It's a safe bet that the typical American's image of the European shopping experience is of quaint little shoppes, not of "hard discounters" who compete on price even more brutally, and with fewer frills, than Wal-Mart. Yet these cutthroat chains, led by companies like Aldi and Lidl, are on the march across Europe, and spreading from there to America, which raises a very interesting question. If European capitalism is, as most economists would argue, softer and less competitive than the American version, why is Europe the breeding ground of the hard discounter?
The basic idea behind these bare-knuckle retailers dates to 1960s Germany, says Boris Planer, a Frankfurt-based analyst at Planet Retail. After World War II, low-income Germans were looking for low-income prices. And hard discounters met their needs with reliable if spartan simplicity. Lidl, for example, has a bring- or buy-your-own-bag policy, and if you want a cart, you have to rent it. Yet by the early 1990s, stores like Aldi, entrenched for decades in the low-income marketplace, had begun to shed the lowbrow image and to spread fast. "I think it's the most interesting, compelling retail format to come along in a long time," says U.S. analyst Dan O'Connor, president of Management Ventures Inc.
Between 1992 and 2003, the number of hard-discount stores in Europe doubled to more than 32,000, generating 110 billion euors in sales. From Portugal to Norway to Poland, consumers are abandoning familiar brands for discounter replicas that are 30 to 50 percent cheaper. While typical supermarkets stock tens of thousands of items, and Wal-Mart up to 100,000, Aldi stocks fewer than 1,000, and Lidl less than 1,300, mostly from their own labels. By cultivating strong ties to fewer suppliers, the hard discounters build impressive economies of scale, streamline delivery systems and pack a big competitive punch. "Aldi ends up with dozens of times the buying power per item, and their products are sourced in huge quantities," says Planer. "It makes them unbeatable."
Europe's bureaucrats inadvertently helped promote this hypercapitalist force. Though they had helped to foil Wal-Mart's attempt to enter Germany in the late 1990s, their rules would help the homegrown discounters. In 1996, France exempted new small format stores from the administrative headache of seeking approval from a local council made up of neighbors (including possible competitors). This move was designed to benefit the small independent butcher and baker, and has been echoed elsewhere in Europe. Instead, the hard discounters rushed into these small spaces, which are well suited to their limited product lines. Since even the largest hard-discount stores are usually under 800 square meters, they tend to fly under many regulatory obstacles.
This is not to say the bureaucrats necessarily welcome the resulting competitive assault. In France, the number of discount stores of fewer than 300 square meters rose 70 percent between 1996 and 2003, while the number of hypermarkets (larger than 2,500 square meters) rose only 23 percent, and supermarkets (400 to 2,500 square meters) fell 10 percent. A report commissioned by the concerned French government last year concluded that the rule on small spaces had indeed backfired to the advantage of hard discounters, mainly the Germans. Lidl leads the discount market in France with nearly 1,200 stores and a 4.1 percent share of the consumer-products market.
But the rise of discounters isn't all about European regulation gone awry. Eric Montazel of TNS Secodip market research says the January 2002 switch to the euro was a turning point. Shoppers flocked to discounters when they suspected that traditional merchants were gouging them. "People lost their bearings on prices. It was a spark that sent them to hard discounters," says Montazel.
Social factors have played a part, too. Europe's population is aging faster than America's, creating a pool of shoppers on fixed incomes who are seeking value, says U.S. analyst Dan O'Connor. At the same time, immigration to Europe is at record levels, and most immigrants take low-wage jobs that also make them natural hard-discount shoppers.
Yet the market is not limited by income. Since their establishment four decades ago, the hard discounters have overcome the popular notion that says this kind of store is only for the poor. In France, a recent study by TNS Secodip showed that even affluent professionals were using discount marts, with the stigma having slowly faded away in favor of convenience. "Today, 98 percent of Germans shop at Aldi halfway regularly," says Planer. "From the unemployed electrician to the millionaire, everyone shops at Aldi. It's a classless thing."
It is not yet so for middle- and upper-income Americans, who like to think they are class-blind, but often can't resist snob appeal in shopping. Planet Retail estimates that by the end of 2004, hard discounters had 27.6 percent of the total food-sellers' market share in Germany, 8.5 percent in Spain and 6.2 percent in France, and only 1.7 percent in the United States. The concept is also growing faster in Europe than in the United States, where the leading domestic food-based hard discounter, Save-a-Lot, is still targeted specifically at the poorest neighbors not served by other retailers.
All this is likely to change fast, because hard discounting is forcing rivals to adapt. In France, the biggest food retailer, Carrefour, has set up its own low-end arm (called Ed) with 600 stores so far, and the Casino retail chain has a hard-discount line called Leader Price. Carrefour and others have begun to experiment with inexpensive private labels, even as Aldi and others are starting to sell name brands. Another big retailer, Leclerc, has threatened to open 1,000 discount locations this fall if the government doesn't reform the rules that favor them. French farmers have protested the hard discounters' practice of shopping for cheap produce abroad by dumping tons of fruit, vegetables and milk in their parking lots. "Everybody is learning what this means, learning how to compete, how to cope with the discounters," says O'Connor.
That includes the Americans. Wal-Mart CEO Lee Scott has called the hard discounters a rival that can't be ignored. Already, Aldi has 700 stores in the United States. Planet Retail predicts that the hard discounters will raise their U.S. market share to 2.4 percent by 2009, and have the potential for tens of thousands of new stores. "The main difference is time," says Bryan Roberts, Planet Retail's London-based global-retail-research manager. "In the U.S., they're only five or 10 years into the rapid acceleration of the discount concept. The thinking is that the U.S. is 20 years behind Europe." Fancy that--Old Europe with a thing or two to teach America about the latest in retail competition.