The discount variety retail market is exploding — and with it the opportunity for savvy fast-moving consumer goods (FMCG) brands. Over the past decade, discount variety retailers such as Action, B&M, and Pepco have experienced significant growth, primarily driven by three aspects of their value proposition. First, they offer very low prices both in absolute and comparative terms. Second, they provide a large assortment of both FMCG and general merchandise, with a focus on breadth rather than depth of offer. Third, they consistently focus on the newness and rotation of the assortment to create a “treasure hunt” feeling in stores.
When it comes to epitomizing the success of non-food discounts, Action is one of the leaders. Its sales have nearly tripled over the last five years, reaching more than €11 billion in 2023. The company now has an estimated valuation of around €29 billion, making it the second-highest valued publicly listed retailer in Europe, behind Tesco.
Looking ahead, the variety retail sector’s rise appears poised to continue. We expect the market to grow by 30% to more than €74 billion by 2028. Consequently, for FMCG companies, the discount variety retail channel, which was largely an afterthought in their commercial strategy 10 years ago, now represents a major source of growth and a priority channel in the current cost-of-living crisis period.
The benefits of discount variety retail for FMCG brands
While the discount variety retail channel has been capturing an increasing share of the FMCG market, its penetration is still relatively low. Given the expansion plan of the main players, there is still significant potential for growth.
FMCG already forms a key part of most discounters’ offers, representing either an impulse category (such as snacks and confectionary) or a traffic driver (such as personal care and pet food). Nevertheless, there is still room for organic growth of the share of FMCG within some discounters’ product mix, providing additional potential to FMCG manufacturers. For example, the Pepco banner, which originally focused mostly on apparel and general merchandise, is currently increasing the share of FMCG in its larger Pepco Plus stores.
Beyond growth, the discount variety retail channel offers other significant advantages to brands. The first is a much lower “cost-to-serve” compared to traditional grocery retailers, as supply chain costs are usually significantly lower due to these discounters ordering large volumes inefficiently. Also, discounters typically don’t command the large promotional investment budgets that grocery retailers do, nor do they require a dedicated sales field force. All in all, our experience shows that although discount variety retail is often seen as a low profitability channel in terms of gross margin, its true profitability compares well with the standards of traditional supermarket retail.
The second advantage is that discount variety retailers, given their lean centralized model, are often much more agile and capable of committing to buying and reselling large volumes in a short amount of time compared to grocery retailers. Thus, they offer good opportunities to clear residual stocks and avoid the costs associated with slow movers and obsolete products.
The hurdles FMCG brands must overcome
Despite the opportunity, there are clear challenges for FMCG brands, linked with three aspects of discount variety retailers’ business model.
THE PRICE POSITIONING CHALLENGE
Extremely value-oriented, these retailers typically command a large price gap versus traditional grocery retailers. This poses a double risk. First, a risk of brand equity erosion, as consumers may not understand the price gap with the offer in their usual grocery store. Second, a risk of channel conflict, as the price gap may generate a backlash with traditional grocery retailers or drugstores, which still account for the large majority of FMCG retail sales, and which could in return ask for better buying conditions. Thus, limiting channel conflict should be an imperative of any go-to-market strategy when it comes to the discount variety retail channel.
THE SOURCING CHALLENGE
Most discount variety retailers typically have a dual approach to A-brands sourcing, with part of their volumes opportunistically sourced “on the gray market” from traders and partly sourced directly from the A-brands (to ensure some stability in their assortment). The stock lot traders typically take advantage of advantageous conditions in one market (driven, for example, by excess inventory situations) to resell the merchandise in other markets, often at price levels that cannot be matched there by competitors. Initially, this was mostly a concern for non-food manufacturers, but gray market sourcing is becoming increasingly concerning for FMCG brands as it accentuates channel conflicts and can drive prices down across the entire market. Many brands have struggled to prevent and control this gray market sourcing, but strategies and best practices exist to mitigate these risks.
THE ASSORTMENT CHALLENGE
Because these retailers usually carry a much narrower assortment in FMCG, brands are constantly competing for shelf space. They need to pay attention to the impact of this narrower assortment on their mix and constantly assess the performance of their assortment and the potential effect of any innovation they would like to add in place of an existing stock-keeping unit (SKU).
Four critical strategies for generating value from the discount variety retail channel
Brands must prepare a dedicated go-to-market approach tailored to the specifics of the discount variety retail channel. We have identified four factors that are key to success.
UNDERSTAND THE DETAILS OF EACH DISCOUNTER’S COMMERCIAL STRATEGY
As an FMCG brand, it is crucial to identify the significant differences in the strategic role of each FMCG category from one discounter to another. For example, Action mostly sees food as an impulse category with a limited assortment, while B&M has a much larger FMCG assortment and tries to compete for larger baskets with supermarkets. A successful go-to-market strategy must apprehend each customer’s assortment structure, space allocated, and targeted price points. We have seen that best-in-class FMCG players can do so by dedicating specific key account management to this channel.
BUILD A DEDICATED PRODUCT PORTFOLIO FOR THE CHANNEL
FMCG brands need methods for meeting aggressive price points on this channel while remaining profitable and avoiding direct price comparisons with traditional retailers. They can adapt pack sizes to conform with typical consumer price targets, and review product formulations to uncover cost reduction opportunities, and offer only the product benefits price-sensitive shoppers value the most. Potentially they also may create dedicated sub-brands or variants to avoid direct comparisons with mass retailers’ offers.
MAKE DECISIONS BASED ON TRUE PROFITABILITY FOR THESE CUSTOMERS
We have observed that many brands underestimate the true profitability of this channel. To make the right commercial decisions, brands need to ensure they have an accurate picture of the profit and loss (P&L) of these customers, reflecting fundamental differences such as lower supply chain costs and selling, general, and administrative (SG&A) expenses.
COMMERCIALLY ACT AS ONE VOICE ACROSS COUNTRIES
Some FMCG brands have suffered in the past from a very decentralized commercial approach, where markets with lower price levels are harming the brand’s overall profitability by selling to wholesalers/traders and fueling the gray market. Negotiating directly what was previously sold through traders should be a strategic priority for all manufacturers. It represents a clear win-win economically by disintermediating the middleman, as well as providing a better understanding of this part of the gray market and enabling a constructive commercial plan with value variety retailers. Best-in-class FMCG players have also created a unique profit and loss statement for major value variety retailers and have centralized the negotiations to ensure an optimized and harmonized approach.
Expert Insights On FMCG Strategy In Discount Retail
With more than 27 years of experience, Simon Hathway, the former buying and merchandising director of Action, is an expert in the discount channel. In this interview with Oliver Wyman Partner Christophe Schmitt, Simon discusses the nuances of the variety of retail channels that FMCG manufacturers need to consider.
Christophe Schmitt
What is the role of the main FMCG categories in discount variety retailers like Action?
Simon Hathway
The role of FMCG varies by retailer, however generally, it’s about driving footfall and shopping frequency. FMCG categories such as grocery, homecare, pet food, and personal care are everyday items that fulfill daily needs and therefore encourage regular customer visits. FMCG also serves as a way to demonstrate low-price credentials, as consumers are more aware of FMCG market prices. For instance, the food and drink assortment in Action is highly impulsive and focuses on getting an additional item into every customer’s basket. However, in the UK, the leading discounters such as B&M, Poundland, and Home Bargains offer a more extensive food and grocery range — including fresh and frozen — and are stealing share from supermarkets.
Christophe
To what extent are the discount variety retailers still sourcing FMCG products from the gray market?
Simon
As discount penetration and market size increase, the large branded manufacturers are adapting and building more substantial direct relationships with the discount retailers. However, wholesale and gray markets still play a significant role in supplying non-food discounts, especially appealing for in/out assortments and promotions. Gray market and wholesale supply have become more sophisticated, offering logistics flexibility and some value-added services such as labeling and repacking.
Christophe
When you were commercial director at Action, what were your most important expectations from FMCG brands when negotiating with them?
Simon
I expected openness, give-and-take, and a good understanding of the discount variety retail format. This means offering brands and products that meet the price expectations of the discount customer and also offering a regular flow of exciting in/out products. Discounters offer huge volumes, quick decisions, and relatively simple terms of business — that need to be recognized and rewarded.
Christophe
What are the best practices that you observed from brands in managing the non-food discount channel versus their other channels?
Simon
I observed some good practices and progressive thinking from several brands. Firstly, recognize that discount is a rapidly growing channel; don’t try and avoid it, instead embrace it. Put your best resources on discount customers, be entrepreneurial, and build plans but be flexible. As well as offering key items, brand owners can be creative and look within their wider business portfolio for pack formats, variants, and even brands that create a point of difference for the retailer at an amazing price. When you have residual stock, be quick to offer it to the discounters who can get it on the shelf within a matter of days or hours, unlike more rigid supermarket and drug store chains.