In 2007, the recession conquered Irish and UK shores, sending consumers scrambling for cover, hoarding the little they had left. Jobs were lost, wages cut and basic necessities like food were becoming more expensive. In retail, consumers unsuccessfully sought solace from the economic war being waged on their pockets, with their supermarket allies like Tesco. But their prices were not budging leading customers to welcome German invasion from budget supermarkets Lidl and Aldi.
Cheap food and products were meted out to the economically hungry. Consumers had a new German love interest they could brag about to their friends. Suddenly it became not just a necessity, buy cool to buy low priced products with housewives cooing about bagging the latest “bargains”.
While corporations may freeze, time does not. As the UK and Ireland exit the recession, we witness people loosening their purse strings once again. Lidl and Aldi’s growth continues but not at the same pace as previous years. Instead, signs are showing that their growth is peaking. Together they hold an estimated 20% of the Irish grocery market and the UK.
Every new product or business has a tipping point. Then sales begin to atrophy, market position flat lines, and growth marginalizes. Lidl & Aldi will hope this isn’t the case especially considering the current retail climate and its budding opportunities. Tesco especially is vulnerable, struggling after accumulating billions of debt from years of financial misuse. When the animal is injured a lion moves in for the kill. However, the Germans are finding Tesco a weakened animal but one which won’t go down easily.
So why has Lidl and Aldi’s growth slowed? Let’s look at some issues circling them:
1. Store Size
The biggest asset of the budget supermarkets was their small size making shopping quick and easy for customers in comparison to the bigger supermarkets. Paradoxically, however, it imposes many restraints for increasing sales. They must be very careful with stock management as they do not have the size to stock everything. They cannot match customers every requirement so customers will always need to shop at the bigger supermarkets.
It also constrains their promotional efforts. Working at Tesco, I saw how Tesco make most of their sales through promotional aisles. They push their products in front of customer’s eyeline and traffic flow. A customer passes a product 3-5 times at different touch points throughout the store. This increases their potential basket spend driving impulse purchases. The more a person sees a product, the more likely they are to buy it.
At Lidl & Aldi however, due to their size, you usually pass a product only once. If you don’t see it or are indecisive in your purchase decision then the store doesn’t offer another opportunity for you to buy it through promotions. They haven’t the shelf space available. Good for the customer who navigates the store promptly but not for the store’s sales.
2. Branding issues
The Lidl and Aldi brand has grown exponentially over the last few years. Customers know and trust it as the best-priced supermarket on the market. Yet their low prices creates branding problems for the companies. Customers associate low prices with low quality. So while they mightn’t care too much about the quality of 49c fruit and vegetables, they will care about the quality of their overall food consumption.
If they believe most of the products in stock aren’t good for you or isn’t manufactured from the best ingredients, then they will be picky about what they spend money on. It’s easy to earn loyalty from low-income households – just provide the lowest price product matching their expectation of quality. The mid-higher income, unfortunately, isn’t as easily swayed. They like a bargain but assume all cheap food is made from cheap ingredients. These perceptions are ones which Aldi and Lidl must change going forward through food quality award initiatives, better branding, marketing and sponsorship efforts.
3. Entrenched customer buying habits
Lidl and Aldi’s growth has been amazing considering they are still very young on the scene in comparison to the other dinosaurs in the jungle. But, people are habitual and customers will always want to visit a store they usually frequent to purchase their “favourite” products. This is why customers do not spend as much in budget supermarkets as they must visit the other stores as well.
This nudges them to pick up the basket in Lidl and Aldi while the trolleys get pushed through the big supermarkets. This has emphatic implications for average spend per customer. The budget supermarkets need to transform those baskets into trolleys if they want to really drive sales.
The big brands also present difficulties to the budget brands. Customers have favourite products and can only buy them in the big supermarkets. Unilever, Largo foods, Cadbury and much more. This gives them added reason to visit these supermarkets and conserve spending at Lidl and Aldi.
4. Recession is over
Saving money and snaring bargains is always sexiest when money is scarce and the economy is in a downturn. While Brexit presents a threat, the economy is generally improving since the economic crisis. Money is becoming plentiful again and customers possess some excess disposable income for a change. In such environments, time becomes more important than saving money. People will accept spending a few extra euros at the big supermarkets if it means “saving” another trip to a different supermarket during the week.
When money is more freely available, customers also make healthier choices such as wholegrains, gluten free, organic and more. They also invest in special “me” products – treats for themselves like Lindor chocolate or a discretionary product they feel they’ve earned. Customers view the larger stores as being more expensive but better quality.
This dovetails back to branding issues and the need for the company to push themselves as great quality yet low price without losing their brand identity as a budget supermarket. A difficult obstacle but if they want growth to continue then this requires being the perfect store for all market segments.
5. Tesco’s Recovery
The biggest opportunity for Lidl and Aldi’s growth is Tesco’s shaky market position. However, in the last couple of months, Tesco has shown signs of recovery thanks to some long overdue investment in their product offerings. Price decreases mirroring the budget supermarkets loss leader pricing strategies of low fruit and veg at 49c is enticing more people instore. They’re also trying to be more community friendly in a quest to recover their fickle customer relationship. They are playing catch up and doing it well-copying moves by the budget supermarkets to be more in line with the times. Improving their bakery section to be more like Lidl and Aldi was necessary as well as enhancing product packaging across fresh food lines.
Tesco’s position also impresses limitations on Lidl and Aldi’s growth. They have excellent store locations purchased from throughout the years especially in the city. This makes trips to Tesco both easy and convenient. The location is everything. They are also piling limitations on Lidl and Aldi’s expansion blocking and appealing any attempts at erecting new stores throughout Ireland. This stymies their growth providing more time for Tesco to recover, reduce their overall debt, and invest more in retaining their customers.
Attacking the future
Lidl and Aldi’s growth has been admirable over the last few years. Now enters a period of their existence which will define what they can really achieve. Do they hold or do they push further investing more and gaining added ground?
With their aggressive expansion in America, my guess is they will invest more growing bolder from their previous success. In order to reach their full potential however they still have many issues left to address.