Lidl's profit hampered by international expansion

Lidl’s rapid international expansion turns out to be expensive: the increased investment has put pressure on the profitability. Owner Schwarz Group now wants to get costs under control.

Growth is slowing down

Lidl launched its foreign expansion in 1988 and is now active in 25 countries. Its international activities contribute about 70 % of the retailer’s overall turnover and are all part of Lidl Stiftung & Co KG. Barclays analysts have just published an audit of the latter’s broken fiscal year, which ended in February 2017. That report shows that the growth is slowing down and that profitability is slumping.

This division’s turnover, which does not include German activities, grew 6.9 % to 41.53 billion euro (up 9.5 % at level exchange rates). That is a respectable growth, but still slightly below the double-digit growth it managed in the past few years. According to Lidl, growth was still above expectations. Its most important contributors to growth were new store openings and the expansion of its current store network. In its fiscal year 2016, Lithuania’s turnover featured for the first time, but the American results did not, because the group only launched there in June.

Increased staffing costs

Lidl’s operational margin dropped to 4.3 %, which is still high compared to the rest of the industry, but nevertheless its lowest since 2012. The company attributes these lower profits to the investments in the new markets, but according to analysts, there are other reasons as well. The remodeled store formula, with a broader product range and new services, has impacted the results as well.

Staffing costs grew by 11 % and are now 9.11 % of its total turnover. That is still lower than Ahold Delhaize (11.5 %), Sainsbury’s (11 %) or Carrefour (10.8 %), but the costs increases are outpacing turnover growth by 2 to 1. The average turnover per employee dropped 3.7 % compared to the past fiscal year. In 2016-2017, its investments more than doubled compared to the year before: from 2.8 to 7 billion euro, with a sizeable share going to real estate investments. The plentiful store remodeling operations probably also cost a lot, as did the preparations for the US launch.

“New stores are palaces”

Lidl said it had faith in a positive development in its fiscal year 2017-2018, with a moderate turnover growth thanks to the modernized store network and US expansion. However, that American expansion will also lead to a further decrease in net income.

According to Barclays’ analysts, it seems that Lidl’s owner, Schwarz Group, will emphasize profitability and financial discipline now. CEO Klaus Gehrig announced that Lidl will need to become leaner and simpler. He told Planet Retail that the new Lidl supermarkets are like glass palaces and he also criticized the (too) spacious entry lobbies and lack of cost management. The decision to appoint Jesper Hojer as the new Lidl CEO in February 2017, combined with a decreased online presence, point to a more cost-aware approach for the discounter.