European retailers have often dismissed Germany's hard-discount grocers as a local anomaly. But the country's two most successful discount chains are bringing their tactics to other parts of Europe and altering the rules of the grocery business. And hard-discount stores don't appeal just to low-income bargain hunters, a McKinsey survey indicates. They enjoy strong acceptance among a majority of Germans and are attracting loyal customers elsewhere.

The German chains—Aldi (Albrecht Discounts, which operates as two separate companies, Aldi Nord and Aldi Süd) and Lidl (Lidl & Schwarz)—eschew frills in a single-minded quest for rock-bottom prices. At 300 to 1,100 square meters (about 3,230 to 11,840 square feet), their stores are smaller than traditional supermarkets, which average 1,000 to 1,200 square meters. Both chains also offer their customers fewer choices (just 600 to 2,000 products, compared with about 7,000 to 9,000 at a typical supermarket), and private-label products predominate.

This bare-bones approach gives Aldi and Lidl a key advantage over their rivals: efficiency. In Germany the sector's top performer, Aldi Süd (which covers about half of the country), had annual sales of €11,130 per square meter of...