Value for money retail: Discounters or Private Label?

Given the effects of COVID-19, there are rising concerns about household income and job security combined with worries of increasing costs among Vietnamese consumers, according to Worldpanel survey. Could this lead to a longer-term impact with consumers controlling more their spending? Would value for money retail formats like discounters be potential to emerge post pandemic?

This article will be discussing on growth opportunities for value-for-money retail models in Asia region and particularly in Vietnam market.

#1. Growth drivers of discounter stores globally

Globally, discounters have been able to grow sales by +6%, versus only +2% for total channels & they now account for 11% of dollars spent, for FMCG, which is a big increase in share, in a short space of time – in fact growth is coming from everywhere except Asia!

There are two angles to this growth: 

The first one is the number of physical store openings across the world, which has been quite a big driver of their share gain. In the US market, Aldi has added 7% more stores to its estate, while in the UK they opened 70 new stores in 2018 alone.

Finding the land for new stores can be challenging however with an average store size of 500-1000 SQ m, which is still smaller than the average H&S store, owners of discounters are still able to find land to build new stores.

The second key driver of their growth is more shopper driven – globally, shoppers want to have good quality at a good price and this value for money standing is exactly the positioning that discounters have been able to carve out.

In Europe the positioning has developed significantly over the last few years and not only about price. The atmosphere is very different if you visit an Aldi or Lidl. Many stores refreshed and enlarged to make for a very pleasant shopping experience with a strong focus on fresh foods, bakery and frozen areas completely different to 10 or 15 years ago.

In France, Lidl has been on a journey from a hard-discounter to a top retailer. Around 2015 they changed their communication style to shoppers. They began to communicate more heavily, increasing .media spends with a clear message about “the real price of good things” which really resonated with French.

Learnings from Latam and Asia markets [Download on the right side of this page]

#2. The evolution of Discounters: Product assortment and shopper profile

There has been a movement.  

At the beginning it was very much about grocery and household products but now discounters have expanded into all sectors such as fresh foods – fruit and vegetables, meat and bakery and they also provide textiles and other non-food items.

However, there are two key differences between Discounters and Hypermarkets & Supermarkets (H&S).

As such, do discounter retail models only attract low income shoppers?

Generally, when we talk about discounters in France or UK, penetration rate is already quite high, so they are quite mainstream.

That said, overall their profile is less high income than average, skewing to low and medium low-income families. 

In the past discounters would be popular for specific events like Christmas or for top up shopping*  between big trips to Hypermarkets & Supermarkets, however, they feature much more in routine missions now, so it has changed, but the frequency of shopping is still much lower than H&S, which leaves room for improvement.

Discounters are now attracting shoppers of all income groups but what they need to do is to focus on building loyalty. For example, they don’t offer any strong loyalty card program which would help drive loyalty and more frequent trips, as well as more data for the retailer to use!

*Top up shopping: small trips to get a few things which maybe run out – not the main routine trip where buying lots of things

#3. Challenges and opportunities for value for money retail models to succeed in Asia

This is not easy at all. In a lot of Asian markets, the modern trade is still developing like in Vietnam where it accounts for just 20% of the market with such a strong traditional trade. However, as we saw in Latam, particularly Columbia, it is still possible to succeed.

Are shoppers ready to go for an 80% private label assortment when they are so used to buying brands? That will be a big challenge to enter Asia market.

Maybe brands would need to have a bigger focus, at least at the beginning. Brands are a way to attract shoppers, give them some familiarity in an otherwise unfamiliar store setting.

From a logistics side, discounters will want to work with small manufactures who can commit to providing exclusively for their store so they will need to do their homework to find them and that takes time. Some manufacturers won’t want to shift focus from being a brand owner to producing for a retailer.

Aldi launching in Shanghai will certainly be interesting to monitor. They’ve shown they can adapt themselves to local context and excite shoppers with imported products. If this first step is successful, it’s highly likely they will be exploring other markets to enter and emulate.

#4. The potential of Private Label

In Asia, private label is still a relatively small proposition, due in part to lower modern trade development. That is slowly changing, and we are seeing more and more private label offers in store. We can learn from European markets about the driving factors behind the success of private label products.

Private labels were fist launched in the 60’s and 70’s but they were poor products and had really bad quality packaging.

It also started in home care markets which are what we call low involvement categories such as paper products, cleaning products where people care less about the product they use – however today you will see private label on offer in nearly markets and that’s because today private labels offer shoppers both a good price but also good quality.

In Europe they account for around 35% value share with countries like the UK up to and over half of spending, and that’s not just one line of private label. Today you have different tiers of private label from value, to mainstream, to premium, to super premium, organic etc…and they play like brands.

Of course, value came first, but starting in the late 90’s and into 2000’s we started to see all the range splits, and a proper focus on quality by working with better processes to produce goods. In many cases, the branded manufacturers also work with retailers to produce their private label offer!

Interestingly, research from Europanel shows that private label introductions are more likely to cannibalise other private label than branded products. Choice mechanisms can help explain why, for example 'Similarity' - the private label often has the same store name; and 'Compromise' - introductions at the bottom and top of the price hierarchy mean that products in the middle (brands) become more attractive compromise choices.

Today the growth of private label is coming mainly thanks to discounters. In the long term, private label growth tends to impact the middle ground. Hence, the more private label develops, the more the manufacturers of such brands need to build unique characteristics or specific use benefits.

If we bring it back to today in Vietnam, private label is still small, earning about 1% market share within FMCG in Urban 4 key cities (Ho Chi Minh city, Ha Noi, Da Nang, Can Tho), however, it’s on an upward trajectory with key modern trade retailers exploring more and more this profitable strategy.

As of now, 90% of private label spend is coming from home care products and packaged foods – paper products, cleaning products, cooking oil, sauces to name a few. Retailers are playing in the lower price points and with bigger pack sizes, but product quality is able to compete with that of branded offers.

Given the low awareness of private label products among Vietnamese consumers, we are seeing the stronger push for private label from key retailers, especially foreign retailers, not only in hypermarkets & supermarkets format like Emart, Aeon but also in convenient formats like FamilyMart. They offer a wider range of choices and segments, invest in branding through packaging and focussing on product display in key areas to attract consumers. It’s not clear at the moment whether their efforts will truly help private label products to grow in popularity, but there is huge potential for success in the next few years. With the rise of convenience stores, the revitalization of big retail formats toward “retailtainment” and the potential emergence of new retail like discounters, it wouldn’t be a surprise to see private label products growing!?

It won’t be easy at all. There are a few things that retailers may consider to develop private label or run discount stores in Vietnam: