Move over Aldi, Lidl may be next for Australian market

If speculation that German discount supermarket, Lidl, is preparing to launch into the Australian market is correct, it will be the biggest shake up in the grocery sector since Aldi’s arrival in 2001.

With potentially five viable combatants in the mix, the way we shop and how supermarkets and suppliers compete, will fundamentally change.

It’s not a matter if, but when

While Lidl has stated it has “no current plans”, it recently trademarked 500 brand names in Australia, including its own, and there have been media reports of it investigating logistics and distribution options.

It has just confirmed its long vaunted expansion into the United States.

Woolworths’ chief executive Grant O’Brien has sought to allay investor concerns about the impact of Lidl by pointing out it would take time for another grocer to gain traction and scale in the market - but with Aldi having laid down the foundations, market penetration and expansion will happen a lot quicker.

But it’s important not to understate the enthusiasm Australian shoppers have shown for the discounter model and more importantly, private label products. It is likely that private label product manufacturers would enthusiastically want to work with Lidl. Where once the option was to deal with either the big two or Metcash’s IGA stores, suppliers now have opportunities with Aldi and potentially Lidl. Lidl’s entry could provide a fundamental shift in power from the big supermarkets to suppliers.

Should the supermarkets be a Lidl worried?

The Schwarz Group, owners of Lidl, are the fourth largest retailer in the world, operating across more than 26 counties and generating more than US$100 billion in sales every year - substantially more than Australia’s Coles and Woolworths put together.

With more than 60% of revenues coming from its international operations, Lidl has both scale and foreign market entry know-how on its side. Lidl’s stores are larger than an Aldi site and while predominantly carrying private label products, they offer a fixed ranged of appliances, general merchandise, apparel and brand name products. All at very low prices.

Across Europe and the United Kingdom, discounters like Aldi, Lidl and Netto have carved out a strong market position and attained shopper loyalty. In Britain, the Lidl brand was considered more likable than Twitter, by young people, aged 18 to 24 years. We should expect to see the same market shift here in Australia.

If the experience of UK brands such as Sainsbury’s and Tesco are a guide, Coles and Woolworths should expect to lose market share. But it is independent grocers that would be would the worst hit. As the grocery market polarises, with full-line supermarkets at one end and discounters at the other, being stuck in the middle is not the place you want to be.

It appears that Metcash’s IGAs are already experiencing this shift.

What might this mean for shoppers?

Shoppers are visiting supermarkets more frequently than ever before, with most seeking “good value” and “low prices”. In any given week, customers shop across several brands and are no longer loyal to one.

With grocery prices in decline since the “supermarket wars” began, it goes without saying that shoppers will be winners.

Strategically, it is not uncommon for global firms to keep their market expansion and entry plans to themselves, rather than letting the incumbents know their planned locations and who their proposed suppliers may be, as global food retailers greatly rely on local supply and third party logistics providers.

The current leaks surrounding trademarking activity and alleged discussions with suppliers and logistic providers would not be sitting well with Lidl, and this may hasten their entry plans, before competitors can lock up key locations and suppliers.

Aldi raised such concerns against both supermarkets in its submission to the 2008 ACCC inquiry into the competitiveness of retail prices for standard groceries.

In a move possibly indicating the big supermarkets want to lock in supply before Lidl arrives, Woolworths has been attempting to negotiate to extend supplier contracts from 18 months to between three to five years.

The future

While it will be tempting to compete on price, trying to beat these global discounters at the own game is fraught with danger. Such at strategy hasn’t worked elsewhere. In the UK and (specifically Holland), the impact of a prolonged price war has lead to eroded margins, and led to loss of market share and closures.

Woolworths and Coles should focus on what the discounters don’t offer, rather than compete on what they do best. IGAs appear the most exposed with the current business model not allowing operators to compete on range or price; accordingly we should expect to see structural change here.

With Aldi’s expansion into Western Australia and South Australia, and potentially Lidl’s entry, shoppers and suppliers will be the winners at the end of the day. As the market, once concentrated around the “big two” starts to distribute proportionately across all five players, shoppers will see lower prices, and suppliers, a greater choice of trading partners.

Gary Mortimer does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.