Lidl 2019: Going Omni-Channel, Disrupting Itself Before Others Do It, Vertical Integration, Digitalisation and US Expansion

Schwarz (Lidl and Kaufland) Grew by 7.4% to €104.3Bn in 2018/19

In 2019 Schwarz (Lidl and Kaufland) broke through the 100bn barrier in sales for the first time. The retailer grew by 7.4% to €104.3bn in 2018/19. Every two to three years the Schwarz Group has changed Lidl’s CEO - and since 2014 there have been 4 different bosses.

At the same time, Lidl added €20bn in sales. This also means that sales growth has not been a factor in the management changes - mostly these were due to internal disputes and Gehrig seems to have a disruptive style that asks for frequent changes. So far this seems to be working.

And so, despite this remarkable success, Europe’s biggest retailer is changing its business model once again. The things that will remain the same are low price focus and an extreme focus on efficiency in all business processes.

The things that will or have changed: (I) a focus on organics and environmental credentials, (II) increased vertical integration in all business processes around post-consumer (recycling and packaging) as a natural consequence of the success of producing its own private label products - and of course packaging is vital to the overall product proposition, (III) automation and digitalisation, (IV) the online push, arguably still in beta phase without full board commitment, and (V) US expansion, a massive opportunity for the company.

Lidl was first, ahead of Aldi, to innovate and move on from the hard discount business model of the past. The retailer did so by sprucing up its tired store estates and creating a better ambience in the store combined with an SKU range extension. This clear trading up strategy, which included permanent listings of FMCG A brands for the first time broke the mould and forced Aldi into copying the strategy.

According to the company, Lidl’s current SKU count stands at 3,500, of which 25% are FMCG A brands (875 SKUs), the remainder is a private label (75%). However, the permanent listing of FMCG A brands had two negative consequences, a clear rise in complexity and cost as well as becoming price comparable, which wasn’t an issue when Aldi and Lidl were predominantly private label only. The direct comparability of many products - especially the FMCG A brands listed by both retailers - has opened up a new opportunity. Lidl is feeling emboldened to attack Aldi, the clear price leader in Germany - a position Aldi has held for decades. The discounter has launched a new ad campaign and a new hallmark called Lidl price. Lidl has gained considerable experience with the promotions on FMCG A brands in recent years and this has led to the discounter undercutting Aldi’s promotions as soon as they have been launched. This also shows that the lowest price is one of the best arguments for either Aldi or Lidl, despite all the trading up strategies.

(1) This trading up and premiumisation has now moved into a new phase with a strong focus on organics. Organics attract a different shopper profile with higher purchasing power and basket spend. Organic also conveys high-end quality and is perfect for an upgrade of the private label proposition. It would also justify higher prices and in turn margins - but this depends on Lidl’s pricing strategy.

(2) Vertical integration, first pioneered with the production of private label products has been so successful that the retailer now stretches the concept into recycling and waste disposal (Greencycle), and takes charge of all packaging and recycling aspects. Another update of the Vertical Integration strategy concerns the automation in the supply chain. In Denmark and Germany Lidl now operates with robots in its most modern DCs and has taken the technology to the USA as well.

(3) The innovation at the back end is mirrored in the front end around shopper communication and personalisation. Lidl’s digitalisation strategy is employing a Customer Relationship Management 4.0 solution. The strategy is far broader than just the rollout of the Lidl Plus loyalty programme. Lidl doesn’t want to lose out on big data approaches and the benefits the online players have in addressing their shoppers individually with one to one marketing initiatives. The discounter is doing so, despite generating 99% of its sales offline in its bricks and mortar stores. In this sense, Lidl has become an omnichannel player.

This, of course, is another radical departure from the old tried and tested the discount business model. The entire idea of a Big Data loyalty system would have been anathema to a discounter only a couple of years ago. In a further step, Lidl is launching its proprietary mobile payment system LidlPay in Europe, distinct from Apple Pay or Google. Many retailers worry about losing their shopper data and relationships to the disruptors and having to pay “rent” to the payment ecosystem companies. That said most retailer initiatives have fallen flat so far, be it sector-wide cooperation or individual players going it alone. Tourists are also supposed to use the Lidl Plus loyalty solution when they are on holiday abroad, as the solution is conceptualised and rolled out on a Pan EU basis. This means the personalised communication supported by the SAP solution as well as the front end interface and brand is standardised (as is the main Lidl brand of course). Despite this omnichannel approach, online sales (4) are accounting for just 1% of Schwarz Group's sales. Online at the moment seems to be kept at arm's length.

The last major change identified in this report remains (5) US expansion. Lidl believes it will take it a decade until the retailer has established itself in the USA. Sales growth is healthy, but the retailer has unsurprisingly not reached profitability yet.