# Retail Disruptors **Jan-Benedict Steenkamp and Laurens Sloot** | [[Strategy]]  --- > "While the cost of goods sold is lower for hard discounters, their prices are so much lower that their gross margin is significantly lower than for conventional retailers. The secret is strict cost control." This is the business model of Aldi and Lidl dissected. Hard discounters deliver high-quality products at prices 50 percent below quality-equivalent national brands—not through squeezing suppliers or paying workers less, but through a tightly integrated system that trades complexity for volume. The insight: hard discounters don't compete in the existing retail market. They create their own blue ocean by extending the price dimension downward while still delivering on quality. Before they arrive, mainstream retailers are a compromise between price and added value. After they arrive, consumers can stock up on staples at the hard discounter and spend the savings on speciality products elsewhere. --- ## Core Ideas ### [[The Virtuous Cycle]] The core of the hard discounter model is a virtuous cycle: high volume per SKU leads to irresistible value for money. This drives high profitability that funds rapid expansion of the store network, which further increases volume per SKU, and so on. The numbers are stark. A typical hard discounter carries fewer than 2,000 SKUs. The average US supermarket carries 40,000–50,000. A Walmart Supercenter sells over 100,000 items. Fewer SKUs means higher volume per item, which means better supplier relationships, lower per-unit costs, and simpler operations. ### [[Simplicity as Strategy]] Aldi's "Doing-Without Checklist" has 20 NO rules: no external market research, no customer surveys, no budget forecasts, no public appearances, no publicity, no PR departments, no sumptuous business offices, no company cars, no gifts accepted from vendors. This isn't penny-pinching. It's a coherent strategy. Every activity that doesn't directly contribute to the value proposition is eliminated. The savings fund the low prices that drive the virtuous cycle. ### [[Quality Through Relationships]] Hard discounters have deep expertise on how their products are produced, who can produce them, and what trade-offs matter. Long-term supplier relationships encourage investment in quality. As a result, hard discounter private labels often exceed the quality of private labels from mainstream retailers. Lower staffing costs come from greater efficiency, not lower wages. Hard discounters are known for paying employees relatively well. The efficiency comes from simplicity—fewer SKUs, standardised layouts, minimal decoration. ### [[The Blue Ocean Position]] Hard discounters don't compete within the existing boundaries of price versus added value. They create their own market space by extending the price dimension downward while still delivering acceptable quality. This explains why premium retailers might actually benefit from hard discounter entry. The two formats complement each other. Consumers go to the hard discounter for staples and to the premium retailer for speciality products. The mainstream retailers in the middle—the compromise option—are the ones who suffer. --- ## Key Insights **More choice is not always preferred.** Shoppers facing 40,000 SKUs aren't better served than shoppers facing 2,000. The hard discounter's limited assortment simplifies decisions and reduces costs without sacrificing perceived value. **Gross margin isn't the goal.** Hard discounters accept significantly lower gross margins than conventional retailers. They compensate through strict cost control and higher asset turns. The business model only works if both pieces are in place. **Promotions compensate for everyday pricing.** Hard discounters frequently run promotions—sales of promoted items can account for 20–35 percent of weekly revenue. To offset lower promotional margins, non-promoted prices are generally slightly above market average. The perception of value comes from the promotions. **They do their own marketing.** Hard discounters can't rely on national brand advertising to drive store traffic, so they invest in their own marketing. They employ relatively few marketers but spend significant amounts on advertising—they have to do the heavy lifting themselves. **The model is tightly integrated.** The four key performance factors—high volume per SKU, irresistible value for money, high profitability, and rapid store network expansion—are interdependent. You can't cherry-pick elements. The whole system creates the advantage. --- ## Connects To - [[7 Powers]] – Hard discounters exemplify Scale Economies Shared: passing cost savings to customers creates a compounding loyalty flywheel - [[Counter-Positioning]] – Mainstream retailers can't copy the model without cannibalising their existing business - [[Better, Simpler Strategy]] – The value stick framework: hard discounters dramatically lower price while maintaining acceptable WTP - [[The Origins of Efficiency]] – Volume drives learning and cost reduction; the virtuous cycle is a learning curve in action - [[Playing to Win]] – A clear "where to play" (limited SKUs, specific store format) enables a distinctive "how to win" --- ## Final Thought Hard discounters win not by doing retail better but by doing a different kind of retail. The 2,000-SKU store isn't a compromised version of the 50,000-SKU supermarket. It's a different business model with different economics. The lesson isn't "carry fewer products." It's that every element of the system must reinforce every other element. Simplicity enables volume. Volume enables supplier relationships. Relationships enable quality. Quality enables customer loyalty. Loyalty enables expansion. Expansion enables volume. The cycle is the strategy. Conventional retailers struggle to respond because adopting any single element—say, reducing SKUs—doesn't work without adopting all of them. The hard discounter model is a package deal, and packages are hard to copy.