Aldi and Lidl: International Expansion of Two German Grocery Discounters: Case study

Answer 1

Greenfield Investment strategy is one of the routes that companies prefer

when it comes to making a Foreign Direct Investment (FDI). As the term

suggests, it is associated with companies expanding its business outside its

national borders. greenfield investment is one such example where the company

sets off in an endeavor to establish its business operations from the scratch. An

alternate way of engaging in FDI could be via Mergers & Acquisitions or Joint

Ventures. However, the degree of flexibility and ease of conducting business

varies between the three.

From the case study of Aldi’s & Lidl’s international expansion it can be

seen that the company has engaged in both acquisitions as well as Greenfield

investment. However, in recent years it is evident that the strategy of these two

companies has tilted in favor of the Greenfield investments. Aldi and Lidl are both

efficiency seekers and more focused on supplying Fast Moving Consumer Goods

(FMCG) at the lowest costs possible. They plan to capitalize on an increased

number of units sold rather than the profits realized on a per unit basis. Tesco,

Sainsbury and other such chains are more focused on the latter factor to realize

profits.

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The two German companies had to look for international prospects as the

market in Germany was on the brink of market saturation as well as negligible

growth in the economy. Apart from this there are various factors that the two

companies could have fancied which lead to the decision of FDI’s via Greenfield

investments. Some of these factors are as mentioned below:

Degree of freedom: Greenfield investment involves setting up

business in the manner as perceived by the investors. They are free to

choose their own suppliers, channel of distribution and so on, and not

have to make do with pre defined operating procedures. This freedom

allowed the two companies to change required strategy whenever

required in order to adapt to different market conditions in different

countries. They have very few rules, regulations, licensing issues as

compared to those entering in a joint venture. This allowed the

company to cash in on the brand name which was synonymous with

low costs and attract further customers.

Resource & efficiency: As the two grocery discounters found it

difficult to expand its base in Germany as most of its market had

already been exploited, the companies’ seeked for ways of acquiring

resources at other arenas at much lower rates. This in turn, would help

them to compete in the markets with major supermarkets and

hypermarkets as they could drive down the costs of products due to

low costs of production. This degree of freedom would cause

consumers to switch loyalty and see them migrate to low cost grocery

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discounters like them. This would help Aldi & Lidl acquire a sizeable

chunk of the market share. Apart from this the company could also

cash in on economies of scale once it had established firm hold over

the market.

Political developments: Germany saw the end of communism

towards the 1990’s. This allowed for privatization and expanding their

business in international waters had become much easier as a result,

providing added encouragement.

Technological aspects: Developments in technology over the years

had made it possible to reduce the time and effort for conducting

business overseas. The utility of internet, telecommunication and

Information Technology in particular made it easier to venture in

emerging markets.

Government regulations: Since the establishment of The World

Trade Organization in 1995, the barriers to entry in the International

markets have been reduced by a great deal. Competition within

sectors such as financial services, telecommunication and transport

ensured that the costs were driven down further in favor of companies

seeking Foreign Direct Investment opportunities. (Griffin & Pustay

2007 pp.27-31)

Emerging markets: Globalizations positive effect on the emerging

markets has seen the standard of living raised considerably. The

demand has been on the rise which allows for the scope of

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establishing business in these emerging markets. Some countries

have witnessed major expansion in a very short duration which

increased the appeal for the likes of Aldi and Lidl.

Economic Factors: In recent years the impact of recession has had a

considerable effect on the consumers spending patterns and

disposable incomes. The ‘no- frills’ approach and the resultant

reduction in product prices offered by Aldi & Lidl during such times has

witnessed migration of consumers from supermarkets such as

Sainsbury’s & Tesco to the heavy discounters such as Aldi & Lidl. For

instance, Lidl was able to drive down the prices of its product by as

much as 30% during the times of the economic recession as compared

to the other supermarkets. (www.thetimes.co.uk) Another instance of

this is evident where Aldi & Lidl experienced approximately 13%

increase in volume of sale in March, 2011 due to the inflation and the

rising fuel costs etc among others. (Banks, 2011)

Closure of cultural gaps: Another benefit of rapidly increasing

technology, especially the likes of the Internet and Satellite and

Television has seen the barriers of social differences getting smaller

and less intimidating. This could have helped both Aldi & Lidl in

developing a perception and gather information of the markets

specifications.

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All these factors were responsible for both Aldi & Lidl in choosing Greenfield investment

as a primary market entry strategy. Griffin and Pustay (2007) pp.27-31

Answer 2

Aldi & Lidl are both essentially ‘No-Frills providers.’ Their target market is

the price sensitive customers who usually have a limited budget whilst shopping

or choose not to buy better quality and expensive products. Aldi therefore has to

sacrifice on the stock of brands that it makes available for sale. More reputed the

brand, the more expensive it gets and hence they opt out of this. Instead they

award contracts to local suppliers and also reduce the carbon footprint in the

process. (Johnson, G., et others, p.227, 2008)

When Aldi entered the UK market in 1990 (Birmingham) with the same

strategy that was popular in Germany, it faced quite a few barriers. They

introduced the same low cost products in the UK market. However, the

perception associated with UK implied that low cost products were related to low

quality. Many consumers were reluctant to try Aldi for this reason. Aldi’s floor

space as compared to Tesco or Sainsbury’s was also lot lesser. They used own

branded products, invested less in décor, architecture of the store itself. All of this

made a poor impression in the consumer’s opinion in UK. Aldi stocked only 1000

lines of products and did not provide much variety and choice. In their defense,

this strategy was adopted because they realized that more products equated

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more overhead costs. The consumers in UK before the arrival of Aldi, which was

one of the first FDI’s, were used to shopping in larger supermarkets. These

supermarkets as opposed to Aldi’s 1000 stock-line, maintained an inventory of

almost 20,000 products.

All these factors went on to portray a poor impression of the company to

the UK market. Aldi, however, were always of the opinion that their products

were of good quality even though their prices were less. They defend it with the

theory of economies of scale.

Since, Aldi were being perceived as an “underclass –discounter’’, they set

about launching advertisement campaigns that showed Aldi in the same standard

as the rest of the supermarkets. They depicted quality of the products as their

major attribute as well as the discount feature. The campaign was fairly

successful and the investment in advertising had attracted a new set of

consumers. They also revamped their stock of meat and added more variety for

the consumers to choose from. Aldi by 2010 was successful in attaining 3% of

the UK market share. Aldi seems to have committed this mistake as it did not

consider the geo-demographical change in interests between Germany and UK.

In Germany cheap products are not viewed as low quality products, quite the

contrary as mentioned in the case. However, in UK, the consumer’s perceptions

are based on price, affluence, brand name, and size. Aldi has rectified these

concerns and currently supply high end products and extra customer service in

UK.

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However, Aldi’s Market growth share seems to have hit a glass ceiling. As

UK claws its way out of recession, competitors like Asda and Sainsbury’s are

providing branded products for less. Aldi seems to be losing the momentum it

gathered during the recession.

Aldi’s entry in Switzerland had similar barriers. It was well received in its

introductory stage. Aldi was again the first of the heavy discounters to enter the

Swiss markets. The supermarkets like Coop, Migros and Denner had most of the

market share split between them. However, just before the arrival of Aldi in the

Swiss market, the two local companies mentioned above started slashing prices

and offering discounts. Aldi had to face the intense competition which was one of

the highest barriers to entry. The customer perception of Aldi was very similar to

that of the customers in UK during Aldi’s introductory phase. They also had to re-

label their products in German, Italian and Swiss. Restrictions on site

development also made it tougher for Aldi. (Jenetes, J. et al 2007 p. 116, Schafer

2006 p.113)

Aldi also had to face criticisms from Migros, Coop and other local

supermarkets. According to Migros’s boss, Herbert Bolliger- price cuts offered by

Aldi came at a cost that was affecting the economy. He considered that the

repercussions of these cuts will have to be faced by producers and employees.

He also mentioned that the price wars would have a definite impact on the

economy and most of the tax payer’s money would therefore be utilized in benefit

of the unemployed.

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Aldi maintained that their Corporate Social Responsibility (CSR) in

Switzerland were evident where most of the products were procured from local

suppliers. They also brought out the issue that Aldi was a welcome respite to the

price sensitive customers. The prices of products were nearly two times more

expensive than the German counterpart. (www.swissinfo.ch)

Discuss the risks associated with this approach.

In order to satisfy the interests of markets like UK and Switzerland, Aldi

had to alter its strategy. This included heavy investment in media,

advertisements through pamphlets, new branded products of higher price range,

refurbishing the stores, added customer service support, increased product

range etc. All of this implied that the costs of production in terms of Land, labour,

material and overhead costs were adding to the cost of the product which was

being pushed to the customer.

Aldi’s global image recognition as a “No-Frills’’ heavy discounter could

change as they continue to provide high quality, high priced products. Following

in the steps of Aldi very closely, Lidl would then benefit from any migration from

Aldi’s price sensitive customers. Aldi stands to lose its brand loyal customers and

ultimately its majority of market share to its closest rivals.

Changes in the product ranges would also imply that some of the old products

that Aldi’s brand loyal customers have grown to like will be withdrawn from the

shelves. This will cause dissatisfaction and may lead to Aldi losing their clientele.

Aldi’s Corporate Social Responsibility of including local suppliers may have to

change in order to provide better brand products. The environmental effects -

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that of carbon foot print will also vary as a result of this approach as Aldi

continues to engage more suppliers from different regions.

Answer 3

I agree with the expert’s opinion on Aldi & Lidl’s expansion strategy as it is

evident in the case study.

Aldi’s “slow & well considered” internationalization approach: Aldi has been

using the “action & recovery” approach for its internationalization process. This is

evident in the case study which mentions that Aldi stopped its expansion activities

for about 10 years before launching another.

By adopting this strategy, Aldi gives itself a chance to scrutinize the market’s

reaction for scope of growth, product requirements etc. By giving itself time, Aldi can

adapt to the changing circumstances arising out of various controllable as well as

uncontrollable factors. These may range from adverse weather conditions, inflation,

Government regulations etc.

In recent years (2000 onwards) Aldi’s rate of expansion has been increased to

one new market per year in order to compensate for the stagnant growth in

Germany as well as the saturated markets for the heavy discounters. Due to this

well considered and slow approach the company also mitigates the losses that may

arise out of losses. By opening one or two outlets at a time, Aldi can minimize its

losses if they desire to pull out of the market. The cost of disposing the business will

also be under control and may not do much harm to Aldi’s overall profitability. Aldi’s

cautious approach is evident where they ventured into Switzerland. They opened

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their stores in the German speaking part of Switzerland before expanding in other

areas, in order to scrutinize the potential for growth.

Lidl’s “Fast & Pushing” strategy: According to me this strategy employed by the

German soft discounters is similar to a trial and error method and may not always

be effective. In fact it can account for major losses if not controlled in time. For

instance, Lidl’s aggressive expansion that saw the opening of outlets in 21 countries

in the span of 18 years is much faster than that of Aldi’s.

In Norway (2008) Lidl had to sell more than 50 outlets at the same time. Norway

already had the highest number of stores per million people in Europe. This implies

that Norwegians did not experience the lack of choice that Lidl could capitalize on

with its soft discount model (www.onwindows.com). If it were to open a few stores

like Aldi & waited a while to see the market reactions, it could have mitigated its loss

to a great extent. The cost of disposing of 50 stores in one go could definitely have

resulted in loss. Lidl’s image must have also suffered and the share values dropped

as a result. The fast & pushing strategy backfired on this occasion.

On the other hand the trial and error method worked for Lidl in Poland (2007)

where they recorded a profit of 759 million Euros. This justifies the expert’s opinion

of fast & pushing strategy. By establishing a hold on the Polish market before its

competitor Aldi could get there, Lidl was able to capitalize on the “first mover

advantage” & successful on this count. By entering in the Polish markets before

Aldi, the company had got a head start and was able to establish its name and

gather consumer loyalty.

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Answer 4

Advantages and Disadvantages of Internationalization by Aldi:

As is mentioned in the case, it can be observed that Aldi’s expansions strategy

although slower than that of Lidl, still encompassed internationalization to arenas

other than Europe. Lidl started taking it business outside the EU only in 2009.

The possible advantages of this strategy on Aldi:

According to Dunning’s, Electric theory of Internationalization, Aldi could have the

advantage of owner specific management, internalization and location benefits.

Owner specific management implied that Aldi’s trade secrets were safe and any

proprietary brand, patents, copyrights etc could give them a competitive

advantage over the others.

Internalization implied the channel of distribution could be trimmed down to

reduce costs, by cutting off intermediaries and capitalizing on the economies of

scale.

Aldi could also have the advantage of selecting an appropriate location to their

favor. They could benefit from setting up stores with fewer competitors, good

access to the labour market and suppliers and so on.

Apart from this Aldi could also have benefited from the ‘First- Mover advantage’.

As is evident in the case in countries like USA, Aldi had the first mover

advantage of being the only recognized heavy discounters. This gave them

ample opportunities to tap into the market with sizeable growth potential. Their

image and brand name could benefit from the first mover advantage.

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Disadvantages of Internationalization (Gupta, S. Randhawa, G., 2008 pp.67-78)

Underestimating culture differences, for e.g. in UK. (case study)

Establishing appropriate suppliers in the beginning is an issue and they might

have to import products until that happens. This leads to reduced efficiency and

increased price of products.

Added cost in the form of advertisements & promotions in order to pull customers

to switch brands.

Lack of local expertise and understanding of competitive forces.

Maintaining a link between the Home country and the Host country becomes a

complex affair.

Recommendations to Lidl on its geographical presence strategy:

Lidl has been entering International markets recently at about twice the speed

that Aldi employs. However, this strategy might not always be successful. If they

are not planned properly, Lidl stand the chance of failure as it witnessed in Norway.

It is important that before they enter into the market they carry out proper market

research. Even when the reports are in favor of expansion they should tread

cautiously and open few stores at a time and not use the strategy of opening many

stores together. This way the losses are mitigated if the company changes its mind

and its image in the eyes of the stakeholder are also maintained. Wrong strategic

decision like that which lead to selling off 50 stores in Norway could not have been

viewed favorably by the stakeholders.

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They should also utilize Line extension and brand extension strategies to

diversify into different markets just like Aldi. By doing this, they can introduce and

diversify into different products and services and capitalize on the brand name.

(Kotler, P., et.al 2005)

Lidl is yet to venture into the formidable markets that consist of Brazil, Russia,

India and China. These sectors are experiencing high middle class growth and the

demand for heavily discounted products is high. If they can overcome the

Government regulations and policies, and develop the retail market sectors further,

it could prove to be a profitable venture.

At present in a bid to keep their prices low, Lidl has been keeping a tight noose

around its employees and suppliers. There have been several controversies in the

past in this regard which might have tarnished its image. In the long run (up to

2020) the company should focus on other ways of cutting costs and not at the

expense of employees and suppliers. (www.guardian.co.uk)

They should also concentrate on cultural differences. For instance their decision

to support selling of Hare meat in its stores across UK attracted a lot of attention

and was criticized by animal rights activists and customers alike.

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