A new report published early this month by retail analysts Verdict Research, part of the Datamonitor Group, finds that the aggressive expansion of no frills hard discounters is now challenging the supremacy of the hypermarket sector in much of Western Europe. 

With a combined market share of 40 per cent in their native Germany, privately-owned Aldi and Lidl have focused their attentions on international expansion, forcing retailers across the continent to rethink their business models to counter the new competition.

While a combination of lifestyle, demographic and political factors have played a role, the key factor in many markets has been the expansion of hard discounters that have developed a highly profitable business model that can deliver customers a combination of convenience quality and market leading prices.

Daniel Lucht, author of the report, comments: “Reviving the hypermarket format, developed according to market conditions 40 years ago, is proving difficult.”

Leading operators are being forced to adopt new ways of doing business, be it the development of a multi-channel strategy, implementing huge cost reduction programs, improving supply chain management, the focus on non-food or the start-up of their online operations.

According to Verdict, hypermarkets’ problems can be directly linked to the rise of the hard discounters, whose success is based on four key points: low price, a high quality food offer, an extremely efficient low-cost business model and managerial acumen.

Lucht comments: “Aldi, for example, benefits from high brand recognition and has a strong reputation for high quality products at very low prices in Germany. Manufacturers have to endure rigorous checks before they start supplying discounters and consumer associations continuously rank Aldi’s private label provision ahead of branded goods from multinational manufacturers.”

The planning system has also played into the hands of the hard discounters. Political parameters guiding planning permissions are stacked against large scale developments and have favoured discounters, since the likes of Aldi and Lidl typically take sites with less than 1000sqm, only a quarter the size of an average hypermarket. As a direct consequence, Aldi and Lidl are the only retailers among Europe’s top 10 to have a presence in all three largest markets of the EU.

The report also shows that slow growth and weak margins in many countries across the EU will hasten the pace of consolidation. Verdict Research expects current trends of accelerating space growth in combination with stagnation in turnover to continue for the foreseeable future. As retailers’ costs continue to rise, further retail casualties will be inevitable.