Food retailing in Europe
The Germans are coming
Aug 14th 2008 | PARIS
From The Economist print edition
Germany's "hard discount" model of supermarket
retailing is spreading in Europe
IT IS as far from the
charming ideal of French
farmers' markets and
small family-owned shops
as you could imagine: strip
lights glare down on a
narrow range of products
in ugly packaging,
displayed in cardboard
boxes piled on the floor
and on low shelves. But
sales are booming at the
new Lidl discount
supermarket in south-west
Paris. Previously, the German chain stuck to the suburbs, where poorer
folk live, says Fatouh Mourad, the store's manager. But rising food prices
and widespread concern about "pouvoir ďachat", or purchasing power, in
France, has given Lidl the confidence to push inside the city's limits.
As economic prospects worsen across Europe, discounters such as Lidl--
and Aldi, another German chain--are taking market share. They generally
charge some 30-50% less for groceries than ordinary supermarkets. In
France, according to TNS, a research firm, discounters increased their
market share to 11.2% in the second quarter of this year, up from 10.5%
a year ago, whereas the share fell at Carrefour, the worlďs second-largest
retailer. In Belgium a local discounter, Colruyt, is gaining share at the
expense of Carrefour and other pricier chains. Dutch shoppers too are
trading down to discounters, says TNS, and in Britain, where Aldi and Lidl
struggled for years, they are now the fastest-growing grocers.
Discounters affect prices well beyond their own stores. "There's a massive
global price-war in food retailing, much of it provoked by the gains by Aldi
and Lidl and other discounters," says James Amoroso, a food-industry
consultant. Tesco, the worlďs fourth-biggest retailer, is fighting an all-out
price war against Lidl in Ireland, and Belgium's Delhaize recently slashed
prices in response to discounters. Carrefour, too, is under pressure to cut
prices.
But can the discounters can hold onto their gains? Tesco's finance director
recently suggested that they were merely having a "moment in the sun".
He was quickly contradicted by the head of buying for Aldi in Britain, who
pledged to open a store a week and win a tenth of the market (it has 2.9%
now). In Germany, the heartland of discounting, cut-price operators have
some 30% of the market, according to Planet Retail, a consultancy (see
chart), and shopping at Aldi and Lidl is the norm for rich and poor alike.
The two firms doubtless reckon they have a shot at replicating that
position elsewhere.
They may well succeed, at least in some markets. "Iťs the best business
model for retail in the world," says Philippe Suchet of Exane BNP Paribas in
Paris. Discounters stock a fraction of the goods that a normal supermarket
offers, resulting in fewer suppliers, a high volume of purchases and sales,
and massive economies of scale. "You
would find 16 brands of tomato
ketchup in a normal big
supermarket," says Paul Foley,
managing director of Aldi in Britain.
"In my store you will find a choice of
one." Discounters mostly sell their
own private-label goods, which are
more profitable than branded goods,
where the brand owner takes a big
cut, and also more efficient--having
bar codes in exactly the same place
on every product, for instance, says
Mr Foley, means faster checkouts.
Aldi and Lidl, which dominate the world of discounting, have annual sales
estimated at 43 billion ($64 billion) and 35 billion respectively,
compared with 102 billion for Carrefour. They are privately owned and
can take a long-term approach to expanding abroad. New stores cost little
to open and generate rapid sales, says Jürgen Elfers, retail analyst at
Commerzbank in Frankfurt, so the discounters can expand during hard
times more rapidly than any other kind of retailer.
The two firms are intensely secretive and say little about their expansion
plans, but new stores are opening all the time. They are expected to
expand quickly in France now that a law designed to keep discounters out
has been changed. Lidl is poised to go into Switzerland, and in a rare
interview last year its chief executive said it wanted to tackle America.
(Aldi is already present in both markets.)
Lidl recently caused a fuss in Dublin, when it bid for a site on fashionable
Grafton Street: critics complained it would lower the tone. But Lidl may not
be so out of place, since middle-class people are changing their shopping
habits to buy at least basic items at hard-discount stores. Five years ago in
Britain, says Mr Foley, a quarter of his customers were well-off shoppers;
now half of them are. Economic worries are part of the reason for that, of
course, but Aldi appeals to middle-class shoppers because it manages to
produce goods of surprisingly high quality at a low price.
What should perhaps worry conventional supermarkets most, in fact, is
that the discounters have proven themselves adept at moving upmarket,
even as they retain most of their efficiencies. In many markets, for
instance, Lidl now stocks a limited range of branded goods alongside its
cheaper own-label items. In Britain Aldi used to be known for tinned and
packaged foods, but has introduced fresh and delicatessen products. In
Germany Lidl even tried to buy a chain of organic supermarkets until an
outcry scared it off. But there is a limit to the range of products
discounters can stock while maintaining the efficiency of their model,
cautions Mr Amoroso.
In recent years the German discount model has experienced only one big
setback. In March Lidl pulled out of Norway after four years of trying to
establish itself. Rema 1000, a local discounter, will take over Lidľs stores
there. Executives at the posher kind of supermarket must be longing to
know how the Norwegians did it.