Updated: Jun 2
Last week has been very eventful. We observed a kind of redistribution of the Russian retail market, initiated by several industry leaders at once. Magnit acquired the Dixy retail chain, (see our post https://www.discountretailconsulting.com/post/magnit-to-acquire-dixy-business-with-2-651-stores-in-moscow-st-petersburg-and-other-regions) and Lenta bought the Billa Russia supermarkets. Behind this high-profile news, one piece of news remained almost unnoticed: the German discounter chain Lidl (owned by the German Schwarz Gruppe) registered a trademark with Rospatent, which indicates its intention to open a Russian store.
Will Lidl be able to compete with local Russian discounters such as Fix Price, "SVETOFOR", "Nahodka", "DA!" ("Okay"), "Chizhik" (X5)? Why does the Billa (owned by REWE) no longer see prospects in our country, and the German Lidl, on the contrary, is once again trying to enter the Russian market? What makes Lidl the largest discounter chain in Europe? We will try to answer these and other questions in this article.
Like many famous German companies and brands today, Lidl was founded back in the 30s. last century as a wholesaler of food products. After World War II, Lidl, which had already gained fame in Germany, the company was destined to revive only a few decades later as a chain of discount stores.
The first modern discounter Lidl opened in the city of Ludwigshafen in 1973. Within ten years the company operates a whole chain of 300 stores, and the name Lidl becomes a household name throughout Germany.
In the late 80s - early 90s. Lidl began to actively expand outside Germany: in 1989 the chain made its debut in France, in 1992 in Italy, in 1994 in Spain and Great Britain.
In its foreign expansion, Lidl followed the path of its "eternal" competitor Aldi, another German discount chain, dating back to 1913 (the first modern stores appeared in the sixties). In the USA, Aldi still maintains a noticeable advantage over Lidl, 2,000 versus 100 stores, thanks in part to its early entry into the US market (Aldi opened its first store in 1976, and Lidl in 2017). And in Europe, both chains maintain parity: Lidl is more represented in the east of the continent, while Aldi is in the west. Surprisingly, even in the total number of stores, Lidl and Aldi are not inferior to each other: each retailer operates around 12 thousand discounters.
We add that in this race, Aldi entered the Chinese market in 2019, which, however, turned out to be not as successful as expected, due to the lack of demand for the discounter format in the fast-growing China. At the same time, Lidl's potential debut in Russia could be a good response from Aldi, especially given the growing popularity of low-price stores among Russians.
Traditional Lidl in Europe occupy an average of 1,000 sq. m, and in the USA, 3,000 sq. m. The assortment of European Lidl is represented by 1,500 SKU, and American, 4,000 SKU. In all stores of the chain, 90% of the assortment of the retailer belongs to private labels brands.
What is good for a German, death for an American!
Lidl makes format exceptions for the American market. This is due to the retailer's failures, which began immediately after the opening of the first stores on the East Coast of the United States, and subsequent attempts to attract American consumers with new formats and an assortment that was unconventional for discounters.
In the summer of 2017, Lidl literally burst into the US retail market with an ambitious plan to open 100 stores in a year. Brendan Proctor, CEO of Lidl in the USA, called "flexibility and adaptability" the main strengths of the company and predicted the retailer's imminent leadership in this segment. Indeed, after more than 40 years of work abroad, Lidl left only one market, Norway in 2008. In all other countries of presence, the German discount chain was able to achieve success. However, it was precisely in terms of flexibility and customer understanding that Lidl failed in the US.
9 months after its debut, by January 2018, Lidl had managed to open only 47 stores. At the same time, the company's management decided to abandon previous plans and open only 20 new stores in 2018. As a result, the 100th Lidl discounter in the United States opened 3 years later than planned, in May 2020. Schwarz Group CEO (owner of Lidl) Klaus Gehrig admitted that the company did not take into account the consumer interests of Americans. He highlighted several key issues for Lidl in the United States.
First of all, the assortment of American Lidl was almost devoid of frozen products and semi-finished products, which are very popular in the United States, especially among visitors to low-price stores. In addition, the company initially chose a large discounter format that was unusual for itself, as a result of which customers complained about the complex navigation system in the store.
American Lidl lacked non-food items, and prices of many products were sometimes on par with neighboring Walmart or Kroger.
The German retailer also made many mistakes when choosing locations for stores: discounters were located too far from the city center, which is why consumers refused to come there.
Experts believe that Lidl set a goal from the very beginning to be the opposite of Aldi in the United States, which at that time already operated more than 1,500 stores in the country. Instead of a traditional discounter assortment, Lidl began selling locally sourced organic produce, hoping to differentiate itself from Aldi and attract customers. However, such products were in no way combined with the simplistic interiors of hard discounters and were not well received by the Americans.
As a result, Lidl still managed to find its buyer in the United States, including thanks to the development of a mini-format and a revision of the assortment, but, of course, plans to conquer the American retail market are out of the question.
The influence of Lidl on local American retailers is interesting. For example, according to last year's study by the University of North Carolina, the opening of a Lidl store in Long Island, New York, forced competitors to reduce food prices by 15%.
It is noteworthy that not only is it difficult for German retailers to develop in the United States, but American companies also fail in Germany. So, in 2006 Walmart left the German market after 9 years of work in the country. The American giant lost more than US$ 1 billion without understanding the German consumer.
Lockdown and offline bet
The coronavirus pandemic and lockdowns hit European discounters hard, and Lidl was no exception. The UK retail market, on which Lidl has been betting for a long time, has been particularly hard hit, planning to open 1,000 stores there by 2023 (there are now 800 chain stores operating in the country).
In February 2021, the UK store of Lidl published its financial results for 2019-2020 (before the start of the pandemic): for the year, the retailer lost 25.2 million pounds (US$ 35.6 million). That said, the German retailer has adopted a new £ 1.3bn (US$ 1.8bn) investment plan to hire more employees and expand its stores in the UK. This plan focused primarily on the development of offline stores, which is in line with the company's overall strategy, and did not sufficiently take into account the growth in online sales, which accelerated with the arrival of COVID-19. During the lockdown, the British were less likely to visit Lidl and order grocery deliveries from other stores. Aldi also experienced a similar problem.
Lidl now hopes to regain its lost positions in the United Kingdom, hoping that in the face of the economic crisis, the British will prefer discounters to supermarkets. However, Barclays analyst James Ansted disagrees: "If you are nervous about COVID-19, would you rather go to a supermarket with wide aisles and large parking lots or a small and cramped discounter?"
HSBC analyst Andrew Porteous believes that price will be the "key weapon" for British retailers in the struggle for leadership. The price gap between discounters and mainstream UK supermarkets is now around 10-12%, up from more than 20% a few years ago. Soon, the price advantage of discounters such as Lidl and Aldi in the United Kingdom will become less visible, forcing them to transform their formats or reduce their presence in the market.
Lidl in Russia - Dream or Reality?
Lidl has made plans to enter the Russian market more than once. In 2003, the German retailer registered Lidl Holding RUS LLC in St. Petersburg, which existed until 2009. However, not a single Lidl discounter was opened in Russia during that period. Later, in 2015, Lidl released a presentation on expansion into Russia. Lidl then called its main local competitor "Dixy". The retailer saw the advantages of the Russian market in the growing middle class, and the disadvantages in cultural differences, competition, high inflation and instability of the local currency. However, those plans were never implemented.
If Lidl intends to enter the Russian market, then there is no better time than now.
Sad as it is to admit, falling real incomes are forcing Russians to pay more and more attention to prices and look for discounts in stores. In this regard, low-price stores Fix Price, Nahodka and Svetofor (which, moreover, opens Mere discounters in Europe) are growing record-breaking in the country, and the leaders of the FMCG market are starting to launch their own discounters, Chizhik from X5, “DA! " from "OK" and others.
“A discounter is by no means a dirty store in an inconvenient location. It is, after all, a store in which the share of private labels can exceed 90% of the turnover. Russian companies, with the exception of Lenta, do not yet have such an assortment of brands to make a separate project. And Lidl has it. He can come here with his own set of trade marks and thereby to some extent crush this market for himself, because they have just this competence more than enough," Ivan Fedyakov, CEO of INFOLine, commented on the news of Lidl's arrival to Russia.
Andrei Karpov, President of the Russian Association of Retail Market Experts, disagrees with him: “The background that they have accumulated in Germany and other countries will not work at all in Russia. They will have to start all relationships with suppliers from scratch. And until they create volume, suppliers will not supply them with goods at a lower price. Often, for those who are used to being big, it can be quite difficult to suddenly find themselves in the situation of small supplicants. A simpler option is a situation where they can buy a player. Then they immediately receive a certain volume of stores, employees who have work experience in Russia, and it will be easier for them to enter. Are they ready for this? "
Foreign companies (with the exception of Metro and Auchan) are rather few in the domestic retail market, which is why the possible arrival of the German Lidl cannot be ignored in the context of the departure of the Austrian Billa after the purchase of the Russian subsidiary by Lenta. Billa made its debut in Russia in 2004, positioning itself as a low-cost store. For 17 years, the Austrian retailer managed to open 161 supermarkets in Moscow and St. Petersburg, subsequently abandoning the discounter format (as in European branches). However, in recent years, Billa has been systematically closing stores in Eastern Europe and the CIS. In the fall of 2020, the company sold its last stores in Ukraine, and left Romania in 2017. At the same time, Lidl, on the contrary, is strengthening its presence in this region: in 2018 the retailer opened its first stores in Serbia, in 2016 - in Lithuania, in 2011 - in Bulgaria. The final difference in formats and policies in the region explains the difference between Billa and Lidl in terms of their vision of the Russian market. And the experience of Lidl described above in Europe and the USA speaks of the retailer's readiness to change the format of stores and assortment based on the realities of a particular country.