According to German market researcher GfK, Lidl was able to increase its share of the country's 150-billion-euro food market by only 0.1 percent in 2009 to 9.8 percent. Archrival Aldi was hit even harder: The discounter saw its market share drop last year to 18.4 percent from 19 percent. Revenue was down four percent – perhaps the biggest sales dip in the company's history.
The reasons for the stagnation aren't just the economic and financial crisis, which has forced numerous consumers to spend less and spend wisely. The discounters, which include Penny and the newly merged Plus and Netto group, have squeezed prices for numerous fast-moving consumer products to record lows and expanded store networks massively in large and small cities alike. There are fewer and fewer opportunities to achieve a competitive edge in both areas, according to GfK food retail specialist Wolfgang Twardawa.
“Every household in Germany is within 10 minutes of a discounter by car,” Twardawa said. “And just look at butter prices. Penny has lowered its price from 99 cents for a 250-gram package to 80 cents. Nobody in the production chain is going to make money at that price.”
"Brutal food retail market"
Independent retail consultant Ulrich Eggert says Germany “is a brutal food retail market.” Food prices in the country, he notes, are 15 percent below the European average. “Nowhere in Europe can consumers buy food more cheaply than they can in Germany,” he said.
Not surprisingly, sales margins of German discounters are low. Market researcher Twardawa puts them at between 1-2 percent. The one exception, he said, is Aldi, with margins believed to be around 4 percent. By comparison, sales margins in the UK are between 6-7 percent.
Until now, German discounters have experienced only growth. With more than 16,000 stores across the country, they currently control 46.4 percent of the country's food market. That growth is largely the result of aggressive pricing. Aldi was the first grocer to feature rock-bottom pricing by offering a limited inventory and squeezing out all necessary costs, from butcher shops to fancy displays. Around 15 years later, Lidl entered the market with a similar strategy.
Supermarkets under pressure
Much of the discounters' growth has come at the expense of German supermarkets, in particular Edeka and REWE. Both, however, have pursued a dual-pronged strategy to counter the competition.
On the one hand, they have sought to win back customers willing to spend a little more money with service, ambience and a broad assortment of high-quality products, including fresh produce. And they appear to be succeeding: Their market share in 2009 rose slightly for the first time in years to 23.7 percent, according to GfK.
On the other hand, with an eye to consumers who need to spend even less, the two supermarkets have adopted the attitude “if you can beat ‘em, join ‘em.”
Both Edeka and REWE have entered the discount fray with their own dedicated chains. Consultant Eggert said he expects the newly merged Plus and Netto discount stores, owned by Edeka, will emerge as a major challenger to Aldi and Lidl.
A threat to diversity?
The increased competition could lead to even greater price pressure on suppliers, warns Matthias Horst, president of the Federation of German Food and Drink Industries (BVE). “We can see that the last round of price cuts hasn't really done anything for Aldi and Lidl,” he said.
“We are concerned about the negative impact that these endless price wars could have on the some 5,000 food suppliers in Germany. Many of them may no longer be able to meet the conditions of the big discounters. There could be consolidation and we could lose the rich diversity we currently have in the supplier sector.”
The new discounters don't seem to be too worried as they scramble for market share in Germany. Nor do the established giants Aldi and Lidl; as they continue to slug it out and try to stay ahead of the newcomers by expanding outside the country, where they face not only less competition but also fatter sales margins.
For sure, German discounters are providing consumers – for better or for worse – plenty of food for thought.
Author: John Blau
Editor: Sam Edmonds