Limited assortment discounters are challenging the orthodoxy of the good, better, best hierarchy in many categories. First pioneered by Tesco, and now copied across many markets, this strategy may need to be reassessed.
The common approach by most retail chains in Europe, including the UK, has been to use the good or value tier to compete on price with the likes of Aldi and Lidl. However, this takes no account of quality because, in nearly every category, discounter quality is better than the ‘good’ tier in mainstream retailers.
An example is chocolate spread, where both Aldi and Lidl benchmark Nutella (containing 13% hazelnuts). Meanwhile many retailers across Europe use their value chocolate spread to compete with the discounters, yet these products can contain as little as 1% of hazelnuts.
Discounters attract consumers by offering amazing value, through low price and good quality. That means consumers across Europe now seek value ,and retailers that do not meet this need will lose customers.
The first retailer to take an alternative approach was Edeka in Germany. It has used its value brand Gut & Günstig to match Aldi not only on price but on quality and packaging. There is no compromise, so its value tier could end up better quality than even the Edeka core brand. Edeka has subsequently reviewed the core Edeka brand lines and, where it could, improved the quality beyond the branded equivalent. Where it cannot add value it has delisted the Edeka core branded line, leaving just Gut & Günstig.
When we compared a basket of 35 products, the pricing in Edeka for Gut & Günstig matched the same pricing index as Aldi at 40% of the national brand. Edeka also matched the Aldi quality, in both ingredients and packaging.
Rewe has now mirrored the Edeka approach, as have Jumbo and Albert Heijn.
So, if major retailers improve good-tier quality, where does that leave the better range and if they drop the price of better where does that leave good and premium? If the price gap between core and either value or better is too large against premium, will that alienate consumers?
Richard Harrow is a partner at IPLC