Retail Format Competition: The Case of Grocery Discount Stores and Why They Haven’t Conquered the Chinese Market (Yet)

Abstract

The international expansion of the German discounters Aldi and Lidl in recent years has been a large success in grocery retailing. In China, the world’s largest grocery retail market, however, grocery discounters have not (yet) established a physical store presence. In 2017 Aldi Süd and Lidl for the first time entered a new market without the help of a physical store, implementing an online shop in China. As to the format’s future, significant disagreement amongst retail experts exists. This paper, which is based on qualitative interviews with high-ranking senior executives of international retailers, argues for three major reasons as to why the discount format has not hitherto gained a foothold in the Chinese market. Firstly, due to the characteristics and challenges of China’s market, such as high fragmentation as well as the need for strong localisation, a high standardisation of the format is not possible. Secondly, the extremely low-margin operation of discounters faces a price level in China that is already very low, limiting one of the discounter’s major competitive advantages. Thirdly, the discount format is facing a lack of consumer acceptance, toughening the establishment of private brands, which represents one of the major characteristics of the discount format.

Profitability and profit persistence in EU food retailing: Differences between top competitors and fringe firms

“…This confirms the fact that this store format has come under pressure due to current trends of consolidation and concentration plus a growing share of discounters that operate with extremely low margins. This has led to increased competition and declining market shares of independent/specialized retailers (Ahlert et al, 2010; Hardaker, 2018). Membership of a Top‐5 group is associated with higher profitability in France and amongst the set of larger firms in Sweden where the market is dominated by three large chains.…”

“Testing the water” – prior-online market entry in China

“…Grocery retailers frequently report major difficulties in realizing the potential offered by entering new markets, especially in regard to China (Siebers, 2011(Siebers, , 2017(Siebers, , 2018Zhang and Wei, 2015;Hardaker, 2018a). Due to considerable economic and sociocultural diversities across China, a high responsiveness to local circumstances, such as differing cultural tastes (Davis, 2013;Frank et al, 2014) and regulations must be complied with (Zhen, 2007).…”

“…As Colla (2003) reasons, mostly the discounter (such as Aldi, Lidl or Netto) reveal strong international presence, through operating a mono-format and a global concept, which is usually modified and adjusted only to a very small degree, as "Aldi usually educates its consumers, which is very unlikely to work in the Chinese market" (Interview VI, 2015). Hardaker (2018a) discussed in length that the discount format proves especially difficult to gain a foothold in the Chinese market. Reasons include the need for strong localization, the already low-price level as well as the lack of consumer acceptance regarding private brands, preventing major challenges for the discount format to prevail.…”

“…Consequently, similar to Wood and Reynolds (2014), our paper attempts to further develop and practically ground the theory of embeddedness in international grocery retailers' expansion process. This paper focuses on the Chinese market due to its highly competitive retail environment (Hardaker, 2017(Hardaker, , 2018a, recent foreign retail divestments from this market (inter alia Carrefour, Tesco and Dia) (Zhang and Hardaker, 2021) and its role as the global leader in e-commerce (Bu et al, 2019), therewith representing a promising and challenging retail environment characterized by advanced digital economies. We have chosen the two retailers Aldi S€ ud and Costco due to their online-first market entry, which represents a new strategy for grocery retailers.…”

Hard Discount Formats Service Quality Assessment Model in Colombia

“…At the international level, studies related to the impact of hard discount stores on the economy and consumers in Ecuador [1], their evolution in Germany [2], the defensive strategies of traditional businesses against hard discount formats in the Netherlands [3], the impossibility of conquering the Chinese market [4], among others; however, no studies were found evaluating the quality of the service of these formats.…”