Hard discount stores: A supply chain management challenge?

This type of stores is increasingly popular in the suburbs of thousands of cities around the world. They are supermarkets, but they have no advertising or decoration. You have to pay for the plastic bags, you have to pack yourself and sometimes you have to open merchandise boxes for filling your shopping cart. Sounds familiar? Well, it has a name: Hard discount stores. If you are interested in the world of logistics and supply chain management, pay attention, because your business might have to adapt to this kind of formats of sale and distribution of goods.

Discount stores are a commercial formula for food and cleaning products, and it was created in the late 1940s, after World War II, in Germany. In its most extreme and wide version, it is known as the hard discount or super discount (smaller establishments, with up to four boxes, are classified as a soft discount.) It is characterized by a limited assortment, private labels as a priority, a constant policy of low prices and, above all, a systematic control of costs. The latter, of course, makes this model a very beneficial way of doing business for both customers and distributors.

This model was invented by the brothers Karl and Theo Albrecht, founders of the Aldi store chains. The brothers, after returning to their native village, Essen, in West Germany, after serving Hitler’s defeated Nazi army during World War II, decided to help to rebuild their ruined city somehow. They opened a small store that only sold the most basic and cheap products available, and gradually learned to significantly reduce logistics processes. This worked for both buyers and local producers, who each day refined their supply chains to make them more efficient, and thus, to compete. In addition to Aldi and Lidl in Germany, there are other popular chains in several countries: Leader Price in France, D1 in Colombia and Bodega Aurrera in Mexico, are some of the most emblematic examples.

Read also: 9 Of The Most Common Supply Chain Mistakes Companies Make, by David Kiger

The format of this type of business is designed to reduce both costs and the number of logistics procedures. Aldi is a company that spends very little on transport and virtually nothing on advertising. This cost saving represents an advantage for the consumer, who, when comparing the prices of other chains of stores and supermarkets, will obviously prefer to go and buy from hard discount stores. Although the variety of products is not really wide, in these stores you can get the most basic products that any person or family needs, at a very comfortable price.

That is why they mean a commercial threat to traditional large supermarket chains. The potential of hard discount chains is tremendous. Most of these companies even begin their commercial activities in large and intermediate cities, with quick success. Its growth is based on two bases: the first is the proximity of the stores to their clients (they are located in neighborhoods, not in malls, for example) and the second is the price. What is most striking is that they do not have a good customer service or discount campaigns, and yet they continue to expand exponentially.

Image courtesy of brandon king at Flickr.com

Although they do not really try to be the direct competition of big chains like Walmart or PriceSmart, because they do not point to the big monthly shopping of families, but to the purchase of opportunity goods that may run out quickly, they are still a reason for concern in wholesale markets. This scheme allows them to sell cheaper, even brands and formats of products that buyers do not know (and have not had the same advertising and marketing processes as others, sold in traditional chains.)

Now, if this type of business is a real threat to the supply chain of companies, especially small businesses, is a debatable issue. Some companies will say that the savings in logistics processes are also beneficial to them, as the percentage of money that these retailers keep is lesser. However, others say that the accelerated growth of hard discount stores also affects industry and brands, since sales decrease as the brand-specific formats grow every day. This industry has been reluctant to play the game of covering their own brands, also known as distributor brands, and, in addition, theirs are not on the shelves of these “hard discount” stores, with a few exceptions.

The problem grows when you realize that their price levels, which are expected to be taken advantage of by consumers of lower purchasing power, are also hunted down by wealthy customers. The fact that the portfolio consists of basic products has made things easier for this commercial trend. Even sales of hard discount formats improve as you climb the pyramid of socioeconomic stratification.

Whatever it is, this is a growing phenomenon that every supply chain manager should pay attention to.

Recommended: The hard discount threat


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