these hard discounters through an analysis of household purchase behavior, both before and after the local market entry of 190+ hard-discounter outlets, reveals that while local hard-discounter entry may cause considerable sales losses for traditional supermarkets, both store formats can actually complement each other.
Consumers usually only switch to hard discounters for price-sensitive products, while they adhere to the broad and high-quality assortments of traditional chains for the remaining categories. Such "store complementarity" can prove to be a competitive asset in several ways.
First, supermarkets close to the hard-discounter entrant are generally better off than those located further away, as consumers are in this case more inclined to combine visits to both stores. Second, rather than trying to catch up in price-sensitive categories, traditional retailers should focus on improving their offer in categories where they are already strong. This makes them the preferred store-of-choice alongside the hard discounter – a strategy not only beneficial to the traditional supermarket, but also to its hard-discount competitor.
As such, by building on their own strengths, supermarkets can "prevent customers from fully defecting, while keeping the risk of a hard-discounter counterattack low," according to authors Mark Vroegrijk, Els Gijsbrechts and Katia Campo.
Traditional retailers competing with hard discounters are therefore advised to take on a "cooperative" approach that allows both formats' unique strengths to thrive – and even build on one another.
The American Marketing Association is the professional association for individuals and organizations who are leading the practice, teaching and development of marketing worldwide.