Lidl: Darwinian discount
Elsevier Food International, Vol.7, No.1, February 2004 Pascal Kuipers
‘Fairness is required towards everybody in the company’ reads one of the company principles of German discounter Lidl. Another principle: ‘Praise, esteem and the ability to resist criticism should in daily work determine our work climate.’
“Coming from Lidl, this sounds really perverse,” says a German retail expert. “They are notorious for squeezing and abusing their employees.”
Lidl, the discount operation of German retailer Schwarz Group, is by no means a people’s business. Not in its stores and warehouses and surely not in its headquarters. Enticed by high wages and bonus schemes, only the toughest managers qualify for promotion, but these opportunities are scarcely available in Lidl’s flat organisation. Founding father Dieter Schwarz decided some four years ago to withdraw from the operational business but in practice he is still pulling the strings at Schwarz Group, where he is surrounded by an inner circle of confidants. Two of them, Werner Hoffmann and Klaus Gehrig, are former Aldi executives who are currently designing Lidl’s rapid expansion.
Underneath this inner circle, top and middle management has been rotating quickly in a Darwinian working climate where targets are increased year by year and only the tough survive. Lidl summarises its philosophy on its website with the one-liner “We are totally uncomplicated”. The discounter, however, shifts any complexity to its suppliers, contractors and even its own employees.
Abusing suppliers and staff
Suppliers complain in the German trade press about the brutal treatment they receive by Lidl buyers who during negotiations tend to raise their voice while dramatically gesticulating in an effort to intimidate suppliers who do not want to give in to additional levies. “Lidl buyers scream and roar as if they are in the Zoo. They all do it. Without exception. They appear to have been cloned,” a supplier complains in Manager Magazin. “They try to aggressively squeeze you,” another supplier says. “In fact one should cease the negotiations and leave, but no supplier can afford to. Lidl is simply too dominant.”
Logistics service providers take care of store deliveries and the return of re-usable and waste packaging to the distribution centre. They are by contract compelled to do this job in a pre-calculated low number of hours, LebensmittelPraxis says. Only these hours get paid by Lidl and any excess work for this sometimes complicated job, especially in older Lidl stores that have inadequate logistic infrastructures, is for their own account.
In the stores, the number of hours that Lidl pays its employees is linked to the sales level. In practice, this means that the staff are not paid for working overtime when sales are low. Working overtime is common practice at Lidl. Many employees are registered for 87 hours per month but in reality they work some 190 hours. Sometimes, leave payment is calculated on the official, low hours count. The German trade union Verdi has monitored these and other abuses at Lidl: employees are forced to work continuously without a break; cashiers have to scan at least 40 items per minute; in case of illness, employees have to take a day off instead of applying for sick-leave; and so forth.
Verdi has been trying to put pressure on Lidl to change working conditions and to allow its employees to establish works councils. Lidl, however, actively discourages the establishment of works councils. Early 2002, Lidl suddenly decided to legally separate its stores and warehouse in the Dortmund region, after a judicial verdict that the employees of the 150 stores in this region were allowed to vote for the establishment of a joint works council. This made the verdict redundant and Lidl decided to repeat this trick countrywide.
Expansionist zeal
Its bad domestic reputation has not deterred Lidl from aggressive cross-border expansion. In 1989, Lidl first set up shop across the border by starting an operation in France where it grew at a very fast pace to some 1000 outlets by 2003. In France, Lidl shrewdly bypassed restrictive legislation for stores over 300 square metres (Raffarin Law) by designing a special small store design with shorter checkouts and higher shelves. By the end of 2003, Lidl had spread its operations to 14 foreign countries. Illustrative for Lidl’s expansionist zeal is Czechia, where it kicked off its operations on 26 June 2003 by opening 16 outlets at once. Most of its competitors were already present in the Czech Republic, so Lidl had some catching up to do. It crossed the mark of 50 stores in Czechia within six months after opening its first 16 stores and the German journal Lebensmittel Zeitung expects that Lidl aims for some 300 stores in this country of 10.4 million people.
Lidl is looking at market entry in 11 more countries, one of which is Canada. This would be Lidl’s first venture outside Europe. According to M+M Planet Retail, Lidl would find an interesting niche in Canada with its small discount stores in residential areas, because low-price retailing in Canada is still in the hands of large-size formats like Loblaw’s or Wal-Mart.
Lidl is also rumoured to be interested in setting up shop in Australia, Central America and in Asia. This is, however, not to be expected to happen in the near future as closer to home more imminent challenges lie ahead for the German discounter in the Balkans, Central and Eastern Europe, the Baltics and Scandinavia.
Aggressive pricing
In the Czech Republic, Lidl is known for its aggressive pricing and high proportion of private labels, mostly imported from Germany and Poland. Early 2003, in the upbeat to Lidl’s entry in Czechia and other markets in Central and Eastern Europe, the international organisation of trade unions Union Network International (UNI) called Lidl “A brutal price competitor who will put pressure on already poor wages and working conditions in the whole commerce sectors of the new host countries”.
In Scandinavia, there has been some attention to Lidl’s labour ethics but most attention goes to the discounter’s aggressive price image, as price levels at Lidl were some 25 to 30 per cent cheaper than local discounters. M+M PlanetRetail says that retailers like ICA, Kesko and Coop Norden refocused more on price and introduced economy private labels. In Europe’s Nordic region, Lidl is already represented in Finland and Sweden. This year, Lidl will start its operations in Norway and Denmark and further expansion to the Baltic countries is expected.
In Sweden, the dominant dairy supplier Arla decided to boycott Lidl in an attempt to prevent price erosion in the dairy category. This urged Lidl to import cheap milk from Germany that is sold under the fancy label Milbona. In Finland, the largest dairy supplier Valio wanted to do the same but Finnish law prohibits Valio from refusing anyone because Valio is too dominant in the market. Finland's leading retailer Kesko, threatened to import cheap milk from Estonia to discourage local dairy companies to produce private label for Lidl and to compel Valio to lower purchasing prices. Again, Sweden shows a similar picture as leading retailers such as ICA consider cheaper imported milk. With its aggressive price reputation, Lidl triggered a culture shock in Scandinavia, where dairy is traditionally seen as something sacred. Using dairy as a traffic builder and importing cheaper milk was inconceivable before Lidl entered the market.
Expectations on when Lidl will enter the Norwegian and Danish market had to be adjusted throughout 2003. In both countries, Lidl faces similar problems with its dairy supply. Especially entry into Norway was postponed due to problems in finding suitable locations and in getting approval by local planning authorities. Lidl’s alleged entry casts its shadow ahead as Norwegian and Danish retailers are expanding their discount operations and lowering their prices. M+M PlanetRetail reported that Finnish retailer Kesko was accelerating the opening of its discount stores in Estonia (Säästumarket) and Latvia (Supernetto) anticipating Lidl’s future entry into the Baltics.
In Ireland, both Lidl and Aldi are scrutinised by members of parliament as imports from Germany soared by 2000 per cent since the German retailers entered the Irish market four years ago. Irish consumers, however, are not concerned about the dominance of imported goods from Germany over local produce. Recent research by Behaviour & Attitudes shows that Lidl in particular expanded dramatically in 2003 with 30 per cent of all shoppers claiming that they shop at Lidl at least once a month while six per cent of Irish shoppers use Lidl as their main grocery store.
Financing expansion
With 14 foreign operations in Europe and 11 new market entries expected in the (near) future – all in Europe, except for Canada – Lidl’s is essentially European. Aldi is represented in 11 foreign countries. Aldi North focuses on the Western part of the European continent, where it is represented in six countries from Spain in the South to Denmark in the North. Aldi South chooses a different cross-border strategy, as it is also represented outside Europe, in the US and Australia. With the exception of Austria, where there is no language barrier to the Germans, Aldi South looks at English speaking countries worldwide.
In total sales, Lidl still stands far from Aldi’s level. M+M Planet Retail estimates Aldi’s total net sales in 2002 at US$33.7 billion, which is some 2.4 times as big as Lidl (US$14.2 billion). Between 1999 and 2002, however, Lidl’s net sales increased by 30 per cent. It is therefore quickly gaining ground on Aldi whose growth in the same period was nine per cent. If both retailers maintain these growth rates, Lidl will have bypassed Aldi’s sales level by 2007.
It remains a mystery how the Schwarz Group finances its drastic expansion scheme. Lidl’s second largest market France in particular is said to be very profitable with fast sales turns of four days while, according to Manager Magazin, suppliers are paid after 30 days. “Food discounters have a business model which is strongly geared towards negative net working capital,” says Jürgen Elfers, head of European Retail Research at Commerzbank. “Lidl aggressively moved into non-food to produce extra cash. France is a profitable business for Lidl that generates sales of some €3.5 billion (exclusive of VAT). Note that in France identical non-food products are some ten per cent more expensive than in Germany.”
The question remains if this allows for the financing of a rapid expansion scheme. Elfers calculates the options: “As opposed to Aldi, Lidl has also used debt financing as a way of financing its empire. Suppose they generate some €100 million net profit in France and they want to leverage the business (i.e. 15 per cent equity ratio), they could then generate some €650 million of additional total capital. If you allocate €2 million per new store, this would allow for up to 325 new discount stores.”
The German trade publication Lebensmittel Zeitung has examined Schwarz Group’s practice of keeping the operational business free of real estate and financing costs. Private equity investors are enticed with attractive returns and provide Schwarz with the required funds for further expansion.
All this, however, can only be done on a solid performance of the operational business. “At the end of the day, money needs to be earned to buy back debt,” Elfers acknowledges. “For now, Lidl is all about being dynamic. Compared to supermarkets and hypermarkets, the discount model obviously bears less risks and offers a much better return profile.”
Schwarz Group
Lidl’s founding father Dieter Schwarz has a reputation for constantly adapting and tailoring his organisation structure to changes in tax legislation. The Schwarz Gruppe is a wickerwork of some 400 to 500 private limited companies organised in two operational foundations, one for the hypermarkets (Kaufland) and one for the discount stores (Lidl). A separate company owned by Schwarz holds the real estate, making it impossible for outsiders to determine if the financial performance of the operational store subsidiaries are positively affected by favourable rents below market level. Ownership and voting rights are separated as well. The Dieter Schwarz Foundation Ltd owns 99.9 per cent of the shares and 0.1 per cent of the voting rights, while the limited partnership Schwarz Trust owns 0.1 of the shares and 99.9 per cent of the voting rights. All this enables Schwarz to retain his control and protect his empire from hostile takeover attempts, either from outside or from within (Schwarz has two daughters and two sons-in-law).
Buying clout: Aldi, Lidl and Wal-Mart
According to Dieter Brandes, former Aldi executive and currently a business consultant, both Aldi and Lidl have a purchasing power that far exceeds Wal-Mart’s buying clout. “Wal-Mart is about six times as large as Aldi but if you roughly compare them when it comes to buying food, Aldi’s buying power is larger than that of Wal-Mart’s,” he says. “Non-food excluded, Aldi’s gross sales are some US$43 billion with 700 SKUs, whereas Wal-Mart accounts for some US$80 billion with 20,000 SKUs. Lidl’s gross sales are some 30 to 40 per cent less than those of Aldi, which is some US$31 billion in food sales with 1,200 SKUs. On a per item level this means that Aldi accounts for US$61 million, Lidl for US$26 million but Wal-Mart only for US$4 million. This only gives a rough impression as there is a lot to say about buying power. For instance if you subtract from Wal-Mart’s sales those products and categories that are not available at Aldi, Wal-Mart scores even less. But on the other hand, Wal-Mart purchases larger varieties and quantities from individual suppliers which means that it is able to relatively strengthen its purchasing power compared to Aldi and Lidl.”
Differences between Lidl and Aldi:
• Age: Dieter Schwarz is 63 years old; the Albrecht brothers are 83 (Karl) and 81 (Theo) years of age.
• Location: Lidl does not reject locations in city centres, as Aldi does.
• Assortment: with 1,200 SKUs, the average Lidl assortment is almost twice that of Aldi.
• Brands: contrary to Aldi, Lidl also offers ranges of A-brands.
• Format: Lidl discount belongs to Schwarz Group that manages a multiformat strategy; Aldi focuses solely on discount stores.
• Buying: Lidl’s purchasers are said to intimidate suppliers during negotiations; Aldi’s buying department has a reputation of fairness.
• Pricing: Lidl does aggressive price promotions in order to establish itself as a low price operator; Aldi focuses on an EDLP strategy and uses non-food promotions as traffic builders.
• Marketing: Lidl is quicker at spotting consumer trends (e.g. increasing parking places, including fresh meat in the offer, fruit and vegetables can be individually weighed out, electronic payment services) than Aldi.
• Service: Lidl’s opening hours are much longer than those of Aldi, especially on Saturdays.
• Wages: employees at Lidl earn some 20 per cent less than their colleagues at Aldi earn.
*PlanetRetail calculates market shares on the universe of modern grocery distribution, food sales. This only comprises grocery turnover from modern grocery distribution formats, with grocery turnover defined as including sales from food, drugstore items and everyday household goods, but excluding non-food turnover (incl. VAT and sales tax).
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