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Evolution of the Discount Channel

Savings and successful private label programs at discount retailers have shown a worthwhile value to many—paving the way for expansion in the discount channel in 2014.

March 1, 2014
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Unlike many retail stores, brick-and-mortar shops in the discount channel have been able to successfully evolve during hard economic times—so much so, in fact, to the point that many of the discount retailers are announcing expansion in 2014.

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Dollar stores have seen an uptick in visits and sales as a result of the recent recession, particularly from many new shoppers, according to Mintel’s August 2013 “Dollar and Discount Store Retailing—U.S.” report.

As shoppers looked to stretch their budgets, many entered discount stores and —whether due to finding good value or continued wariness of the economy—many have stayed.

The outlook for dollar and discount stores remains solid—sales are expected to grow by 19 percent between 2013 and 2018, reaching $227 billion in 2018, according to the Mintel report, up from $180 billion in 2012. Though consumer confidence was up as of June 2013 (84.1) compared to earlier in the year (73.8 in January), levels had not fully returned to those of pre-recessionary times in 2007.

“As consumers remain cautious about the economy, they may stick to shopping at dollar and discount stores in order to keep their budgets on track, yet may stray from these channels when they feel a bit more optimistic about their economic prospects,” said the report.

Mintel also noted the rise of the U.S. Hispanic population is likely to benefit dollar and discount store retailers. When asked about 2013 vs. the previous year, some 37 percent of Hispanics surveyed said they are shopping at dollar stores more often than the previous year, more than one quarter said they are shopping at discount stores more often, and nearly half are shopping at discount stores the same amount. Furthermore, this group is shopping across a variety of dollar and discount store retailers, and tends to be satisfied with the prices, selection and store experience of both types of stores. Hispanics also tend to be heavy users of dollar stores, visiting this channel once a week or more often.

In light of this bright outlook, the three major dollar store chains—Dollar General, Dollar Tree and Family Dollar—are all looking to expand, while discount grocer ALDI has announced plans to open 650 new stores in the next five years. Supervalu’s discount grocery banner Save-A-Lot has announced sales increases. Meanwhile, Kroger has been slowly expanding its limited-assortment chain, Ruler Foods, a concept that is still a test for the supermarket giant.

Mintel cautions, however, that while store expansion will make this format accessible to more shoppers and potentially draw new shoppers, retailers have to be careful not to expand too quickly and run the risk of market saturation.

 

ALDI

Number of stores: 1,200+

Private Labels: Simply Nature, Friendly Farms, Season’s Choice, Appleton Farms, Fit & Active, Little Salad Bar, Priano, Cattlemen Ranch, Tuscan Garden, Sundae Shoppe, Chef’s Cupboard,  Nature’s Nectar, Specially Selected, Choceur, Boulder, Clancy’s, L’oven Fresh, Baker’s Corner, Millville, Sea Queen

Leading discount grocer ALDI, Inc. is No. 12 on the PLBuyer Top 35 Private Label Retailers list, with estimated private label sales at $9.3 billion. More than 90 percent of products at ALDI are store brands. The retailer offers a limited number of SKUs, usually in the range of 1,000 to 1,500 compared to 10,000+ in traditional supermarkets. ALDI continues to stock more perishables, including some in-store bakeries.

In a study of 6,600 consumers, conducted by Market Force Information and released in July 2013, ALDI was named as the top-ranked grocer for low prices.

ALDI isn’t holding back with its limited-assortment success either. In December 2013, the retailer announced a five-year expansion plan involving the opening of 650 new stores across the nation, and the building of a regional headquarters and distribution center in Moreno Valley, Calif. ALDI currently has more than 1,200 U.S. stores located in 32 states, primarily from Kansas to the East Coast.

“We’ve updated our new store design to be brighter and more welcoming than ever before,” said Jason Hart, co-president of ALDI U.S., in a press release.

To reach its aggressive expansion goals, over the next five years, ALDI plans to accelerate the pace of new store openings to an average of 130 per year, up from an average of 80 stores per year in recent years. The retailer also plans to invest more than $3 billion to pay for land, facilities and equipment. When the expansion is complete, ALDI will have stores coast-to-coast and anticipates serving more than 45 million customers per month, which will open up opportunities for new private label suppliers and manufacturing partners.

“We’ve updated our new store design to be brighter and more welcoming than ever before."

“We’re ramping up our expansion plans to meet growing demand for ALDI from customers across the country,” said Hart. “Recently, we successfully entered new markets such as Houston, and expanded our presence in competitive markets like South Florida and New York City.” He also tapped Southern California as new territory for ALDI.

ALDI moved into the natural and organic space this year with the official launch of its new SimplyNature brand, a line of all-natural and organic foods. Products range from cereal, honey, fruit bars and apple juice, to pasta sauce, pizza, salsa and various snacks. For example, shoppers will find new organic frozen fruit bars, frozen organic blueberries, and “all-natural” bacon under the SimplyNature brand.

ALDI has also added organic produce to its nearly 70 varieties of fresh fruits and vegetables available, such as organic bananas, baby carrots, apples, tomatoes, and salad mixes. ALDI ran a sweepstakes this January through Facebook, offering fans a chance to win a year’s supply of produce by making a pledge to a healthier lifestyle in the New Year.

Also in January, ALDI started offering targeted, original content to its shoppers via recipes and cooking tips, nutritional and lifestyle suggestions, and articles from the newly founded ALDI Advisory Council, a group consisting of five nationally renowned registered dietitians. The content is promoted through the ALDI website, the ALDI Simply Smarter Living Blog, a Facebook page and in the “ALDI fresh” catalog available in stores and online.

The retailer’s Fit & Active line, promoted in “ALDI fresh” alongside other store brands, offers a number of foods formulated with nutritional merits like less fat, reduced sodium and fewer calories.

In its attempts at meeting both affordable and premium shopper desires, ALDI has made recent strides with its higher-end products. Last April, ALDI launched its premium brand Specially Selected, a range of specialty products available periodically throughout the year that includes German coffees, gourmet pastas and premium meats and cheeses.

ALDI first launched the Specially Selected line in Europe, where many of the brand’s products have won awards. Domestically, the retailer has introduced many of the products through its popular Special Buy Program, available while quantities last.

Other recent private label products ALDI has added include frozen “steamable” vegetables under the Season’s Choice line, Little Salad Bar Hummus Quartet (segmented packaging with Cilantro Jalapeño, Classic, Garlic and Roasted Red Pepper hummus), and Friendly Farms Plain Nonfat Greek Yogurt. There’s also a new L’oven Fresh Triple Chocolate Crème Cake for shoppers looking to indulge, and Fit & Active Chocolatey Chip Protein Meal Bars for shoppers looking to get healthy.

 

The Kroger Company

Discount Banners: Ruler Foods, Food 4 Less

Number of stores: Food 4 Less, 145+; Ruler Foods, 25+

Private Labels:Simple Truth, Simple Truth Organics, Private Selection, Big K, Value, Fresh Selections by Kroger, Water Quality, Comforts for Baby, Wholesome@Home, Home Sense, Pet Pride, Quality Guarantee

The Kroger Co. holds the No. 2 spot on the PLBuyer Top 35 Private Label Retailers list, with estimated private label sales at $33.8 billion. Its discount banners include Food 4 Less and Ruler Foods.

Kroger continues to expand its discount banners, whether limited-assortment or warehouse-style. Price-impact Food 4 Less stores typically have a hybrid warehouse-supermarket format. Kroger has expanded the banner at a fast clip, with stores mainly concentrated in California, Nevada, Illinois and Indiana; some of the units in California operate under the Foods Co. name. Food 4 Less carries a wide assortment of Kroger store brands, along with a proportionate balance of national brands. In the wake of Safeway’s decision to terminate its Chicago-area Dominick’s banner, which involved the closing of 83 stores, Kroger expressed an interest in purchasing some of the stores to convert over to its Food 4 Less banner.

Kroger’s small-footprint (about 20,000 square feet), limited-assortment banner, Ruler Foods, stemmed from Kroger’s acquisition of JayC Food Stores back in 1999, and the number of Ruler Foods locations nearly doubled between 2012 and 2013, with some units simply converting from the JayC banner to Ruler. Kroger has also been remodeling select Ruler locations of late. Product selection at Ruler is primary focused on Kroger store brands, comprising an estimated 80 percent of stock. Like ALDI, Ruler shoppers rent shopping carts and bag their own groceries. Most Ruler Foods stores are located in the Midwest.

 

SuperValu

Discount Banner: Save-A-Lot

Number of stores: 1,300+

Private Labels: Allure, Angel Fresh, Baked Fresh, Basic Soft, Baumann’s Best, Bay Mist, Being Well Baby, Being Well Body, Being Well OTC, Bramley’s, Bubba, Cat Cuisine, Chenard, Cheshire Litter, Coburn Farms, Cowboy Billy’s, Crisp, Crown Creamery, Crystal20, Deter’s, Diane’s Garden, Dr. Pop, Fairgrounds, Ferratto’s, Ginger Evans, Glo, Hargis House, Hickory Springs, Hilltop Mills, Home Churned, J. Higgs, Jade Dragon, Jungle Jammers, Kaskey’s, Kiggins, Kindle, Kurtz, Luster, Madelyn’s, Mantia’s, Marcum, MaxForce, McDaniels, Medeiros, Morning Delight, Mountain Holler, Nature Trails, Panner, Pasta on the Side, Peake’s Pick, PolySteel, Port Side, Portmann’s, Potatoes on the Side, Power Cycle, Pure Grove, Rice on the Side, Save-A-Lot Today, Scent Melodies, Senora Verde, Shaner’s, Skillet Masters, Snack-A-Tizer, So Cheezy, SpecialBlend, Splash Out!, Stuffing on the Side, Summerset, SureClean, Tipton Grove, Triumph Plus, Tubz, Vivid Light, Westcott, World’s Fair, WrightWare, Wylwood

SuperValu came currently sits at No. 14 on the PLBuyer Top 35 Private Label Retailers list, with estimated private label sales at $7.2 billion. Its discount banner Save-A-Lot has been a bright spot for the retailer and features a large assortment of store and exclusive brands—77 compared to the 43 national brands the banner notes that it carries. Recent product introductions include Coburn Farms Bleu Cheese and Pepper Jack Singles, and J. Higgs Buffalo Wing Potato Chips and microwaveable Kettle Corn.

The banner’s chemistry has catalyzed strong sales. “One of the real highlights for this quarter was the sales momentum we continue to see at Save-A-Lot, where both corporate store and network ID sales were positive and again showed sequential improvement,” said Sam Duncan, CEO and president of Supervalu, during the fiscal third quarter 2014 results earnings call in January.

Save-A-Lot’s positive results partially stem from the benefits of its focus on the fresh side of the business, such as its revitalized meat program.

“Our meat program is strengthening, in part due to the rollout of meat cutting and a portion of the corporate stores that we did not have it before, but also as a result of our focus across all of our fleet on executing with more variety, better pricing and improved messaging,” said Duncan.

Save-A-Lot has also fine-tuned its focus on produce across the entire store network, with boosted quality assurance and more-tailored regional assortments.

Duncan said the company’s private brands—across all banners—are running ahead of internal sales penetration goals, helping generate significant savings. “Our private brand sales penetration has increased 75 basis points on a year-to-date basis compared to last year, and we know we still have a significant opportunity in front of us,” stated Duncan.

SuperValu has been launching rebranding campaigns in all of its retail banners to improve customer messaging through in-store signage, weekly ads, customer emails, mobile tactics and banner websites.

 

Dollar General

Number of stores: 11,000+

Private and Exclusive Labels:Clover Valley, DG Body, DG Health, DG Home, DG Baby, DG Auto, DG Party, DG Office, DG Hardware, Smart & Simple, True Living, Sweet Smiles, Ever Pet, Butcher’s Select, L’Oreal Vive, Rexall, Bobbie Brooks

Dollar General is No. 21 on the PLBuyer Top 35 Private Label Retailers list, with estimated private label sales at $3.8 billion. On the heels of continued success, the retailer celebrated its 11,000th store opening last October, now serving 40 states. And expansion continues.

“In 2014, we plan to open 700 new stores throughout the country and remodel or relocate an additional 525 stores,” said Crystal W. Ghassemi, APR of Dollar General. She notes approximately 25 percent of Dollar General products are priced at $1.00 or less.

About 1 percent of the retailer’s stores are Dollar General Markets, which feature an expanded grocery section, including fresh meat and produce. Last October, the retailer added its first fuel station to a Dollar General Market in Hanceville, Ala. Ghassemi said the fueling station was added to “determine if it’s a good fit” for the retailer, as part of an agreement with Mansfield Oil. Both will evaluate the results of the pilot project over the next year and jointly assess expansion opportunities.

Dollar General reported record sales, operating profit and net income for its fiscal 2013 third quarter.

“Dollar General once again delivered strong results in the third quarter, even in the face of an ongoing challenging consumer environment,” said Rick Dreiling, CEO of Dollar General. “Our merchandising initiatives have continued to be successful in driving traffic and sales. We had solid financial performance across key metrics, including better-than-anticipated gross margin performance and solid SG&A leverage. As a result, we are now forecasting full-year adjusted earnings per share of $3.18 to $3.22.”

The consumables category offered 11.9 percent growth in the third quarter, comprising about 75 percent of total revenue for Dollar General.

Adding more consumables has been a priority for discount retailers, as they blur the channel lines and aspire toward further penetration into key grocery categories.

In addition to the new fresh, frozen, and refrigerated food offerings, low prices continue to be main drivers for shoppers to visit Dollar General.

Last year, for the second year in a row, Dollar General topped Kantar Retail’s opening price point (OPP) survey, narrowly beating out Walmart. The survey determines how select retailers meet the grocery and consumable needs of shoppers looking for the lowest shelf prices to fulfill their basket requirements—and private label is a significant contributing factor here.

“For the most part, all the retailers in this study achieved their OPP positions through everyday pricing. Private labels, however, had a more significant impact than in previous iterations of this study, as the retailer with the least-expensive sub-basket achieved that standing primarily through private labels in each case,” said Leon Nicholas, senior vice president for Kantar Retail.

Dollar General primarily offers its store brands under the DG umbrella, breaking out categories with labels such as DG Baby and DG Home. However, the company kept its Clover Valley line for consumables during the redesign. It also acquired the Rexall brand for OTC, vitamins and health care.

New products include DG Home Laundry Pacs (capitalizing on the new single dose packaging trend for laundry detergent); Clover Valley Country Sunrise Blend Ground Coffee, Jalapeño Cheddar Cornbread Crackers, Mini Fruit Flavored Marshmallows, and Sliced Almonds; and DG Health Cough Drops and Mucus Relief-ER.

The retailer incorporates its store brands into promotions, as well. In the recent “Blogger Recipe Challenge” Dollar General asked bloggers to create meals using Dollar General products, showcasing the results on its website.

 

Dollar Tree

Number of stores: 4,950+

Private Labels: April Bath & Shower, Assured, Cooking Concepts, Greenbrier Kennel Club, The Home Store, more

Dollar Tree came in No. 25 on the PLBuyer Top 35 Private Label Retailers list, with estimated private label sales at $2.2 billion.

While Dollar Tree stores are packed with stores brands and all items actually retail for $1.00, the retailer doesn’t clearly display its name on store brand products, only identified by “Distributed by Greenbrier International Inc.” on the back of product packaging. Its Deals banner, with 195+ stores, also offers private label products in its mix of household, party, cosmetics and personal products. Many products at Deals also retail for $1.00.

Dollar Tree has increased its private label offerings of late, including more refrigerated and frozen foods, and sales have remained strong. Dollar Tree’s consolidated net sales for the fiscal 2013 third quarter were $1.88 billion, a 9.5 percent increase over the same quarter in 2012.

Comparable-store sales increased as the result of growth in both consumer basics and growth in seasonal and variety merchandise, with higher margin variety categories growing at a faster pace, said Bob Sasser, CEO of Dollar Tree. This has attracted new customers.

To serve those new consumers, Dollar Tree opened 117 new stores, expanded or relocated 19 stores during the third quarter in 2013.

“Dollar Tree has been emphasizing the need for margin expansion and revenue growth through the introduction of private label offerings as they result in higher margins,” said Seeking Alpha.

 

Family Dollar Stores

Number of stores: 8,000+

Private Labels: Family Gourmet, Family Dollar, Kidgets, Family Pet, Family Chef

Family Dollar Stores, Inc. came in No. 31 on the PLBuyer Top 35 Private Label Retailers list, with estimated private label sales at $1.6 billion. The company operates more than 8,000 stores in rural and urban settings across 46 states. In the first quarter of fiscal 2014, Family Dollar opened 126 new stores and renovated, relocated or expanded 179 stores.

Net sales increased to $2.5 billion, with strongest sales in the consumables category, which increased 4.7 percent during the quarter, driven primarily by strong growth in refrigerated and frozen food, health aids, and tobacco.

Private brand penetration was also expanded in the first quarter, according to Howard R. Levine, chairman and CEO.

“Continuing to refine our assortment to meet the needs of our customer is critical to being a compelling place to shop,” Levine commented, noting that it’s expected the merchandising experience Jason Reiser, the new executive vice president and chief merchandising officer, brings to the table—along with his “understanding of our customer position”—will grow customer trips and market share.

In 2010, the retailer launched its Family Gourmet food range, which replaced the Family Pantry brand. That year it also launched the Kidgets line, a line of value-priced clothing, diapers and more. Family Dollar has noted that it plans to double the number of private label SKUs it offers over the next three years, primarily in key consumables categories.

 Meanwhile, some analysts have begun speculating that Dollar General might be planning a takeover of Family Dollar.  

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