Lidl is rapidly expanding its international reach, but with a new CEO and on the verge of its first American store openings, it is interesting to investigate the numbers that help create its success.
Even though Lidl is not a listed company, it does publish results for its Lidl Stiftung & Co KG division, which controls all of Lidl’s non-German activities. Barclays analysts examined the results for its four previous years including fiscal year 2015, which ended in February 2016, with some astounding findings.
One can only respect Lidl’s incredible growth pace: turnover grew steadily, up 14.1 % in 2013, up 11.2 % in 2014 and up 12 % in 2015 to 38.3 billion euro. Despite a lack of country-specific results, we know it achieved tremendous growth in the United Kingdom, Spain (+ 12.5 %) and Czechia (+ 16 %).
Usually, rapid growth has an impact on the company’s margins, but that is not the case for Lidl. Its EBITDA was 7.79 % in 2015, its highest position in four years’ time and second only to Colruyt, albeit ever so slightly, in Europe.
Regardless of its huge price investments across several countries, the company’s gross margin grew to 26.4 %, which is also at its highest in four years. Its upgrading process, adding more fresh food and name brands to its product range, is most likely the reason for this increase and also clearly shows Lidl’s sturdy business model: strong purchase power meets thorough cost management.
Lidl’s expenditure in personnel was 8.9 % of turnover in 2015, a very low number compared to its competitors. Only DIA and Jeronimo Martins perform even better, but Colruyt spends more than 13 % of turnover on staff, Ahold Delhaize even more than 14 %. Even so, Lidl is not known for its low wages, which simply means it is very efficient and this is clearly visible in its turnover per employee, a number that grew 4.7 % in 2015.
Having a similar layout across all stores and a limited product range definitely helps employees become more productive. Another contributing factor is the extensive use of shelf-ready packaging. On top of that, the store employees are able to do different tasks, like manning the cash register or stacking the shelves depending on the number of customers.
In the 2012 – 2015 period, Lidl doubled its international investments and in 2015, Lidl Stiftung’s Capex (Capital Expenditure) grew 13.7 % to 2.84 billion euro, equivalent to 7.4 % of turnover.
Compared to other competitors, that number is high, but one has to take into consideration that Germany, where it basically no longer needs to expand, is excluded from the results. Thanks to its relatively simple store design and construction, it will have added exponentially more square meters than the competition, but that cannot be examined as Lidl does not publish these numbers.
Lidl Stiftung’s results show that it seems to have its aggressive expansion strategy under control: its working capital is negative (-5 % and lower, which is better than the industry’s average), its terms of payment dropped from 41 to 40 days and its stock rotation was only nineteen days in 2015, compared to 21 in 2014 and 31 for the overall European market.
Lidl’s unique approach contributes to these excellent numbers. It only carries a limited product range, which not only helps sell large volumes per item, but also limits the supply chain’s complexity and the risk of having too much stock. Its private label strategy strengthens its price competitiveness and profitability and is an excellent bargaining chip when dealing with suppliers. In/out discounts with non-food items also generate traffic to the stores with limited risk for excess stock.
The next frontier: America
Lidl’s parent company, Schwarz Group, already announced it would increase its investment budget from 5.2 billion to 6.5 billion in 2016, mostly to the benefit of its Lidl chain because the retailer will enter the Serbian and American market and continue to upgrade and remodel its current store network elsewhere. In all likelihood, it will also continue its online expansion.
The first twenty American stores will open this summer, in Virginia, North Carolina and South Carolina and will lead the charge to about 100 stores along the East Coast by the summer of 2018. Kantal Retail estimates the chain could become a considerable force by 2023, generating a 9 billion dollar turnover, if it opens 100 new stores annually. At first, an American Lidl should generate 10.9 million dollars in turnover, but that number should grow to 15.2 million dollars by 2023.
What about Ahold Delhaize?
Lidl’s arrival will undoubtedly impact other retailers in te region, including Aldi and Save-A-Lot that have both announced sizeable expansion plans themselves. Wal-Mart is not sitting idly by and has even sparked a price war, possibly pressuring traditional, regional supermarket chains that have not invested enough in store experience and prices over the past few years.
Could Lidl even perturb Ahold Delhaize’s American operations? Barclays says that depends on the approach. Both Delhaize and Ahold already know what it is like to be a Lidl and Aldi competitor in their home territories and other markets, which may give them an advantage over their American colleagues in dealing with the German discounter threat.
A possible issue for Lidl and Ald is that American consumers value national brands more than Europeans do, weakening a discounter’s position. Supermarkets also have a more extensive product range and service.
It seems Lidl is well aware of the cultural differences as its American stores will be larger than their European counterparts. The move may also backfire, because any deviation from their standard model may be risky. We will just have to wait and see!