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Business

Bracing for the German Discount Store Revolution

German discount supermarkets Aldi and Lidl are slowly but surely extending their global reach. And in Ireland, the latest market to accomodate them, rivals are getting jittery.

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Customers are getting carried away with discount stores Aldi and Lidl

A recent market study shows that German discount supermarket chains Aldi and Lidl are preparing to extend their reach into Ireland. As the two companies challenge each other for domination in their European discount niche, the result is a global spread that has rival stores all over the world sweating nervously.

In terms of an invasion, it looks more like a well-planned and slow paced revolution. Instead of a concerted and aggressive thrust through the countries targeted, the German discount retailers Aldi and Lidl are subverting the population at the source – the high street stores.

Armed with bargains and traditional German products, Aldi and Lidl are proving to be very popular in almost all the countries they move into. After conquering Belgium, France, Spain and even the United States and Australia, the latest market to succumb to the cut-price, no frills chains is the Irish supermarket industry. It appears to be the next step in an escalating expansion plan which is setting the two discount giants against each other in markets all over the globe.

Irish expansion in mind

Aldi Logo

In less than five years after the first store opening on the Emerald Isle, Aldi and Lidl have cut themselves a five percent slice of the Irish grocery market pie. The German chains have a total of 46 stores between them, 36 of them belonging to Lidl. Aldi seems determined not to be left behind as surveyors assess up to 90 sites across the country. Sources for the company told the market research company Mahon Retail Research, who published the study, that Aldi would not be opening stores on all these sites but their interest in such a number strongly hints at the company’s intent to expand its reach in the Irish market.

It is a situation that has got the local supermarket chiefs shifting uncomfortably in their boardroom seats. Although Aldi and Lidl are the first choice for only 8.5 percent of the shopping population in Ireland, behind Dunnes Stores (27.5 percent), Tesco (25 percent) and Superquinn (23 percent), the recent report shows them an emerging force when it comes to shopping for basic items. The Germans appear to be making dents in the sales of toiletries, detergents and other household goods as well as alcohol. Their strength of sales in these areas also means that they benefit from the so-called repeat trade, those satisfied customers who come back for more.

Widening customer base

Logo von Lidl

It also seems that the traditional lower income customer base for the discount stores is encompassing a much wider proportion of the population. The research by Mahon Retail showed that for those polled in the County Donegal research area, price has now become a major consideration for most Irish shoppers – and Aldi and Lidl are under-cutting their rivals considerably on this score, by up to 25 percent on some products.

Everything looks set for a battle for the purse strings of the Irish shopper. And it may herald hard times ahead for the local chains as they slash prices to compete with the Germans while trying to manage their own rising input costs. Although lowering prices will benefit Dunnes, Tesco and Superquinn immediately, the long-term effect of adopting the discount model, according to the Irish Business and Employers Confederation's (IBEC) Food and Drink Federation, could be the loss of up to 20,000 jobs in the Irish food retail industry.

The odds seem heavily in favor of the Germans in the current Irish retail climate. Aldi and Lidl employ small numbers of non-unionized staff in their stores, they typically operate in stores around 15,000 square feet in size – remaining unaffected by the government’s cap on store size – and supply their supermarkets from lower cost sources, again bypassing laws which ban the sale of below cost selling.

Feargal Quinn, the chairman of Superquinn stores in Ireland told Deutsche Welle how the Irish supermarket chain had been affected by the arrival of the German discount shops: "Of course we are being affected by Aldi and Lidl in Ireland, they’re having quite an impact," he said. "We’re not concerned about losing customers, but we are concerned at losing out on some of the products our customers buy, namely bathroom and kitchen products."

Quinn added that the stores feeling the pinch were mostly those who competed in the cut-price sector infiltrated by the Germans. "As we focus more on the quality of service and diversity of product range, we haven’t been hit as yet in the area of pricing."

Imports benefit discount stores

Another aspect that is concerning the Irish chains is the fact that Aldi and Lidl are more likely to use overseas sources for goods and services. Whereas just over 20 percent of the total amount spent for Irish food retail - worth €8.4 billion in 2002 – goes on imports, the IBEC estimates that imports account for 80 percent of the amount spent by discount groceries.

Shopping

In an area where Aldi and Lidl are dominating, Superquinn has taken its own steps to make sure the lure of continental products and the cheaper rates from European suppliers do not contribute to a drop in customer numbers. "The German discount stores buy almost all their products from European suppliers," said Feargal Quinn. "In response, Superquinn now buys a range of products through AMS [The Association of Retailers, based in The Netherlands] under the Euroshopper label." Quinn added that the advantage his stores have over the Germans is that they stock Irish products as well as imported goods. "You’ll always have shoppers who prefer to buy local products," he said.

Aldi in the United States

Ireland is just the latest country to re-shuffle its market to accommodate Aldi and Lidl. Since its birth in 1960, Aldi has spread into 13 countries across the planet, moving its core European base into countries as far flung as Australia and the United States. In the U.S., Aldi is slowly taking on such established homegrown giants as Wal-Mart and K-Mart in the lower price sector and making good money by doing so. Aldi's turnover in the United States was estimated at $4 billion (€3.4 billion) in 1999. The German chain now has over 671 stores in 25 states and intends to continue its spread, not only in the United States but also in other countries where the company has already made an impact.

A spokesperson for Aldi told Deutsche Welle that although there were no immediate plans to open in any new countries, the company spread in those where they already have a presence would continue as per its expansion strategy. "Our typical strategy is to open a distribution center capable of supporting 50 to 100 stores, and to build up volume slowly and steadily. In the countries where we have a distribution center, we will be following that plan." And once Aldi becomes established, the stores are there for the long haul. "We absolutely guarantee that we will never exit a country we have entered," the spokesperson added.

Lidl has a strategy to widen its Europe-wide presence but when questioned, sources at the company declined to elaborate. One thing is for sure; the German discount store revolution is under way on a global scale.

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