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Hard Discounters May Win Small-Box Sweepstakes

Hard Discounters May Win Small-Box Sweepstakes

America has lots of problems, but a lack of stores isn't one of them. No presidential candidates are campaigning on the platform of accelerating the expansion of food retailers. Neither is that a goal for most grocers, which have cut back on new openings in recent years to ease the glut of stores. One exception is the growing interest in small formats from Tesco, Safeway, Wal-Mart and others that threaten to one day flood the market with new square footage in a smaller way.

However, there's actually one segment of retail, indeed of small-store retail, that may not have enough stores. That is the limited-assortment category, also referred to as hard discounting in some circles. This class of retail made a big splash in Europe, but in the U.S. its participants, chiefly Aldi (part of Germany's Aldi Group) and Save-A-Lot (a unit of Supervalu) have rarely commanded the spotlight despite noteworthy successes.

All of that may now be changing, largely because the U.S. economy's nosedive has led many consumers to seek out the lower-priced, private-label-heavy assortments offered in these outlets.

Which brings up the question of whether there are enough of these stores to satisfy shoppers. In this week's Part Two presentation of SN's Financial Analysts' Roundtable (see Page 22), John Heinbockel, managing director at Goldman Sachs, New York, contends that the demand for hard discounters may actually outpace the supply. Here are excerpts from his comments:

“The most promising small-box concept is an old one but an underdeveloped one in the U.S. — the hard discounter. … When you realize there are more than 15,000 dollar stores in the U.S. and only about 2,200 hard-discount stores targeting the much bigger retail food market, it's very clear there could be 6,000 or 7,000 or 8,000 hard-discount stores in the U.S. ultimately. … Aldi is probably growing too slowly, and so is Save-A-Lot, which may allow a third competitor to come into the market.”

I think Heinbockel is onto something here, although I have a hard time imagining the number of stores at the upper range of his prediction. Both Aldi, at close to 1,000 units, and Save-A-Lot, at about 1,200, are on expansion paths, although not the kind of growth that would add thousands of stores.

These retailers are also trying to enhance customer experiences. Aldi is focusing on improving the look of its stores, better integrating its brands across categories, and selectively expanding SKUs. Save-A-Lot is giving its operators more leeway to practice local marketing and is hoping to expand its base to include younger, urban and ethnic customers. These changes are important because hard discounters will encounter more competition in coming years. How these retailers execute their changes will determine if they solidify a larger base or stumble by testing too many new directions.

I would bet on these players because the stars seem to be aligned. When you look at all the retailers experimenting with a wide range of small formats, it's clear that the most proven of the small boxes — the hard discounter — has the best shot at success.

TAGS: Walmart