I work alongside many suppliers to retailers, both online and bricks-and-mortar. We work together to shape and match products to shopper profiles to ensure suppliers’ products match the retailer’s core shopper needs. This means packaging design, size, promotional activity, communication, and of course, price.
When it comes to price, we often hear some retailers referred to as “discounters.” Retailers like Aldi, Lidl and Amazon. But here’s the thing. They’re not discounters and don’t think of themselves as discounters. Here’s why.
Let’s start with definition of the term ‘discount’ from Google:
a deduction from the usual cost of something.
“rail commuters get a discount on season tickets”
reduction, deduction, markdown, price cut, cut, lower price, cut price, concession, concessionary price
Firstly, Aldi and Amazon have a fiercely won and maintained low “cost of doing business”. There are as few costs as possible between the receiving dock at the warehouse and the trolley in the store, and this includes their head office.
Aldi has no phone numbers to call the stores. This allows the managers to be on the floor filling shelves or at the receiving bay receiving products or on the checkout. And that’s just the manager.
The Aldi trolleys all have gold coin locks so shoppers invest their time in finding and returning trolleys. In fact, no store staff or suppliers to Aldi probably ever touch a trolley, other than to repair it. Only the shopper. Why is that important? Well collecting a fleet of 300 trolleys probably costs around $32,000 a year per store and for 700 stores with trolleys, this equates to a lazy $22 million a year.
It’s just one, but very obvious, example we see before we even enter an Aldi store. The whole of the phase ‘discount’ infers that the pricing being offered is something short lived but Aldi has been pricing this way since the 1940s, and Amazon since 1999.
So how can you offer lower prices all day every day ever since you were founded? And how can higher priced retailers compete?
Amazon chief Jeff Bezos is famous for his phrase, “your high margins are my opportunity”. He didn’t set out to sell groceries and electronics but the margins he saw were so attractive he had to compete. And it’s not just retailers that have high embedded cost, but major branded manufacturers too. What he actually meant by the phase “your high margins are my opportunity” was that the combined high costs of many suppliers and retailers allow Amazon to offer either its own products vasty cheaper or branded products a lot cheaper.
Discounts in brand marketing means lowering the price of a branded item from the level the manufacturer would normally like to sell at and the shopper would normally expect to pay. So, if Amazon is doing this, it must be a “discounter”, right? Well not if you do that all day every day as you actually begin to set the price that shoppers expect to pay. Amazon lowers the price across the market and makes money while it is selling at these lower prices.
Aldi and Lidl have exactly the same philosophy. They aren’t discounting; they just operate on a lower cost of doing business and are supplied by companies with a lower cost base. When you combine these two low cost bases, retailers like Aldi and Amazon need lower cash margins and so offer lower cash prices to shoppers. Their shareholders too have lower expectations of distributions from profits. Aldi is a private company and invests most of its profits into geographical growth. Amazon runs at break-even so doesn’t need to pay corporation tax and reinvests all of its product gross margin into growing the business. Shareholders benefit from rising share prices, not dividend streams.
Does this mean it is all over for full-service retailers and branded goods manufactures? Well no. It just requires a long-term plan to lower operating costs via massive capital expenditure.
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Retailers have to apply money from today’s profits to protect future profits. They need to put money into new lower ways of doing business to allow them to sell at lower prices and still make a return for shareholders. And that’s often bad news for current shareholders, as they lose dividends during the transition from high to lower cost bases. The same is true for the branded suppliers to retailers. It’s not easy running major retailer or branded manufacturers anywhere in the world.
So what three areas of internal costs could a manufacturer lower in order to lower the product cost of all its products, and which three areas for a retailer?
• Outsource warehousing and production;
• Share or outsource the sales and merchandising team;
• Apply a lower general advertising spend.
Full Service Retailers
• Shopper trolley management via coin operated trolleys;
• Electronic shelf labels to change price aligned with online offerings; and
• Self serve checkouts.
The list isn’t a random one. The strongest manufactures reinventing their cost base are doing all three of the above. The most consistent low price retailers are doing at least two to three in the list above.
However, both parties had to apply massive amounts of capital to get there and many shareholders left at the start of the journey of change. They’re coming back though.