Dive Brief:

• British grocer Tesco will soon open a new chain of discount grocery stores to battle discounters Aldi and Lidl, according to various news outlets. The chain will reportedly be called Jack’s, after founder Jack Cohen, and may have up to 60 locations across the U.K.
• Aldi and Lidl entered the British supermarket industry in the ‘90s, and now collectively have a 12.7% market share, according to Kantar Worldpanel.
• Tesco has also lowered prices on store brands and forged a partnership with Carrefour SA to give it more purchasing leverage with suppliers. Earlier this year, Tesco purchased cash-and-carry chain Booker to create the largest food group in the U.K.

Dive Insight:

Discounters have wreaked havoc on the U.K.’s so-called "big four" chains Tesco, Sainsbury’s, Asda and Morrisons. Much of this pressure has come in just the past several years. Between 2011 and now, Aldi and Lidl grew their market share from 4.8% to 12.7%, Kantar Worldpanel data shows.

Much of this damage is self-inflicted, as British grocers didn't take the discounters seriously until it was too late. Sensing consumers’ willingness to change up their habits and spend less, Aldi and Lidl launched marketing offensives that elevated their profile with consumers. Pretty soon, traditional grocers were hemorrhaging shoppers.

Before Lidl made its U.S. debut last summer, industry observers wondered if discounters would rattle stateside grocers in the same way. But the German chain faltered, in part due to poor execution, but also due to pricing and marketing promotions from American grocers that knew better than to replicate their British counterparts’ approach.

And yet, discounters remain a potent threat in the U.S., calling into question grocers’ defensive maneuvers and whether establishing a separate chain like Tesco could be a sound investment.

Aldi’s remodels and new builds are sweeping across the country, with plans to hit 2,500 stores within the next few years. As in the U.K., Aldi has been around for a while — it opened its first U.S. store in 1976 — but has decided to pounce after sensing consumers’ willingness to try new formats and new products — and, of course, to save money. The chain’s revamped stores focus on perishables, bright colors and improved layouts, and are nibbling away at market share in key markets from California to Florida.

Dollar General is another discount player that’s moving steadily into grocery, with a portion of its stores adding snacks, frozen food and even fresh produce. Meanwhile, experts caution that Lidl should not be counted out, given its strong financial backing and ability to adjust its approach. The company just hired a new U.S. president and according to a recent survey, it’s forging strong bonds with repeat shoppers.  

For many retailers, discounters are one of many forces putting pressure on them. To stay relevant, chains are applying a broad strategy that include price cuts, updated loyalty programs, remodels and more emphasis on private brands.

But do grocers need to mount a discounter-specific response? Do they need to establish separate chains like Tesco?

Some already have. Kroger has Ruler Foods, Walmart has its Neighborhood Market banner and Whole Foods has its 365 stores. Others are experimenting with small formats and lower prices, though investing in a new format is too cost-intensive for most retailers.

Still, consumer trends and operational advantages are increasingly lining up in discounters’ favor. Consumers are spending more than ever on store brands, and more than half of all shopping trips are quick trips to snag just a few items, according to IRI — the sort of trips that are conducive to small stores. Small stores are also cheaper to run, and profit margins from private label products are better.  

Many U.S. retailers have started building smaller stores, and this trend should continue into the foreseeable future. If Aldi keeps its momentum going and Lidl gets its footing, major chains could very well respond with discount stores of their own.