[In depth] Why Lidl sees margins shrinking

Lidl‘s international operations are growing fast, but margins are under pressure because the discounter is not passing on all price increases to consumers and investments costs remain high.

Strong sales growth

Lidl recently published the financial results of Lidl Stiftung & Co KG (i.e. its international operations) for the fiscal year which ended in February 2023. That business unit accounts for 70 % of the discount chain’s total sales. Barclays analysts dived deeper into the figures.

First observation: sales grew faster than expected. Lidl had forecast “moderate sales growth” last year, but a 22.6 % rise to 81.8 billion euros can hardly be called moderate. The strongest growth since 2012 was caused by inflation, market share gains and new store openings.

Price investment

Conversely, profitability fell to its lowest level since 2012. Lidl International’s EBIT fell by 6.6 % to 2.6 billion euros, implying a margin contraction of 250 basis points to 2.3 %. This is partly due to price investments: the retailer does not pass on all cost increases to remain competitive. Moreover, non-food sales fell and debt rose due to high investments with rising interest rates. Net profit actually fell by 23 %.

The financial year was marked by a 14 % increase in investment to 5.2 billion euros, of which 3.6 billion was in real estate. This is the highest level since 2016. In March 2022, the chain opened its first eight shops in Estonia, but in several other countries Lidl slowed down expansion in order to invest more resources in price cuts. This was the case in France, Spain and the United States, where the retailer still has fewer than 200 stores six years after its launch, far below its original ambitions.

High productivity

Lidl does keep staff costs firmly under control: they amount to only 8.4 % of sales, which is strong compared to other retailers, and also the lowest level since 2012. Moreover, productivity is on the rise: turnover per FTE rose by 12.6 % to 446,000 euros a year. On the other hand, the retailer is struggling with the cost of high non-food stocks due to weak sales, which may be due to a consumer cutting back in times of inflation and declining purchasing power.

In its outlook, the group remains very cautious: moderate growth and stable net profit, with a caveat due to major uncertainties in terms of inflation, availability of goods, interest rates and consumer behaviour. On the expansion front, Lidl is preparing to enter the Balkan countries of Bosnia and Herzegovina, Kosovo, Montenegro and North Macedonia. The retailer is also further expanding its non-food webshop (launching in France last year). The group hopes to derive additional revenue from its retail media division Schwarz Media, which was established in 2022.