This, along with the fact that the multiples are deploying whatever tactics necessary to prevent the hard discounters getting a price edge, will not make life easy for the brands and hard discounters hoping to hop into bed with each other.
But, as shopper demographics change and discounters attract an ever wealthier customer with an eye for the smart buy, the offer will have to evolve to suit - and that points to more branded goods.
Wilson says: “We’re starting to see hard discounting really take off in areas such as clothing in the multiples.
“People are becoming quite proud of their bargain purchases, and it’s going to change in food as well. Suppliers are going to find a way of getting their brands into the discounters without upsetting the multiples. I suspect the challenge will be to manage the balance of supply.”
There is nothing new in supplying exclusive lines to a grocery retailer. But when that retailer is a hard discounter, it is a different story. Yet that is exactly what Nestlé is doing for Lidl in mainland Europe.
Vice chairman and chief executive officer Peter Brabeck-Letmathe’s rationale is brutally simple: “If you don’t adapt, you’re dead,” he says of the decision to supply an exclusive two-litre ergonomic bottle of Vittel to the hard discounter. “We have 54 loaded trains leaving Vittel and going to the Lidl warehouse. This fully dedicated line allows us to offer relatively low prices while keeping high margins.”
Nestlé is not the only supplier in mainland Europe touting for more business in the hard discounters, and now big brands in the UK appear to be following suit. Masterfoods, Premier Foods, United Biscuits, Cadbury Trebor Bassett, Procter & Gamble, Burton’s Foods and Interbrew are just some of those with brands jostling for shelf space not only at Netto, with its long-standing policy of stocking 20% branded lines, but also at Aldi and Lidl.
So are big brands falling in love with the hard discounters? And if so, how are they avoiding confrontations with the multiples, which they also supply and, rumour has it, are decidedly hostile to suppliers who want to swing both ways? As far as Nestlé is concerned, the hard-discounter market is one of the only remaining avenues for growth in a mature European market.
Brabeck-Letmathe says frankly:“In Western Europe we have negative demographic growth. At the moment, 40% of our turnover comes from Europe, but one day it will be a third.
“First, you have to ensure and keep your place. Second, you have to follow your customer whenever, wherever and however they shop. If the consumer wants products in hard discounters, they have to be in hard discounters. That’s why we now have quite an aggressive hard-discounter strategy.
“It allows us to palliate the negative growth,” he says, pointing to one of the markets Nestlé is finding toughest. “In France, for the first time, food consumption is down. You can swim in the river for a certain period, but eventually it will take you down.”
Nestlé has increased its European turnover in the hard discounters to 5% in as many years. It now supplies Lidl and Netto, and is hoping to renegotiate a deal to supply Aldi. It also supplies Wal-Mart, which as Brabeck-Letmathe points out, is the biggest discounter in the world.
He is not unduly worried about lower price points in the hard discounters: “The fact is that net prices are not so different. Let’s take France. A multiple may have a high list price. But they have to give promotions, so the net price is not so different.”
It should not be an issue if the offer is sufficiently different, he adds. “We have to adapt to specific customer needs. We’d never have thought that we’d have 25 people in Bentonville co-ordinating strategy - or a best-performing product in Wal-Mart.”
However, he concedes, Lidl and Aldi are tough nuts to crack because of their limited exposure to branded goods.
Nestlé’s strategy is driven largely by the dominance of the hard discounters in mainland Europe. Sarah Wilson, associate director at market consultancy Egremont, says: “Suppliers are being squeezed every which way. With the hard discounters continuing to expand, they’re going to have to look at ways of reinventing their brand offer for the market.”
In the UK, the market is smaller thanks to the pre-emptive push by the multiple players into low-price territory. This has meant that many big brands have been reluctant to list in hard discounters, not just because of the risk of brand erosion, but because of fears they could jeopardise their relationships with the multiples. Rumours that Tesco has been heavy-handed with suppliers it suspects are supplying Netto on better terms do little to settle the nerves. Yet, even here, there are signs that attitudes are changing.
Changing shopping patterns and shopper demographics are influencing both how receptive hard discounters are to branded goods and how willing suppliers are to provide them.
Mike Tipping, head of customer relations at Cadbury, says: “Our strategy will always be to adapt to what the shopper requires. It is driven by the demands of shoppers; and it is not driven by Europe, but what the UK requires.”
Procter & Gamble takes a similar line. It supplies a broad range of health and beauty and household products as well as snack brand Pringles to Netto and a limited range to Lidl, though nothing to Aldi.
Gary Coombe, director of customer business development, reasons: “Our business with the hard discounters is growing generally and growing faster in Netto, though it is still a relatively small player in the UK. Our brands need to be sold where consumers choose to shop. That includes Aldi and Lidl.”
Like Nestlé, P&G has adapted its offer in an effort to avoid direct price comparisons. “We offer differentiated solutions - different pack sizes, different varieties. A lot of discount shoppers are convenience shoppers, so smaller pack sizes make sense. We’d supply larger packs to Tesco, and a fuller range generally to the multiples.”
Coombe claims there is not much in it when it comes to the difference in terms, but admits: “Things can be awkward. All I would say is that as Netto grows, Tesco will be keen to be competitive with them, just as Asda will be.”
The other stumbling block to growing branded presence in the hard discounters is the tendency on their part to list branded goods on a short-term basis, he says. “We are very keen that any discounters interested in listing P&G brands do so on the basis that they want a long-term relationship with us. There is evidence that discounters are listing just for a short period of time to drive footfall and then delisting. We have little interest in listing for a short period and then being kicked out.”
Stuart Lane, general manager for export and confectionery at Burton’s Foods, which has supplied branded and own-label goods to the hard discounters since they entered the UK market in the early 1990s, agrees that short-termism has limited the number of branded goods on the discounters’ shelves.
But long-term listings are not impossible, he says, pointing to Wagon Wheels, which Aldi has stocked for the past two to three years in the UK. He adds that Burton’s Foods has a “steady business strategy” with branded goods. Nevertheless, around 90% of what it supplies to hard discounters is own label. Lane is sceptical that the discounters will suddenly increase their exposure dramatically to branded goods. “I don’t think there is going to be massive growth, because their focus is on providing high quality own-label products.”
If they can, who’s to say that, five years from now, these fledgling relationships won’t have turned into full-blown love affairs?