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Chapter 1: How hard discounters are disrupting the traditional retail model
Why would you even want to go to a hard-discount store? Because the prices were rock-
bottom. You could fill up your shopping cart for a fraction of the price you had to pay in
conventional (“Full-service”) supermarkets.

Hard-discount retailers offer basic goods and daily necessities at the lowest possible prices,
while maintaining high-quality standards. To reduce costs, hard discounters often display
items on shipping pallets and in the boxes in which they arrive. The store is minimally
decorated and offers a limited assortment of consumer packaged goods and perishables –
typically less than 2,000 stock-keeping units (SKUs). Offering a limited assortment of
products enables hard discounters to provide a high volume of basic goods and helps to
streamline efficient operations.

Why do brands matter?
1) Brands make decision making easier
2) Brands are a quality assurance

Three important developments have made hard discounters increasingly attractive for middle-
class and even high-income consumers.
- Stagnating incomes
- The impact of recessions
Why do we not see a return to conventional retailers after the recession? Because as new
hard-discount shoppers learn that the quality, assortment, and shopping experience is actually
better than they had expected, a significant proportion of them remain loyal to the hard
discounter, even after the necessity to economize on expenditures is over.
- Smart shopping phenomenon: increasingly, it is considered ‘smart’ shopping to
purchase hard-discounter products of (supposedly) comparable quality for a much
lower price, rather than being ‘ripped off’ by high-priced manufacturer brands or the
store brands. It is a global trend in consumer behaviour.

The rise of hard discounters costs conventional retailers directly via lost sales and indirectly
via downward pressure on prices. Prices at hard discounters tend to be 33-50 percent below
those at other retailers (direct effect). These retailers have responded to the hard-discount
attack by reducing the prices of national brands, as well as their own store brands (indirect
effect).

The rise of hard discounters poses a triple-whammy threat to brand manufacturers:
- Any private-label item bought at a hard discounter is a sale lost to brand
manufacturers
- The success of hard discounters compels other retailers to put more emphasis on their
own store brands to try to be more price competitive
- Brand manufacturers feel the pressure to reduce prices, or at least to restrain price
increases, in order to retain market share.

In the US, hard discounter have been less of a factor in grocery retailing than in other
developed countries. However, change is expected because:
- Consumer receptivity to hard discounters
- Market opportunity
- Hard discounters’ plans

, Chapter 2: Understanding the hard discounter business model
The core of the business model is the virtuous cycle, in which a high volume per stock
keeping unit (SKU) leads to irresistible value for money for consumers. This contributes to
high profitability that funds expansion of the store network, which further increases the
volume per SKU, and so on.

High volume/SKU
- Consumer desire to simplify choice  limited assortment  small stores
 irresistible value for money
- Private-label focus  long-term relations with suppliers  high quality, low price
 high profitability
- Low staffing costs  low store investment  low overhead
 rapid store network expansion
- Uniform format  short payback period  incumbent myopia

Why would consumers patronize a store that limits their freedom of choice by more than 95
percent? Because more choice is not always preferred by shoppers.
Economic theory dictates that the greater the number of options in a product category, the
higher the likelihood that consumers can find a close match to their needs. This attracts a
broader, more diverse set of people to the store, as they can be more confident that they can
find a suitable item in that store, facilitating one-stop shopping.
A stream of subsequent work has documented that consumers regularly experience choice
overload, leading to less satisfaction, more post-purchase regret, and lower likelihood of
purchase.
Why would a large assortment lead to a lower, rather than higher, probability that a consumer
makes a purchase from the assortment? Because a large assortment can be cognitively
overwhelming.

When is preference for a limited assortment most likely?
- If the shopper is under time pressure
- If the shopper is intent on buying rather than browsing.
- If the shopper is focused on making a satisfactory decision.
- If the consumers has limited brand knowledge.

Most of the time, consumers are satisficers, not maximizers. Satisfices prefer to quickly
choose the option that meets the minimum criteria.

How private-label suppliers in Europe experience the relatonship with hard discounters and
conventonal retailers
Hard discounter Conventional retailer
Negotiations Very demanding but Very demanding and prone
adherence to agreements to additional demands
afterwards
Relationship with supplier Focus on longer-term Transactional and short term,
collaboration to the mutual the main concern being to
benefit of both parties have bought at the lowest
price
Number of contact persons Mostly one point of contact Multiple points of contact,
involving multiple