The success story of food retailers Aldi and Lidl

Wednesday 25th March 2015 05:52 EDT

When most of the illustrious names in grocery chains like Carrefour of France, Tesco of Britain and Walmart of the United States, are making a retreat from their overseas forays, two German chains, Aldi and Lidl are making it big in their international expansion.

They are now the world’s biggest “deep-discount” grocers, offering mostly their own brands of goods and almost no premium-priced products. The Schwarz Group, which owns Lidl as well as a hypermarket brand, Kaufland, is also Europe’s biggest retailer. As mainstream supermarket groups contract, in Europe especially, the German duo continue to eat up market share. So, how far can they go?

In their home market their position is strong, though far from dominant. Their combined share of sales among German food-retailing chains was just over a quarter last year. Aldi (which is divided into two legally separate but co-operating companies, Aldi Nord and Aldi Süd) had 14.8% and Lidl 10.9%. In Europe as a whole they are still relatively small: Aldi has a 3.3% share of sales and Lidl 3.8%. In Britain - where the two increased their sales by 22.6% and 15.1% respectively last year - their combined share is now 8.5%. Aldi, which already has 600 stores in Britain, aims to have about 1,000 outlets by 2022.

Aldi’s performance in Australia has been impressive. The discounter opened its first store there in 2001 but already has about 10% of the grocery market on the eastern seaboard. It recently announced plans to spend A$700m ($530m) on distribution centres and outlets to expand into southern and western Australia.

In America, Aldi has been quietly growing for decades. Aldi Süd has 1,375 stores under its own name, mainly on the east coast, but has expanded into Texas, Florida and California. Aldi Nord operates 435 shops in America under the name of Trader Joe’s. Together they have just 1.7% of the national market. But in 2013 the group announced a $3 billion expansion plan, to add 650 Aldi-branded stores. Lidl had planned to enter the American market this year but has postponed this until 2018.

Despite the impression of relentless expansion, Aldi is picky when it looks abroad. It only “seeks out countries where returns on groceries are significantly higher than global averages,” explains Paul Foley, a former head of Aldi UK. Usually this is because the local market is dominated by a few giants. Britain is one such place. Australia is another: Aldi has muscled in on a cosy near-duopoly between the Woolworths and Coles chains. In America, Aldi started out in those states and regions where market conditions were similar. As a family-owned, private company, with no need to appease outside investors, Aldi grows slowly and organically, Foley explains, “to suck the profitability out of the industry in favour of the consumer.”

This is not the only way in which its strategy is self-limiting. Aldi is highly protective of its reputation as a squeaky-clean, family-owned business. This has made it uncomfortable about entering countries where corruption is endemic. Much the same can be said of Lidl. It is therefore hard to see the duo plunging into the emerging markets. In November it was reported that Aldi Süd was looking to enter China - but analysts still think this unlikely.

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