Foreign Market Servicing Strategies of Lidl

Lidl is one of the leading global discounter and owns round about 9000 stores in Germany and all over Europe. Lidl has beaten its main competitor Aldi. Aldi is already successful in the United States.

The latest history of the company Lidl was clouded by the observation scandal in 2008. This scandal damaged their image. In the matter of the important topic Corporate Social Responsibility Lidl started a project called “ECO2LOGISCH”. This project is about building stores that are energy-efficient and sustainable. In addition the company sells Fair-trade products.

The food retail industry in Germany had a moderate growth in the past but the forecast for the industry looks good. The category of supermarkets, hypermarkets and discounters has the highest market share in the food retail industry. The buyer and supplier power is moderate as well as threats of new entrants and substitutes are moderate. The rivalry in the industry is very strong.

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The US food retail industry in comparison to the German one has a strong growth and the forecast is not less significant. The category of supermarkets, hypermarkets and discounters has a major market share of 80.2 %. With a Gross Domestic Product of $ 14.2 trillion in 2009 the Unites States are the second largest economy after the European Union. There is a very high diversification of income and thereby a problem of poverty occurs in the United States.

With predominating Strengths and Opportunities after the SWOT analysis, the United States satisfy all requirements to become the new market Lidl should expand to.

Lidl has ownership, location and internalization advantages and thereby Foreign Direct Invest is the best mode of entry. Given that Aldi used Greenfield investment successfully to enter the US market in 1776 and Lidl did use the same strategy to expand to the European markets, Greenfield investment is the appropriate strategy to enter the new market in the United States successfully.

Introduction

In times of globalization and international expansion Lidl, who is one of the leading global discounter, should think about an expansion overseas.

The following report should discuss if the United States are the right country to expand to and which mode of entry Lidl should use for the expansion.

In the first steps the company Lidl itself will be analysed with a closer look at the Corporate Social Responsibility. After that the German food retail industry will be examined. Porter’s Five Forces Model will be used for this. The next step is to analyse the food retail industry in the United States. For this the industry itself will be investigated and the PEST analysis will give a closer look at the United States. The SWOT analysis will demonstrate the Strengths, Weaknesses, Opportunities and Threats for Lidl by entering the US market. Afterwards the mode of entry will be discussed and the conclusion will give a final answer to the question, if the United States are the right country to expand to.

The company Lidl

Company overview

Lidl is a German discount chain and is part of the Schwarz Beteiligungs GmbH (Holding company). The Schwarz group also owns the consumer markets Kaufland, KaufMarkt, Concord and Handelshof. The history of Lidl can be traced back to the beginning of 1930. At this point in time Josef Schwarz got general partner of the Südfrüchte Großhandlung Lidl & Co. He restructured it to a wholesale business which was then destroyed in 1944. After ten years the business was rebuilt and in 1972 the headquarter was relocated to Neckersulm. After the dead of Josef Schwarz in 1977 his son Dieter Schwarz assumes full responsibility for the business. Dieter Schwarz bought the naming rights from Ludwig Lidl and from this point on the success started. Lidl first expanded in the region of Neckersulm and then to the whole republic. After the success in Germany, Lidl started to expand internationally. Lidl now owns round about 9000 stores all over Europe and thereby has more stores than its main competitor Aldi (Langer, 2004; Wikipedia Lidl, 2011).

Corporate Social Responsibility

Due to the fact that Lidl is not a public company, it is very hard to find any information about Lidl itself. In the history of Lidl it was always the case that Lidl did not want to show any information about the company. For this reason Lidl got the nickname “Geheimniskrämer” (mystery monger) (Langer, 2004).

In spring 2008 Lidl got involved in a big scandal in Germany. Lidl was accused to observe their employees. This scandal damaged the image of Lidl. Lidl Germany has apologized for this incident and has assured that they will promote immediate moves to prevent any of these incidents to happen again (Byrne, Skilly, 2008). After this incident, Lidl reformed the conditions of employment.

A new project is called “ECO2LOGISCH”. This is a new store generation. The stores will be energy-efficient and sustainable. For example the new stores will be 100% heated using the waste heat from the refrigerated sections. Lidl plans that from 2010 on all Lidl-stores should be build “ECO2LOGISCH”. With this project Lidl is the first food retailer in Germany who sets sustainable building services engineering as a standard (Lidl: ECO2LOGISCH, 2010).

In addition Lidl sells Fair-trade products and has some social projects like a football club for kids.

The food retail industry in Germany

The food retail industry includes the sales of food and beverages. In Germany the category “Hypermarkets, Supermarkets and Discounters” has the highest market share of 47.6% (see Appendix 1).

In 2009 the industry had a growth of 2.3 % and a value of $ 234.8 billion. In the past the growth was moderate with an average of 2.1 % (see Appendix 2). The forecast for the industry looks good. The growth should be steady and in 2014 the industry will have an expected value of § 265.5 billion (Datamonitor (a), 2010, p. 10).

With the help of the Porters Five Forces Model the food retail industry will be analysed in the following. In the analysis the buyers will be the end-consumer and the suppliers will be food manufacturers, farmers, and agricultural co-operatives. The players in this analysis will be supermarkets, hypermarkets and discounters.

Buyer power

There is one important change in the consumer’s behaviour to which the retailers have to respond to. Nowadays the importance of health gets bigger and bigger. The convenience food becomes less important and consumers are more interested in fresh and healthy food.

Another important fact is the price. Because there is a wide range of large retailers in Germany the consumer faces no switching costs and thereby the retailers have to have an attractive price scheme. All in all the buyer power is moderate (Datamonitor (a), 2010, p. 15).

Supplier power

The big German retailers often have a large range of suppliers. With this strategy the retailers ensure stability. They avoid possible delays in deliveries and price fluctuations. In addition to that some large retailers have started to sell own brand products. These two facts weaken the supplier power in the German food retail industry. Overall supplier power is moderate (Datamonitor (a), 2010, p. 17).

New entrants

It is not easy for new entrants to enter the market because of the aggressive marketing and pricing schemes of the large retailers in the industry. Nevertheless there are low entry and exit costs in the food retail industry and the changes in consumer’s behaviour gives new entrants a possible niche to enter the market successfully. Besides the low growths rate makes the industry not that attractive to new entrants. In conclusion the threat of new entrants is moderate (Datamonitor (a), 2010, p.18).

Substitutes

The only real substitute to the food retail is the food service represented by fast foods restaurants, sit-down restaurants and delivery services. But for consumers the food service is more a complement than a substitute. A more direct substitute are individuals and families who cultivate their own food. This is no longer used nowadays but in the long term possible because of the changes in the consumer’s behaviour and the threat of economically and politically instability. The threat of substitutes is therefore weak (Datamonitor (a), 2010, p.19).

Rivalry

There exists a high competition in the food retail industry. Main reasons for this are the not existing switching costs for the consumers. The similarity in the basic products of the large retailers pushes them into a competitive pricing scheme. This leads the price wars. These are encouraged by the consumers who are now comparing more and more. They have a look on special offers and the lowest price. The German food retail industry has a lot of competitors. Therefore in a conclusion rivalry is strong in this industry (Datamonitor (a), 2010, p. 20).

The United States for expansion

Since Lidl already expanded to whole Europe it is time to think overseas. Aldi, one of the main competitors, expanded successfully to the United States in 1976. Lidl already beat Aldi in Germany and Europe. Lidl has more stores all over Europe and has overtaken Aldi in the rankings. So the existence of Aldi in the US food retail market is no real threat for Lidl.

The food retail industry in the United States

The US food retail industry in comparison to the German has a strong growth. The total revenues in 2009 had a value of $ 859.1 billion and the average growth rate in the years from 2005 to 2009 was 5.3% (see Appendix 3). The forecast is not less significant. By the end of 2014 the US food retail industry will have an expected value of $1,043.1 billion (Datamonitor (b), 2010, p. 10).

In the US the category “Hypermarkets, Supermarkets and Discounters” has the highest market share of 80.2 % (see Appendix 4). Worldwide the market share of the US food retail industry is 19.8 % billion (Datamonitor (b), 2010, p. 11).

All these facts make the US food retail industry attractive for Lidl to expand to. To have a closer look at the real attractiveness of the US market for expansion a PEST analysis of the United States will be proceeded in the following.

PEST analysis of the United States

In this section the political, economical, social and technological environment of the United States will be analysed.

Overall the United States are one of the strongest powers worldwide since more than 50 years. Politically the United States have a strong position. In 2009 the democrat Barack Obama displaced the republican George W. Bush. Barack Obama was inheriting a poisoned chalice because of the financial situation and the great debates about the military operations in the Iraq and Afghanistan. Nevertheless the US has a great global influence and a strong democratic setup (Datamonitor (c), 2010).

With a Gross Domestic Product (GDP) of $ 14.12 trillion the United States were the second largest economy in the world in 2009 after the European Union (CIA – The World Factbook, 2010). In the years before the 11th of September 2001, the United States had an economical boom, after that date the growth slowed down and they felt into a recession. The congress passed bills to stimulate the financial market in 2008 and 2009. Because of this the public dept in the United States increased from 39.7 % in 2008 to 52.9 % of the GDP in 2009 (Datamonitor (c), 2010).

The United States are facing a rapidly aging population. This can lead to a decreasing economic growth and thereby to rising tax rates and shortages in labour. The US have a very high diversity in the distribution of income. The Gini index was 45 in 2007 (CIA – The world fact book, 2010). 1 per cent of the population belongs to the upper class and in 2009 these people owned 37.1 per cent of the entire property of the United States (Wikipedia Vereinigte Staaten, 2010). However, the United States have a remarkable education system and Barack Obama passed a new health service reform in 2010 (Datamonitor (c), 2010).

On the technological front, the United States are a world leader in adapting and applying technology and innovations and they will stay in the position in the near future. But there will be a threat of competition in this sector because of the continuing process of for example China (Datamonitor (c), 2010).

SWOT analysis of the company Lidl

The SWOT analysis brings together the analysis of the environment and the company. It identifies the Strengths, Weaknesses, Opportunities and Threats. SWOT is the basis for the strategy development of a company. The main facts of the Strengths, Weaknesses, Opportunities and Threats will be discussed in the following. The whole SWOT analysis is provided in Appendix 5.

Lidl has a high market share in the fast growing market segment of the food retailers. It has become a global player due to the fact that Lidl expanded successfully to Europe and owns round about 9000 stores. After the success in Europe there are no more obstacles for an expansion to the United States. Another important Strengths is the very good pricing which attracts many consumers.

The main Weakness of Lidl is the damaged image because of the observation scandal and the discussion about minimum wages, which affects nearly every discounter. Additionally the low customer loyalty represents another main Weakness. This is an issue because of the low switching costs for the consumers because of the high competition in the food retail sector.

An Opportunity is that the category of supermarkets and discounters has a markets share of 80.2% in the food retail sector in the United States. Another Opportunity is the existing poverty in the Unites States. Poor people are more interested in low pricing products.

The main Threats are the competitors on the US food retail market. There is Wal-mart, who now starts to open smaller stores like in the store model of Lidl and there is Aldi, the main competitor in Germany. Aldi is a Threat and an Opportunity. Lidl already beat Aldi in the German and European market and Aldi was successful on the US market by using the same discounter model like Lidl. But Aldi entered the US market in the 70s and is now integrated and accepted from the US consumers. This is a challenge for Lidl.

In a conclusion the Strengths and Opportunities predominate and Lidl should start the expansion to the United States.

Choosing the mode of entry to enter the US market

After decided that the United States are a good market to expand to, it is now time to think about the mode of entry. There are various modes of entry:

Exporting

International Licensing

International Franchising

Specialized modes (e.g. contract manufacturing, management contracts)

Foreign Direct Investment (Greenfield investment, Acquisition strategy, Joint Venture).

Dunning’s Eclectic Theory gives a good framework to decide which mode is the right one for the company and the market it wants to expand to. Dunning developed three conditions which a firm should be satisfying.

Ownership advantage: The firm has to have some special advantages to compete with the foreign companies. For example a good brand name, special technology, know-how or a unique product. In this case exporting would be the mode of entry.

Location advantage: It has to be more benefiting to expand to a foreign market rather than expand in the home market. For example lower labour costs. If the ownership advantage and the location advantage apply contractual arrangements like licensing, franchising or alliances are the best modes of entry.

Internalization advantage: There has to be a higher profitability by controlling the activities on the foreign market on their own rather than recruit a local company to provide all the important services. For example lower exchange rate risks. In the case that all three conditions are satisfied Foreign Direct Investment would be the best mode of entry (Griffin, Pustay, 2010, p. 196).

Lidl as a retailer has the ownership advantages like a bargaining power in purchasing and a special supply chain. Another fact is that exporting would be no alternative for Lidl because a retailer sells products it buys from suppliers. It would be meaningless to export the products again.

There are location advantages as well. The German food retail market is concentrated with a high level of competition. Hence there is not much space for further expansion. The market in the United States is a big market and offers enough space to expand to. Even though there are some main competitors. The entry and exit costs are low. For a retailer franchising harbours some dangers. For example it is difficult to legally protect the innovations a retailer is making. Franchising has indeed lower costs but the firm has also a lower level of control.

Internalization advantages occur when company-specific advantages cannot be achieved on the foreign market via franchising or similar cooperation forms. This is given because of the facts mentioned before (Borgström, Hertz, Nyberg, n.d.).

In summary Lidl satisfies all three conditions and for this reason Foreign Direct Investment is the best mode of entry for Lidl. Now Lidl has the choice between Greenfield investment, joint venture or acquisition. By having a closer look at Lidl’s past expansion in Europe and the mode of entry Aldi chose in 1776, Greenfield investment is the best solution for Lidl. The company also entered the new markets in Europe via Greenfield investment and Aldi did the same in the United States and it was successful for both.

Conclusion

The food retail market in the United States offers a good opportunity to expand to. The market has a strong growth and the PEST and SWOT analysis acknowledge the choice of the United States for a new market for expansion.

As a conclusion to Dunning’s theory, Foreign Direct investment and more precisely Greenfield investment is the best mode of entry. Exporting, Licensing and Franchising do not offer Lidl a good business. These modes of entry are not appropriate for a retailer and in addition Lidl would lose parts of their revenues.

Due to the fact that Lidl is not willing to disclose any internal information, Acquisition or a Joint Venture do not represent a possible choice, even though both possibilities have low fixed costs. Furthermore the companies could be competitors on another market and no company wants to share information with a potential competitor.

Greenfield investment is the best solution for a successful expansion to the food retail market in the United States.

Appendix

Appendix 1: Germany food retail industry by categories: % share, by value, 2009………….13

Appendix 2: Germany food retail industry value: $ billion, 2005-09………………………..13

Appendix 3: United States food retail industry value: $ billion, 2005-09……………………14

Appendix 4: United States food retail industry by categories: % share, by value, 2009……..14

Appendix 5: SWOT analysis of the company Lidl……………………………………………15

Appendix 1: Germany food retail industry by categories: % share, by value, 2009

Source: Datamonitor (a), 2010.

Appendix 2: Germany food retail industry value: $ billion, 2005-09

Source: Datamonitor (a), 2010.

Appendix 3: United States food retail industry value: $ billion, 2005-09

Source: Datamonitor (b), 2010.

Appendix 4: United States food retail industry by categories: % share, by value, 2009

Source: Datamonitor (b), 2010.

Appendix 5: SWOT analysis of the company Lidl

Strengths

Weaknesses

High market share in a fast growing segement (discounter)

Global player

Very good pricing (always offers the lowest price on the market)

Very good store locations (near housing areas, good transport connections, good parking facilities)

Fast reaction to changes in the market conditions (flexibility is very important in a high competition sector)

Damaged image (oberservation scandal and dicussions about minimum wages)

Dependence on discouter model

Low customer loyalty

Exit from the Norway market because of low success

Changing consumer behaviour (healthy living)

Opportunities

Threats

After successful expansion all over Europe its time for overseas expansion

Significant market for supermarkets and discounters in the US

Expansion of the product range (more healthy food)

Poverty problem in the US leads to higher demand of low pricing products

Aldi already had a great success on the US market (same discounter model)

Only focus on low princing products

Existing competitors in the US food retail market (Wal-Mart, Aldi)

Limited success of food retailer Tesco after entering the US market in 2007

Source: Self made with the help of: Bord Bia, 2008; Jiroutek, n.d.