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 Aldis & Lidls 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.

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 FDIs via Greenfield investments. Some of these factors are as mentioned below: y 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. y 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

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. y Political developments: Germany saw the end of communism towards the 1990s. This allowed for privatization and expanding their business in international waters had become much easier as a result, providing added encouragement. y 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. y 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) y 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

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 Sainsburys & 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.

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. Aldis floor space as compared to Tesco or Sainsburys was also lot lesser. They used own branded products, invested less in dcor, architecture of the store itself. All of this made a poor impression in the consumers 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

more overhead costs. The consumers in UK before the arrival of Aldi, which was one of the first FDIs, were used to shopping in larger supermarkets. These supermarkets as opposed to Aldis 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 consumers 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.

However, Aldis Market growth share seems to have hit a glass ceiling. As UK claws its way out of recession, competitors like Asda and Sainsburys are providing branded products for less. Aldi seems to be losing the momentum it gathered during the recession.

Aldis 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 Aldis introductory phase. They also had to relabel 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 Migross 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 payers 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. Aldis 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 Aldis 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 Aldis 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. Aldis Corporate Social Responsibility of including local suppliers may have to change in order to provide better brand products. The environmental effects 8

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 experts opinion on Aldi & Lidls expansion strategy as it is evident in the case study. Aldis 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 markets 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) Aldis 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 Aldis overall profitability. Aldis cautious approach is evident where they ventured into Switzerland. They opened

their stores in the German speaking part of Switzerland before expanding in other areas, in order to scrutinize the potential for growth.

Lidls 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, Lidls aggressive expansion that saw the opening of outlets in 21 countries in the span of 18 years is much faster than that of Aldis. 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. Lidls 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 experts 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 Aldis 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 Dunnings, Electric theory of Internationalization, Aldi could have the advantage of owner specific management, internalization and location benefits. Owner specific management implied that Aldis trade secrets were safe and any proprietary brand, patents, copyrights etc could give them a competitive advantage over the others. y Internalization implied the channel of distribution could be trimmed down to reduce costs, by cutting off intermediaries and capitalizing on the economies of scale. y 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. y 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. y Added cost in the form of advertisements & promotions in order to pull customers to switch brands. y y Lack of local expertise and understanding of competitive forces. Maintaining a link between the Home country and the Host country becomes a complex affair.

y y

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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