Discount Retail Chain Action (owned by UK based PE 3i Group) wants to expand into Switzerland. In an interview, HSG Professor Thomas Rudolph explains what this means for local retailers and customers and what hurdles the discounter in Switzerland has to overcome.
Cleaning products, cosmetics, household appliances, decorations, clothing, toys, snacks, the Dutch discounter Action already offers this product range in eleven countries. And at very low prices. Action now wants to be the twelfth country to conquer Switzerland. As the Handelsblatt "Konsider" wrote last week, the company has founded a subsidiary in Basel: Action Switzerland GmbH.
It is not yet clear when the first Action store will open in Switzerland. Thomas Rudolph, professor of business administration at the HSG, already dares to predict what Switzerland can expect from the low-cost discounter. Thomas Rudolph is Professor of Marketing and International Trade Management and Director of the Institute of Trade Management at the University of St. Gallen (HSG). His research focuses on purchasing and consumer behavior, among other things. In the past, Rudolph has studied the impact of Lidl and Aldi's entry into the Swiss market.
Thomas Rudolph, have you ever been to an Action store?
Thomas Rudolph: Yes, abroad. This is also out of professional curiosity, as Action is already very successful abroad.
What was your impression?
I was surprised by the huge offer. These are primarily non-food products. But I also noticed the prices. With these, Action attracts customers abroad to its branches. Action is the lowest price range. It doesn't get any deeper than that, from the consumer's point of view. Of its 6000 products, about 1500 items cost only one euro. Nevertheless, the discounter still manages to generate a 10 percent return. This is remarkable and only a few companies manage to do so. That's why you can say that Action has a very successful retail concept.
How can a company offer such prices and make a profit from it?
You have to ask yourself where these products come from and under what circumstances they are produced. However, this alone does not explain the prices. Action has been around for 30 years. During this time, the company has constantly developed and optimized its processes. It mainly relies on purchases in very large quantities. Furthermore, the discounter spends significantly less money on staff than, for example, Migros or Coop, because it simply needs fewer staff.
Why does Action need less staff?
On the one hand, because non-food products require less "support". For example, there is no fresh food counter and the logistical effort is also lower for products that do not require refrigeration. On the other hand, the discounter saves on customer advice and the presentation of its products. The items end up in the store directly from the pallet. Action doesn't have to pay anyone to put the goods in the limelight or to design the shop window.
Do you think Action will be successful with this concept in Switzerland?
Customers will vote on this with their purchases. Of course, there are also people in this country who like to buy 1-franc products. However, studies have shown that Swiss consumers are more quality-conscious than those abroad. If a cheap item doesn't work, Swiss customers won't come back. It will therefore be a challenge for Action to adapt to Swiss needs.
Is that also the reason why Action is only now trying to make an attempt in Switzerland?
It's hard to say. Market entry abroad is always a high-risk business in all countries. 50 percent of expansion projects fail. However, Switzerland has a few other peculiarities that make it difficult to get started.
Who would be? On the one hand, Switzerland is a very small country. In other countries, the sales potential is much greater, even though purchasing power is considered high in Switzerland. On the other hand, the three different language regions are important, which means that products and marketing have to be translated. What's more, Switzerland is expensive. Rents for retail space and personnel costs are significantly higher in Germany than abroad. There are also other peculiarities in relation to the products. Switzerland, for example, has different sockets than the rest of the EU, which you have to keep in mind when selling electronics.
Can you give a few examples of brands that have failed to expand into Switzerland? There are countless examples: OVS, Carrefour, the Quelle Versand, which seemed to have made it for a short time, but had to withdraw after a few years. Or Burger King and McDonald's, which needed a second attempt.
Well-known discounters that have managed to expand into Switzerland are Aldi and Lidl. How did they manage to do that?
Unlike in the countries where they had already been successful before, Lidl and Aldi in Switzerland relied from the outset on a Swiss range of local products and marketing that focused on the "freshness" of their products rather than on their low prices. That was well received.
However, Action as a non-food discounter will not be able to rely on it.
Yes, that's why I'm curious to see how Action will succeed in convincing customers. However, because of inflation, the company has chosen a good time. The pressure to save money among the population is greater, and so is the interest in a discounter.
If action prevails, which retailers need to be worried? Migros? Coop? Otto? This is not easy to predict because there is not yet a non-food discounter of this calibre in Switzerland. Probably, all retailers will feel it a little. Especially non-food shops and textile retailers. But that only after a few years. If, for example, customers notice that you can get a good shampoo for one franc at Action, their expectations of the other retailers increase.
Is it therefore pleasing for customers that Action wants to come to Switzerland? Maybe, yes. But it's likely that the impact of action will be significantly less than many would assume based on the experience with Lidl and Aldi. The situation is different today than it was ten or 15 years ago. As a brick-and-mortar store, Action may serve a gap in the market, but numerous online providers have been supplying this market in Switzerland for a long time: AliExpress, Wish, Temu, to name just a few. The intensity of competition is very high, especially in terms of population size and density in Switzerland. We tend to have too many providers rather than too few.
