Discount Channel Update: Dollar General vs. Aldi
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Discount Channel Update: Dollar General vs. Aldi
In a time of sluggish overall retail sales, value-focused discounters have experienced a
tremendous surge of growth. The strong value proposition discounters offer through their low
overhead, limited assortment, no-frills business model positioned them to take advantage of
consumers’ recent shift to price-conscious shopping. While growth in the discount channel has
correlated with downturns in the overall economy in the past, aggressive expansion and
innovation in the channel by discount retailers like Dollar General and Aldi seen today may
lead to a more permanent shift in the retail landscape with significant share swinging to
discounters. In this article, RNG will compare and contrast these two discounters’ strategies
and discuss their larger implications in respect to the discount channel and retail industry as a
whole.
Source: RNG Database
Key Points to Consider
Growing addressable low-income and value-oriented market
Aldi continuing to develop private label
Dollar General breaking the discount mold
Discount channel holds high potential
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Growing Addressable Low-Income and Value-Oriented Market
(Source: www.calculatedriskblog.com)
Since the peak of employment in 2007, 6% of total U.S. jobs have been lost to date. More
importantly, unemployment, which is now at 9.3%, has been unprecedentedly slow to rebound
and shows few signs of a quick recovery in the near future. As of this month, 14% of Americans
nationwide rely on food stamps – 16.2% higher than the same time one year ago. This low-
income audience, the majority of which live paycheck to paycheck, have been accommodated
by discount stores with convenient locations, expanded merchandise including fresh foods,
smaller pack sizes, and an overall small product selection focused on necessities. This growing
low-income market continues to drive the bulk of sales within the discount channel.
Less cash-strapped Americans are also shifting portions of their budgets to discount stores.
The recession has caused many shoppers to become more value-conscious and budget
expenses wherever possible. Over the past few years, we have seen shoppers begin to look
past the low quality, low status stigma that comes with shopping at a discount store. When
shopping for necessities or “topping-up” the kitchen cabinet, mainstream Americans are
increasingly migrating from grocers like Whole Foods and Albertson’s to discount retailers like
Dollar General and Aldi. While this trend originated as a necessity during the recession, many
are continuing their trips to value stores.
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U.S. faces massive distressed populations
(Source: US Bureau of Labor Satistics, RNG Research)
Aldi Diversifying Private Label Offering and Evolving Store Layout
Aldi bases its business off of a simple consumer proposition – low prices. Low overhead,
concentrated buying power, predominantly private label products, and minimal advertising allow
hard discounters like Aldi to cut prices to points that rival mass merchandisers like Walmart.
Aldi continuing to focus product selection around private label
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In the past, it was common for an Aldi store to carry only 700 SKUs. In the last few years
however, Aldi has been diversifying its private label offering. Each Aldi now carries an average
of 1,400 high volume SKUs per store. As opposed to carrying only one SKU per item in the
past, Aldi has expanded certain categories to include multiple tiers per item. Approximately
95% of these products are private label. National brands are marketed as “special buys” and
are normally only sold for a limited time or while supplies last. Although SKU count has
expanded over the last few years at Aldi, their selection is still significantly limited compared to
approximately 30,000 grocery SKUs carried at an average supermarket.
As Aldi has expanded the range of its private label products, the retailer has also been
upgrading the quality and brand perception of its private label lines. Moving away from old
fashioned looking packer labels, Aldi has developed brand packaging on par with national
brands without knocking off the category leaders who are likely not in the store anyway and
portray a better balance of quality and value.
Aldi’s private label increasingly diversified while portraying premium quality
Another advancement at Aldi includes brand development across categories. Whereas in the
past Aldi’s private brands were item specific, newer brands like Aldi’s health-conscious Fit &
Active now stretch across multiple categories of products. This along with multiple tier item
strategies in many categories helps expand the appeal of the offering to a wider range of
consumers as well as to increase up-selling within its existing shopper base.
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Revamped refrigerated section, wider aisles, and low sight lines increase shoppability
With its expansion of private label Aldi has also begun to roll out larger stores. Previously
averaging 15,000 square feet, the newest Aldi stores are between 16,500 and 18,000 square
feet. While much of this extra space is due to an increased product line, Aldi has also
introduced low sight lines as well as wide, open aisles to its new store layouts. Combined with
its growing premium line of private label products, Aldi’s stores have become a much more
shoppable and relevant shopping destination for Americans who have previously viewed
discount stores like Aldi as cheap, low-quality, grungy shops to avoid unless necessary. The
range of auto brands in the parking lots is testament to the success of this approach. The
resulting increase in shoppability may be temporary however if continued expansion of Aldi’s
product range begins to approach clutter.
Currently there are approximately 1,100 Aldi locations in the U.S. with short-term plans to open
an additional two stores every week. RNG estimates Aldi bannered stores to total 1,400 by
2014. This is a relatively slow and deliberate ramp-up approach by Aldi compared to its discount
competitors.
Dollar General Redefining Value Retailing
As the largest U.S. retailer by store count with over 9,000 locations, Dollar General has no plans
of slowing down as RNG projects the retailer to grow sales at an 8.5% CAGR while aggressively
expanding stores at a 4.4% CAGR between 2010 and 2014.
With 10,000 to 12,000 SKUs per store in a considerably smaller box compared to Aldi, Dollar
General offers significantly more variety to its customers. While Aldi generally carries only one
private label item of a particular product, Dollar General will most likely carry a number of
national brands along with its own private label brand for that same product.
SKU count and box size show differences in product selection at Aldi and Dollar General
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(Source: RNG Research)
The result of these two strategies is that Aldi has significantly higher sales per SKU. Dollar
General has yet to realize store level productivity compared to Aldi, some of this is likely due to
the number of new stores still ramping up to a normal rate. Also Dollar General’s wider
assortment of non food and general merchandise, dilutes this performance metric.
Aldi much more efficient in generating sales per square foot
(Source: RNG Database)
Consumables have been driving an increasingly large share of sales since the recession and
have been a focal point for Dollar General as well as for the broader discount channel.
Dollar General % of Sales
Category
2007 2008 2009 2010 YTD
Consumables 66.5% 69.3% 70.8% 72.3%
Home Products 9.2% 8.2% 7.4% 7.0%
Apparel 8.4% 7.9% 7.3% 7.0%
Seasonal 15.9% 14.6% 14.5% 13.7%
Consumables growing share of total sales
(Source: Dollar General)
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Dollar General incorporates more national brands into product mix Unlike Aldi, Dollar General has been developing its portfolio of national brands in conjunction with its portfolio of private label brands. While private label accounted for 21% of consumables sales in 2009 up from 17% in 2007, the majority of the remainder was attributable to national brand sales. With higher margins on private label products, Dollar General plans to continue the expansion of its private brand portfolio – particularly in its non-consumables offerings. Although national brands play a key role in Dollar General’s sales, the discounter nevertheless actively attempts to persuade shoppers to trade down to its “equal quality, higher value” private brand products. CONFIDENTIAL & ©RetailNet Group, www.retailnetgroup.com Page 7
National brands still face high price competition from Dollar General’s private label
Dollar General sign post branding departments with national brands
CONFIDENTIAL & ©RetailNet Group, www.retailnetgroup.com Page 8Dollar General has been continuing the roll out of its “customer-centric” stores which feature a larger box at around 9,000 square feet, expanded foods, increased staffing, and more organizational signage. This strategic shift away from a bare bones discounter business model creates some risk for the retailer. Hoping to retain newly captured middle-income customers who traded down from more premium retailers during the recession with this new format, Dollar General is working to improve the shopping experience and provide a one-stop shop for customers in the future. However, as a discount retailer, Dollar General could be moving into the swampy middle ground of retailing with higher overhead, higher expectations, and lack of scale to cover it all. In a recent survey conducted by Nielsen, Dollar General reports that 97% of shoppers with household incomes greater than $70,000 said they would continue shopping at Dollar General despite an improvement in the economy. Dollar General has targeted these higher income households as a key opportunity for growth. The value retailer’s alignment of quality national brands with increased shoppability demonstrate this. We will have to wait and see if their store locations and modified business model will support them and if the new normal will play right into their hands. Discount Channel Holds High Potential The discount channel has been experiencing tremendous growth, with the recession fanning the flames. Both the participants and many analysts expect the channel to maintain this growth even as the U.S. economy begins to recover. The key challenges for discounters will be to not lose their value business model and performance while trying to retain customers who traded down during the recession and to continue to build on the broader trend within the value channel - smaller stores more conveniently located to reduce travel time and cost. Continued penetration is another opportunity with improved image as Dollar General estimates that among people who live within range of one of their stores, only 41% have shopped at them within the last year. With only 3.2% of total U.S. chain sales attributable to discounters, compared to much of Europe where the discount channel’s share of sales are in the high teens, the value channel is currently a high growth market with equally high potential. With a similar shift in development focus as the Targets and Walmarts of the world, moving from smaller towns to more densely populated older suburbs and urban markets, the discounters have the advantage of speed and easier site acquisition while the disadvantage of scale and operating leverage. The battle just moves to where more people can participate and watch. CONFIDENTIAL & ©RetailNet Group, www.retailnetgroup.com Page 9
Conclusions & Implicaitons to Retailers and Suppliers
Retailers:
Mainstream retailers, especially traditional supermarkets will need to continue to address
value-focused shopper sentiment or risk continued loss of market share and relevance
to discounters.
Retailers are having to learn new business skills to compete in this new reality. This
includes not just development of distinctive, multi tiered private label products, but also
learning how to optimize that business model once it is joined. Packaging changes and
fragmentation are far more costly to private label productivity than national brands, so
retailer organizations and their suppliers need to balance that in their exuberance to ride
the recent wave of private label growth.
Non-discount retailers will really need a balanced offering of value and experience to
continue to maintain relevance and choice by shoppers with more acceptable choices
than in the past.
Suppliers:
Shoppers have gotten past the old stigma and image of discount stores. Suppliers will
need to follow and expand distribution and sales in this class of trade. The challenge is
one of a different and more limited assortment mix, fewer marketing and merchandising
opportunities, and balancing the lack of scale of individual stores with demands for
pricing relevance. The traditional Drug Channel model of higher retailer margins, higher
prices does not work in the discount channel.
As the discount channel gains scale and even more visibility, branded suppliers need
pricing and merchandising strategies that are relevant to the needs of the channel while
not destroying brand equity and relevance or sales in other larger scale channels. This is
likely one of the most significant challenges facing suppliers today.
Suppliers need to continue to be wary of degrading brand value by offering products in
the discount channel. A customized, channel-specific offering is necessary for most
brands.
As always we appreciate your comments and feedback
Let us know what you think!
Bryant Shao
Research Analyst
RetailNet Group
Bryant.Shao@retailnetgroup.com
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