Assessment ONE. Individual Case Study Report (40%)

MKT 3130 Coursework

Aldi and Lidl: International Expansion of Two German Grocery Discounters
Source: Ghauri, P. & Cateora, P. 2010, page 566-571

With a worldwide annual sales volume of €3.7 trillion in 2007 and an average annual sales growth of 2.7 percent during the past ten years, the grocery retailing industry can be considered as one of the world’s key economic sectors. Over the past decades, grocery discounters such as Aldi and Lidl have strengthened their position in the grocery retailing industry – especially in Germany and Europe. With their no-frills approach, they have led to significant changes in the industry and have challenged many companies which operate other store formats,’ such as supermarkets or hypermarkets. In this context, a Financial Times report on international retailing noted in 1995: ‘The spread of the discount format has been particularly disruptive to Europe’s grocery retail industry and has driven retailers to examine cross-border markets’.

The Grocery Discount Format
The key terms describing a grocery discounter are ‘minimalism’ and ‘efficiency’, which are integrated into all business areas. In fact, grocery discounters’ ambitions are to sell quality products at the lowest price possible. To realise profits in spite of the low prices, grocery discounters reduce their costs to a minimum and attempt to generate high volumes of sales through a limited product range of fastmoving items. The approach of cost reduction especially affects the spending for store design, customer service and advertising: grocery discounters try to save money by building up their stores in suburban areas and remote districts, where the rental fees or purchase prices for properties and buildings are low. Furthermore, all companies have a basic outlet format similar to that of a warehouse, with merchandise sold straight from cardboard boxes. In the stores, customers only have limited possibilities to contact service personnel in case of product-related questions since there is no dedicated customer service department. And with regard to advertising, grocery discounters usually do not launch costly TV ads or image campaigns – oftentimes they only use flyers and newspaper ads as promotion material. With regard to the grocery discount concept, experts distinguish between so-called ‘hard’ and ‘soft’ discounters: today, the product range of a hard discounter covers some 800 items – and almost all of these are store brands. The product range of a soft discounter, however, covers a range of 2500–3000 goods and includes store brands as well as branded products.

Development of Grocery Discount in Germany
In the early 1960s Karl and Theo Albrecht opened the first Aldi (Aldi = Albrecht Discount) grocery discount stores in Germany. At that time, many industry experts questioned the potential success of the hard discounter’s business model. However, within a few years, the two brothers built up several hundred stores in Germany and started their international expansion in Europe. They confounded the experts and proved that their new store format was highly competitive and successful. Based on the national and international success of Aldi, the German grocery discount industry became an important segment within the worldwide grocery retailing industry. By 2007 Germany was the home base of six major grocery discounters with an annual sales volume of more than €50 billion in Germany and more than €100 billion on a worldwide level.
Today, however, success stories of the six major grocery discounters originating from Germany are being jeopardised: while the companies were able to expand their market share in Germany during the past years, they now increasingly face signs of market saturation and stagnating growth in their home market. The market share of grocery discounters in Germany is at a level of about 40 per cent and experts assume that this figure will remain unchanged in the coming years. As a result, German grocery discounters have to adjust their strategies in order to fuel further growth. They face two key options for the future. They can
● try to identify and target new customer segments within their home market Germany, and/or
● continue their growth through expansion in foreign markets.
The two leading grocery discounters in Germany – Aldi and Lidl – started their international expansion well in advance of any other competitor. Today, both Aldi and Lidl generate more than 40 per cent of their revenues in foreign markets. Furthermore, the two belong to the Top 10 companies of the pan-European and worldwide food retailing industry and are regarded as the world’s largest food discounters by sales volume.

Aldi’s History
Aldi was founded by the two Albrecht brothers in 1946, when Karl and Theo took over the grocery business from their parents. At that time, they faced a severe shortage of goods and groceries in post-war Germany. As a result, the two brothers were forced to narrow the product range in their stores. Even in the 1950s when the German economy prospered again, they did not decide to modify their product offerings. It was in the early 1960s when they realised that this limited product range was no disadvantage for them at all. Karl and Theo found out that their stores were highly profitable and they saw no need to implement the characteristic store concept of a supermarket, where shoppers could choose from a wide range of goods. Dieter Brandes, a former Aldi manager, states that the two brothers initially planned to convert their grocery stores into typical supermarkets before they noticed that their minimalistic business model was highly successful. Brandes describes the hands-on mentality at Aldi by claiming that the company did not set any financial targets: ‘They have no budgets, no annual plans. Why on earth do they need them? Budgets are just toys for top managers. Budgets are one of the big money wasters.’ In 1961 the two brothers split up their company into two separate organisations. According to their agreement, Theo Albrecht was responsible for the northern part of Germany and founded the Aldi Nord GmbH & Co. OHG based in Essen, Germany. Karl Albrecht took over the lead for the southern part of Germany and established the Aldi Süd GmbH & Co. OHG based in Mülheim, Germany. Today, both companies operate independently, except in strategic decisions such as price promotions and purchasing conditions, where they consult each other.2 During all market entries in foreign countries, the company followed the initial territorial agreement from 1961. So Theo Albrecht focused his expansion on the north eastern, western and southwestern countries in Europe. Karl Albrecht concentrated on the southern and southeastern regions. Additionally, Karl was responsible for the market entries in the anglophone countries such as Australia, Ireland, United Kingdom and the USA. In 2007 Aldi operated more than 8500 stores in 15 countries and generated sales revenues of about €47 billion worldwide. Further statistics show that about 52 per cent of the worldwide sales can be assigned to Germany, 31 percent were generated in other European markets and 17 percent were achieved outside Europe.

Lidl’s History
In 1973, eleven years after the Albrecht brothers opened their first Aldi stores, Dieter Schwarz established the grocery discount retailer Lidl in Ludwigshafen, Germany. Similarly to Karl and Theo Albrecht, Schwarz had worked in a small family-owned retail business before he launched his own discount retailer business. Today, the Lidl Stiftung GmbH & Co. KG is a part of the ‘Unternehmens- gruppe Schwarz’, a group of the three independent companies Lidl, Kaufland and Mega Cent. At first sight, it seems that Dieter Schwarz has successfully copied Aldi’s business model for his own grocery discount stores. However, a closer look reveals that Lidl follows a so-called ‘soft’ discount strategy where the product assortment in the stores is enlarged to almost 3000 items and customers are offered branded products as well as store brands. Statistics show that Lidl’s soft discount concept has been expanded successfully: in 2007 Lidl operated about 7900 stores in 21 countries and generated sales of about €36 billion on a worldwide level. Forty percent of the sales were achieved in Germany and 60 per cent in European markets. Nevertheless, today Lidl is still number two behind its rival Aldi with regard to sales volume and number of stores in Germany and on a worldwide level. However, on a European level, the company has already taken the lead with regard to the number of stores: Lidl operates about 7900 stores whereas Aldi operates 7200 stores only.

International Expansion of Aldi and Lidl
Aldi realised early that international expansion could be a key lever in enhancing the company’s growth. In 1967 the management decided to enter Austria by acquiring the local grocery retailer, Hofer. Then, from 1976 to 2006, Aldi entered another 13 foreign markets. However, the expansion plans were not limited to Europe only – ten years after the market entry in Austria, Aldi began to make gains in the US market and, in 2000, the grocery discounter extended its operations into Australia. Unlike Aldi, Lidl limited its expansion plans to the German market first. Thereafter, in the period from 1989 to 2007, the company entered 21 foreign markets and impressed experts with its astonishing rate of internationalisation. Additionally, Lidl seized the opportunity to expand into a number of developing European markets and developed markets, where no competitor had been present previously. While Aldi – in most cases – preferred to wait for a retail sector to mature, Lidl has been far more adventurous and began its Eastern European expansion with the market entry into Poland in 2002. Lidl’s rapid expansion into Poland seems to have paid off: in 2007 the company achieved sales of about €759 million and was ranked among the top three grocery discounters in the country. With this well-established position, Lidl has a clear advantage over its rival Aldi who entered the Polish market in 2008 and still has to build up consumer trust and market share. Some of Aldi’s and Lidl’s market entries were a result of simple trial and error: often the grocery retailers declined support from market research companies or management consultants and judged the attractiveness of a foreign market on the basis of their own manager’s gut feeling. In 2008 Lidl were forced to realise the defects of this strategy: after four years of unsatisfactory sales, the company retreated from the Norwegian market and sold its 50 stores to the local competitor Rema. Norway’s unique geographic structure and the distribution of its population were key factors that led to Lidl’s failure. The thinly spread population density in Norway required Lidl to build up several central warehouses in order to ensure smooth supplies for each discount store in the country. Consequently, logistics became more expensive and the additional costs threatened the profitability of Lidl’s stores. Werner Evertsen, head of Lidl Norway, explained that the stores were closed because they offered no further development potential, and he indicated that the store location was a key issue, which should have been checked more carefully: ‘It can simply be a case of wrong location or too low population density. Of course, we want to be where the population is.’ In addition to these mistakes, Lidl Norway had to cope with a high level of fluctuation among its top managers. One of the country managers left the company 20 months after he signed his employment contract. The frequent change in Lidl’s top management and the resulting uncertainty among the employees also affected the long-term strategic planning of the company in a negative way.

Differences in the International Timing Strategies of Aldi and Lidl
Aldi’s internationalisation pattern is characterised by phases of ‘action’ and ‘recovery’. In the past the company entered one or more markets within a short period of time and then paused its market entry activities for about ten years. Since 2000 Aldi has accelerated the internationalisation process and has entered about one new market per year. Lidl, in contrast, acts much faster: although the company started its internationalisation quite late in 1989, it entered 20 foreign markets in the period between 1992 and 2007. On a country level, the two companies pursued different strategies as well: while Lidl opened up many stores in different regions at the same time, Aldi entered foreign markets more carefully and slowly – it began to build up stores by entering one region after another. In Switzerland, for example, the grocery discounter started its operations in the German-speaking regions first. Other districts followed successively.

Adaptation to Local Needs
Aldi and Lidl decided to implement their grocery discount strategies not only in their home country but in all their foreign markets. Nevertheless, both companies allow local managers to adapt the product range according to countryspecific demands. In an attempt to increase consumer acceptance, Aldi, for example, re-labelled its German products in Switzerland so that former German-branded items became Swiss-branded goods. In the USA Aldi stores usually do not sell any German products at all. Only the famous German ‘Christstollen’ and almond paste are offered during the Christmas season. In the UK Lidl offers regional products as well: about 90 per cent of its meat and poultry is from the UK and Ireland and, when in season, lots of the fruits and vegetables are British. Lidl UK director Martin Bailie explains: ‘It’s not all pan-European buying; we have to look what UK customers want.’ At first sight, this customer focus seems to conflict with the standardised grocery discount concept. However, Aldi and Lidl realised that this adaptation to local needs can help the grocery discounters to successfully develop a foreign market. In Switzerland and in the UK, where Aldi faced stiff competition from local retailers, the company departed from the rigorous hard discount concept and launched advertising campaigns in order to convince customers to shop at Aldi. An Aldi spokesperson explains the benefits of the advertising campaign: ‘The activity has proved very successful and is an important part of our positioning as a quality mainstream supermarket with a discount proposition.’ In addition to the advertising campaigns, stores in Switzerland and in the UK were stocked with a broader selection of meat and seafood products, more upscale frozen meals and a new ‘food to go’ counter. George Wallace, retail expert at Management Horizons Europe, explains why Aldi had to adjust the product assortment in the UK in order to overcome the reputation of an ‘underclass-discounter’: ‘In Germany, cheap equates to value. You always hear the word “billig” (cheap) being used, and it means value. By contrast, in the UK low prices are not necessarily equated with value and are more often associated with poor quality.’

Further Expansion of Aldi and Lidl
Aldi’s and Lidl’s success in their home market Germany is beyond dispute. However, both companies realised that if they stuck to their original discount format, they might have limited growth prospects abroad. With their altered product and service strategies in the UK and in Switzerland, Lidl and Aldi are trying to meet the requirements of their demanding local customers. While Aldi managers retain their pricing strategy also in those countries where Aldi heads upmarket, Lidl has slightly increased the sales price for some of its products. It will be interesting to see whether the grocery retailers will implement these strategies in other foreign markets as well. The next market entries could serve as an indicator for the strategic course of the two rivals: in 2008 Aldi opened its first stores in Poland, Hungary and Greece. In the following years the grocery discounter intends to expand its operations to Croatia, Romania and the Czech Republic. In the medium term, Aldi plans to enter the Turkish market, Russia, New Zealand and South Africa. It seems as if Lidl intends to continue its rapid internationalisation as well: in 2008 the company entered Malta and Cyprus. In spring 2009 the first stores in Switzerland were opened. In the medium term, Lidl plans to conquer Brazil, Mexico, Russia and the USA.

Case-Study Questions

1. While Aldi and Lidl entered some foreign markets via acquisitions (for instance, the acquisition of Hofer by Aldi in Austria in 1967), they mostly opted for greenfield investments as their entry strategy. a. Discuss the reasons why Aldi and Lidl choose greenfield investments as primary market entry strategy and 20 marks b. Analyse the advantages and disadvantages of such an entry strategy? 20 marks

2. In an attempt to improve its image of an ‘underclass-discounter’ in the UK and in Switzerland, Aldi enlarged its product range and offered a higher level of service to the customers. a. Explore the rationale behind such a strategy in the UK and in Switzerland? and 20 marks b. Discuss the risks associated with this approach? 10 marks

3. Until 2009 Lidl restricted its internationalisation to countries within Europe. Aldi, in contrast, decided to open stores in Europe, Australia and in the USA. a. Discuss advantages and disadvantages of Aldi’s strategy? 20 marks b. As part of your analysis, provide a recommendation to Lidl in terms of its geographical presence strategy until 2020. 10 marks

Coursework Weighting: 40%
Submission Date: 14th of February 2010
Word count: circa 3000 words