Are discount grocers outpacing traditional operators?

Sales growth at discount grocers such as Aldi, Lidl and Grocery Outlet likely outpaced overall grocery sales growth in 2022, and the discount segment will continue to gain market share and pressure traditional supermarkets in the year ahead, according to a new report from Coresight Research.

“As a result of frugal shopping behaviors instigated by inflation, we believe discount channel growth will continue to outpace total [grocery] growth in 2023 and beyond,” Coresight’s U.S. Grocery Discounters report concluded.

The report notes that while the discount sector has been aggressive in growing its store base in recent years, it has faced challenges in growing its e-commerce business. This weakness was exposed during the height of the pandemic, when the pace of discount channel growth slowed below that of the total market, according to the Coresight report.

Although growth slowed in 2020, the discount channel is expected to see sales growth of about 10% this year, vs. total grocery growth of an estimated 8.2%, Coresight predicted, and discount growth will exceed the total grocery market by several percentage points in each of the next four years.

The discount grocery segment — which for this report did not include dollar stores and mass merchants such as Walmart and Target — is expected to continue to pressure traditional supermarket operators going forward in part because of these chains’ aggressive new-unit growth plans.

Aldi, for example, planned to open 150 new stores in 2022, and recently said it was on track to become the third-largest grocer in the U.S. by the end of this year. Grocery Outlet, which operates primarily on the West Coast, and Lidl, which operates along the East Coast, are both also expanding at a rapid pace.

Save-A-Lot, another limited-assortment retailer in the discount sector, has struggled with its large debt load and has actually contracted in size, bucking the discount-grocery trend, according to the Coresight report.

Traditional grocery retailers that compete directly with discounters could face growing margin pressures in the future, the report concluded. These traditional supermarkets should look to focus on their own value positioning, including areas such as private label and loyalty discounts. Ecommerce capabilities could also help differentiate traditional grocers.

The report follows another recent report from Colliers showing that value grocers have been increasingly attracting shoppers across all income brackets, including not only 86.3% of low-income shoppers, but also 48.2% of middle-income and 17.6% of high-income shoppers. The Colliers report found that 34.7% of consumers said they would shop more in value stores if inflation persists.

In addition to the ongoing growth of discount grocery chains, dollar stores are also expanding aggressively and increasingly focusing on their grocery offerings. Dollar General, for example, said it plans to open 1050 new stores in 2023, while also expanding its grocery assortments, including perishables. Dollar Tree, meanwhile, added added more than 200 net new stores through the third quarter of this year.

In testimony at a Senate subcommittee hearing last month on Kroger’s planned merger with Albertsons, Rodney McMullen cited the dollar chains’ growth, particularly in rural areas, as an indication of the potential opportunity for Kroger to expand its own presence in those markets. He cited tests of smaller stores and its Hometown Pickup option, which allows customers to order online and pick up at a central location.

“We’re testing several different areas because we think it’s a business opportunity,” he said.

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How concerned are you about the sales growth seen by discount grocers this past year? Let us know in the comments below, or email SN Executive Editor Chloe Riley at [email protected].