Lidl UK FY23 Loss is £76m
Lidl, a retail giant originating from Germany, has been causing waves in the UK supermarket industry. In recent years, the supermarket has seen significant growth, directly challenging the traditional big players like Tesco, Sainsbury’s, and Asda. However, recent news indicates that Lidl UK FY23 operations have faced a financial setback, reporting a £76m loss amid a broader fight to keep inflation in check.
Lidl is not a minnow in the competitive pool of UK grocery retailers. It currently has 960 stores, capturing 7.1% of the market. FY23 Revenue increased 18.8% to £9.3 billion, with an EBIT (Earnings Before Interest & Tax) Loss of £79 million. They have attributed the loss to opening almost 50 new stores in the year – the most of any supermarket chain in the United Kingdom. It also recently raised its long-term store target to 1500 stores by 2025. The fact Lidl has increased this target by 25% just days after announcing its FY23 loss tells us their internal business case for store expansion stacks up.
Lidl has been engaged in a fierce price war with its competitors, primarily Aldi. Lidl, despite its financial loss, is a key player in a market that is still dynamic and growing, according to a recent study by Savills. While the company battles with rising prices, its broader impact is visible, especially in the discount grocery retail sector.
Is Lidl’s loss indicative of a broader problem?
UK’s supermarket industry is definitely facing broader pressures. All players are battling escalating costs and a challenging market environment. Increasing commodity prices and supply chain disruptions are affecting all supermarkets. Despite these challenges, aggregate grocery sales have not dramatically increased – total grocery sales have only increased 1.7% to 2023 and growth is forecast to decrease through to 2026.
UK’s Grocery market is interesting because it has strong competition. The two largest players (Tesco and Sainsbury’s) together account for just over 40%, and have done so for decades. “Discount” players like Lidl and Aldi have gained a foothold and were growing reasonably well, however because higher grocery costs are part of inflationary pressures across the whole economy, customers are switching to more affordable supermarkets. In 2022 Aldi reached 10% market share and overtook Morrisons to reach fourth place.
UK’s grocery market is undergoing an abnormal change. Supermarket margins are being squeezed as a result of cost inflation, but due to strong competition customer prices are not keeping pace. Normally businesses with larger market share have capacity to absorb higher costs temporarily and squeeze out smaller competitors, BUT rather than accept slightly higher prices to stay with their “traditional” supermarkets, consumers are actually switching to discount alternatives as they feel the inflationary pinch.
Lessons from the Past: Lidl’s German Origin and Evolution
To understand Lidl's current position in the UK, it's essential to look back at its history. Germany has a long history of successful discount grocery chains. Lidl was founded in Germany in the 1930s as a grocery wholesaler and has since grown into one of the largest supermarket chains in Europe. The company managed to become a household name in Germany before extending its operations worldwide:
12,000 stores
200+ Distribution Centres
31 countries
Europe, America, & Asia
In Germany Lidl competes in the discount section of the grocery market with Aldi, Penny, and Netto. Over 60% of German Lidl customers shop regularly with 60% visiting several times each week. Like Aldi, Lidl has already expanded internationally and is competing strongly, although is slightly behind Aldi in speed of expansion.
Navigating Global Waters – What can go wrong when Grocery chains expand internationally
Lidl's recent loss in the UK market is part of a larger narrative of supermarkets struggling to adapt to economic challenges and fluctuating market dynamics. Supermarket history is littered with stories of failures as supermarket chains expand beyond their original geographic boundaries through mergers, acquisitions, and organic growth. Let’s examine a few of these to see what Lidle needs to avoid!
Tesco’s International Expansion: A Cautionary Tale
As Lidl grapples with its UK market challenges, it would be prudent to examine the unsuccessful overseas expansion of UK's supermarket juggernaut, Tesco. With failed forays into markets like the United States and China, Tesco’s global ambitions have come under significant scrutiny. For example, their 2007 venture into the US with the Fresh & Easy brand was short-lived and ended in financial turmoil, as analysed in a Firmex report. Similarly, Tesco's struggle in cracking the Chinese market starting in 2004 through partnership with a local supermarket chain has been well documented by The Guardian and Raconteur. The common thread? A failure to adapt to local consumer behaviours and market conditions:
Relied heavily on its membership loyalty scheme to let customers build up points, did not realise the local preference of consumers to use multiple loyalty schemes to seek bargains.
Copied its UK model of having large footprint stores for bulk shopping trips located on city outskirts, vs local habits of shopping within walking distance and doing multiple small shops each week.
Inability to adjust to supply chains within a much larger country.
Competition from local brand and “buy local” sentiment, exacerbated when Tesco bought out its local partner quickly, losing its “local” brand.
Royal Ahold - Catastrophic attempt at Worldwide Domination
The Dutch mega-grocer Royal Ahold expanded rapidly worldwide in the 1990’s until it suffered a catastrophic failure in 2003. It’s worldwide CEO and CFO resigned after “Accounting Irregularities” became made public – it announced it had overstated earnings by over $500m! Royal Ahold had rapidly acquired businesses from 1994 to 1999 across Europe, South America, Scandinavia, Asia, and North America, chasing a 5 year target of growing both Sales and Net Profit by 15% every year, in order to become the second largest food retailer in the world. Trying to do so resulted in cascading failures:
Acquired businesses so fast it couldn’t manage them – at one point negotiating 10 takeovers across 3 continents at the same time.
Couldn’t properly integrate its acquisitions. Lack of systems, processes and controls meant subsidiaries were operating much as they were prior to being bought, with little to no benefit from being part of the group.
Lack of integration added a layer of confusion and internal control failures which were discovered by internal auditors, but ignored. This lack of controls encouraged local management to engage in unethical negotiations with suppliers that undermined business profit. This compounded the restatement of net income to more than $1.1 billion.
Trying to pinpoint Royal Ahold’s failure to a single cause is difficult, but it’s clear that one thing would have had a good chance at avoiding the failure – better governance.
A supermarket chain expanding internationally is not new, and many businesses do it successfully. These case studies of failures are important in understanding what not to do … and determine if Lidl has the right strategy.
What is Lidl Doing Differently in 2023?
Lidl’s key competitors are evidently setting the pace in 2023, forcing the German giant to rethink its strategies. Marketing Week’s analysis on UK supermarkets in 2023 illustrates that Aldi is aggressively ramping up its UK operations, marking a contrast to Lidl's recent challenges. Meanwhile, a Retail Insight Network report shows that Lidl is attempting to one-up its competitors by offering better employee pay packages, thereby aiming to attract and retain a motivated workforce. It has recognised that in times of high inflation and low unemployment, in a market with strong competition, it needs to:
Keep its prices low to attract more customers to switch to it, in a market where consumers are naturally “sticky”.
Focus on holding less SKU’s to better manage supplier pricing.
Increase its geographic footprint to ensure it’s available to as many consumers as possible.
Attract and keep staff to ensure capability to deliver.
Will Lidl's Expansion Plans Succeed?
The Future Landscape: Opportunities and Risks
As we have seenabove, Lidl is navigating an extremely competitive and volatile market. However, what might the future look like for Lidl if their expansion plans are successfully implemented? According to The Guardian, Lidl could potentially disrupt the 'Big Four' supermarket chains in the UK if it successfully executes its expansion plans. This sentiment is corroborated by 365 Retail, which states that over 1.3 million more customers shopped at Lidl GB in the run-up to Christmas, signifying growing consumer interest.
However, this growth doesn't come without its challenges. The company needs to maintain the quality of its products and services while also expanding rapidly, a complex task that requires prudent financial management and strategic planning.
Will Lidl Succeed? A CFO's Perspective
The key to Lidl's success will be its ability to adapt and innovate. Lidl's £76m loss in the UK needs to serve as a crucial data point, not a conclusive judgement. The company should see this as an opportunity to re-evaluate its financial models, cost structures, and investment plans. The success of any expansion, whether it's market-wide or international, hinges on the brand's ability to maintain its core value proposition while adapting to new market realities.
While Lidl faces headwinds in the form of rising operational costs and fierce competition, it can also capitalise on its robust European legacy and a growing consumer base that is becoming increasingly receptive to the discount retail model. Financial agility, strategic foresight, and adaptability will be the critical factors that determine whether Lidl will sink or swim in these choppy market waters.
Concluding Thoughts
It is evident that the UK supermarket industry in 2023 is more challenging than ever. Yet, within that challenge lies opportunity — an opportunity for brands like Lidl to recalibrate, refocus, and reclaim their growth trajectory.
If Lidl can lean into the lessons learned from its competitors and the broader market, while at the same time holding true to its roots and core value proposition, there is every possibility that it can turn the tide in its favour. It’s a story still in the making, fraught with both opportunities and pitfalls. In the dynamic world of retail, only time will tell which brands will rise to the occasion and which will falter under the pressures of an ever-changing marketplace.
Thank you for joining us on this deep dive into Lidl's current challenges and future opportunities in the UK supermarket industry of 2023. Stay tuned for more analyses and expert perspectives on the world of business.