After years of being ignored, the hard discounters now find big brand suppliers such as Nestlé, Procter & Gamble, Kimberly-Clark and Ferrero Rocher literally falling over themselves to get through their doors. While winning listings with Aldi or Lidl can be great news for manufacturers keen to build a new sales channel, it can also be irritating for rival retailers. Normally, those retailers like to keep their concerns private. But this week brand owners were sharply reminded just how damaging this trading u-turn can be to existing relationships.
Hans-Joachim Körber, CEO of leading German retail group Metro, is the first to break ranks and warn manufacturers that they are making a big mistake supplying their products to the discounters.
Speaking at the Anuga trade show, Körber’s anger was mainly reserved for suppliers that have decided to supply the discounters with just a few lines with the best sales volumes. He claims this strategy unfairly penalises chains that stock a manufacturer’s full range, and says these retailers have the most to lose should value be driven out of the category as a result of products being listed in the discounters.
The issue is a hot topic in Germany, where discounters’ share of the grocery sector has grown to 40% from 25% in the early 1990s. Conventional mass-market retailers are struggling to compete and prices have been crashing as a result. However, analysts say Körber’s anger is not just a case of sour grapes. His argument will no doubt resonate with UK retailers that continue to keep close tabs on discounters and the suppliers that deal with them.
Although much of the action is happening across the Channel, one top manufacturing analyst says the thawing of relationships between big brands and discounters is a European trend and he warns: “It is a very difficult circle to square and could backfire on suppliers.”
When you look at some of the deals made recently in Europe, he reckons it is understandable that retailers such as Metro, which owns the Real chain, should be so angry. “I am not convinced that the latest attempts from suppliers to offer a different product to the discounters go far enough. For me, Nestlé selling its Vittel in Lidl in a different pack format is not a sufficient differentiation. It’s easy to see why mainstream supermarkets get upset when a supplier asks them to sell the same product in a number of formats at a higher price.”
The analyst also argues that the decision of other suppliers, such as Unilever, to offer mainly local brands through the discounters can still damage relationships. “The fact that the discounters are able to sell branded items for less than some retailers can buy them is bound to create friction.”
There are clearly no easy answers. When a manufacturer decides to look at working with the discounters, the mainstream retailers will naturally get twitchy. However, in countries where the discounters have such a high market share, they would miss vital sales by ignoring them.
Kimberly-Clark, for one, says there are no issues in supplying all retailers. A spokeswoman says: “Kimberly-Clark’s strategic focus in Europe remains on the full-service retailers, where we have the greatest opportunity to showcase our brands. The challenge for us is to find the right products to support our customers across all areas. There are ‘value shoppers’ in Europe who use discount stores and, in order for us to reach more consumers, we do sell a limited product range through selected soft discounters and have had talks with some hard discount stores.”
As big brand suppliers continue to plough this new furrow in countries across Europe, relationships need to be managed carefully, otherwise it is inevitable that tensions will increase. However, retailers don’t necessarily have the upper hand. As one analyst says: “Ultimately brands could be damaged if retailers get tough and start delisting all of a certain supplier’s lines. But we are talking about major suppliers and customers expect to find these key lines - although it would be interesting to see what would happen if smaller suppliers began dealing with the discounters.”