By Christoph Geldmacher, Stefanie Möller, Patrick Nava and Tobias Wachinger

Discount stores are the stars of food retailing: the segment is growing throughout Europe.

Between 2008 and 2010, the conventional representatives of this format increased their sales by 4.3% each year, well ahead of all other food retailers. Furthermore, more and more hybrid discount stores are proving astonishingly successful: Colruyt in Belgium, Mercadona in Spain and Kaufland and Netto Marken-Discount in Germany. These stores position themselves between conventional discount stores and full-range retailers, offering discount-level prices but coupling this with a comprehensive offering of both fresh produce and brand produce, and often having more appealing stores than conventional discounters.

Hybrid discount stores have enjoyed particular success in Germany: while ‘hard’ and ‘soft’ discount stores have only marginally increased their market share from 36% to 37% in the last ten years, Kaufland and Netto Marken-Discount boosted their share from 7% to 17% during the same period. Together, discount stores and discount-like formats already command more than half of the German food market.

It is not easy to copy the business model used by hybrid discount stores. Given the huge success of Mercadona in Spain or  Colruyt in Belgium, it is little wonder that hybrid discount stores are today considered to be the success story in European food retailing. Nevertheless, those seeking to emulate hybrid discounters should be very careful: it is not enough just to simply mirror individual elements from their business model. For instance, Géant Casino reversed its decision to transform its convenience stores into a Kaufland-clone (Géant Discount) after customers in the test stores complained about the lack of local products once the range was reduced. Even Auchan quickly returned to its proven business model with its Atac supermarkets following a failed attempt to reduce its range by 20% based on the Mercadona model; the Atac stores’ sales figures immediately declined sharply.

But how do such differing results come about? Why can’t retailers just transfer the hybrid discount stores’ business model, which appears so simple? And what have successful players such as Mercadona or Kaufland done right? These questions can be answered by analysing the areas in which full-range retailers often want to adapt the discount stores’ concepts: range, price positioning, and support processes.

There are three important principles:

Range: less can be more—if it’s done right.

Price positioning: it’s customer perception that counts.

Support processes: cost awareness must filter down to all departments.

To see the rest of this report, including discussion of these three points, download the PDF.