Lidl and Hard Discounter Culture | In Practise

Lidl and Hard Discounter Culture

Former CEO, Lidl UK

Learning outcomes

  • The central aspects of the hard discounter business model that distinguishes it from the set up of mainstream retailers (competitive positioning, pricing, format & real estate strategy, operating cost structure & labour productivity, supply chain & logistics)
  • The principles of organizational culture by which a hard discounter like Lidl is run and how these differ from mainstream retailers (incentives and company values, talent acquisition and retention)
  • The leadership and cultural values at hard discounters that contribute to discounter success that are applicable to larger incumbent retailers
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Executive Bio

Ronny Gottschlich

Former CEO, Lidl UK

Ronny spent most of his career with a discount grocery food retailer Lidl, where he worked in various positions from 2000 to 2016. This culminated in the role of CEO for Lidl’s UK business from 2010 to 2016. Lidi’s UK business grew revenue from GBP 2.5bn to over GBP 5bn under Ronny’s leadership, doubling its market share in under five years. He now runs his own retail consultancy business Heunadel. Read more

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A very good morning to you Ronny, it’s a delight to have you with us. Before we dive into the salient aspects of the discounter business model, could you tell us a little about your experience over the last few years in food retail, with a couple of highlights?

Good morning Will and thanks for having me, and good morning or whatever the time may be to the listeners. I’ve spent most of my career with a discount grocery food retailer called Lidl. For the last 16 years, I’ve been working with that German giant. When I joined them in 2000, it was a known business model in Germany and in quite a few parts of Europe I would say, but it was not so well known in the UK or not so established. I worked through the ranks. This is very typical for the 3 or 4 discounters; they’re trying to grow their talent from within rather than bringing in many people from the external world. They’re trying to grow their people by making them appreciate how tough the working environment is in their stores: work as an area manager become a regional director.

At some point, I was lucky enough to run the UK, as CEO, from 2010 until the end of 2016. And in that time, we managed to grow that business, mainly through like-for-like growth, from about £2.5 Billion to around about £5 Billion, which was phenomenal at the time and I’m sure caused quite a few of the incumbents a few headaches.

That’s north of 14% growth per annum.

It was huge growth with all the associated problems as you can imagine: finding staff quickly enough, not having enough warehouse space. From an external point of view, it sounds like a phenomenal story, and trust me, the appetite internally would have been even bigger. But, sometimes, even though you’re working for a very big corporate business, it felt like a start-up business, with all the headaches associated. And maybe we could have squeezed out a few more percentage points market share. We just couldn’t find enough staff, we just couldn’t get enough warehouse space built quickly enough and a few other things held us back from growing faster.

That’s quite an incredible growth track record for a business operating in what was considered one of the most mature food retail markets in the world. So, Ronny, let’s talk a little about the business model and the core elements of that business model and strategy that allowed you to deliver this growth.

I think it’s worthwhile mentioning some key aspects of what differentiates the discounters, the Lidls of the world, from some of the established hypermarkets in Britain. One key aspect is a reduced range of assortment that is made available to the consumers. Traditional hypermarkets have everything between 20,000-40,000 products, SKUs (stock keeping units), on sale, whereas the discounters these days have 1,500-1,800 SKUs available. So a very, very reduced range of products but they would argue, this offering most comfortably serves what the majority of the British population or the German population needs for their weekly shopping and their weekly food consumption. Now what they do not do with the reduced range of SKUs obviously is that they do not serve specialty needs. They might have 5 or 6 different types of bread on sale where the traditional hypermarkets might have 40. With that additional offer and choice, an increase in price usually occurs and this is the main differentiator.

Aside from the SKU count, due to their lean operation, the discounters usually manage to offer the products at a discounted price of around about 15-20% below what you would have experienced at the hypermarkets. And clearly, over time, this resonates more and more with the customers. If they then learn to appreciate that the quality is by no means lower and that the discounters by no means allow themselves to put cheaper quality in because of a reduced price, but sometimes even putting better than the branded quality into their private label product. Over time, this is something that starts working more and more with the consumers. It took a little bit longer in the UK than it’s taken on the continent. But, as we can see, it starts working better and better with the British consumers as well.

This element of quality often arises as a misconception. So you’re suggesting that in this ‘good, better, best’ hierarchy that the hard discounters are really aiming at the better and best part of the tier. Is that fair?

With their standard private label product, they always aim for the top two tiers. Just take it from a very personal point of view, if you were to sell a product that was of a very poor quality, but you had it at a discounted price of 20 or 25%, this is something that would be communicated around and between the customers and consumers in Britain quite fast. People would have picked that up, that you actually can just buy a poorer quality at a cheaper price. But the opposite is the case. Both discounters, and other discounters in the world, are known to try and put in the same quality or better than branded quality into their private label products so as to not give any excuse to the customers not to come to their stores, but to say, “Listen, we’re saving on everything but the quality. We’re saving on having Santa Claus waving at you when you’re leaving the shop before Christmas or something like that, but we never save on the quality of the products.”

On the structure of the business that allows this price discount to be delivered to the customer, let’s get into on the level of the operating cost structure of the business, store formats and real estate.

From what I have seen in retail, and I’ve seen different types of retail proximity discount model hypermarkets, the operating format is the most well thought through business model from the customer all the way back to the product, or if you want to think of it the other way round, from the product all the way to the customer. What I mean by that is obviously everything is being lined up to satisfy the customer from the start. So the products that are being put on sale in a discounter will have to deliver much higher unit sales per store per week than they may have to do in a hypermarket. They just need to turn over much quicker than in some traditional retailers. But discounters will go into much greater detail in optimizing packaging, the size of the shelves, et cetera, to make everything very productive when working with the products, getting them onto the shelf and making sure the product can sell in the fastest way possible. So you will find that the product at the discounters probably sell 2 or 3 times faster than some of the products you can see in the traditional hypermarkets.

Because of the reduced SKU count, you obviously start with a much-reduced headcount in your headquarters. For 1,500 or 1,800 SKUs you need fewer buyers in your organization than you’d need to source 20,000 or 30,000 SKUs. You need less experts for packaging. You need less airtime in marketing, et cetera. All over there, this is where you save a lot of time, whether this is via people headcount, whether this is via commodities, which you are able to put back into a reduced price or an increased quality, if you like.

And then it goes down to the operating model, the physical store environment. The discounters are aiming to have a similar look and feel store everywhere across the country: ideally in a rectangular shape with the products positioned in every store in the same positions, if possible, so that when the products are flowing through supply chain, from the warehouse into the store, they are landing in the store in the most effective way. Then they can be worked in the most effective way. So that the pallets arriving are being carried through the store in exactly the same way in every single one of the 600-800 stores, and are worked onto the shelf in the most productive way. If you can set yourself up in that way, it becomes almost like producing the Ford model T, because you’re kind of operating like a conveyor belt all the time, moving the products onto the shelf. The only thing which interferes with that is the customer who picks the product up and goes to the check-out.

And, even there, the German discounters would have installed some very, very lean processes to make sure the customers are flowing through there in a very, very fast way. To give you an example: at the check-out you can spend a lot of time queuing just because the two or three people in front of you are offering the cashier some change. So you're paying £23.45 and everyone keeps looking for the 45p change. Lidl and Aldi would encourage their cashiers to always have enough change in their cash drawer – now, we all know we’re going a bit more towards card payment, but historically this was a big issue – if every second or third person looks for those 45 pence, that is an easy 1 or 2 minutes added for every second or third customer. This takes a lot of time if you have hundreds of thousands of customers running through your check-outs and it’s a lot of time you can save because your cashier can hand out the correct change much faster than you can find the 45p in your wallet. Not to mention that sometimes you only find 44p and you say, “I’m sorry, I only have 44p, I can’t give you the 45p,” which is even more time wasting if you like.

So I think this is illustrative of a mindset that’s pervasive in the business that we can get into now, having set out the fundamentals of the model. Let’s talk about the vision at play in these businesses and how that vision and mission are articulated by senior leadership.

Well, they obviously have a shared vision and mission statements but as a brief summary, what both retailers really believe in is that they can be relevant to every household across the country. What they’re trying to replicate with their offering is what the majority, let’s argue, 80% of people, consume 80% of the week. And, if you’re trying to build this up then you’ll find that they are satisfying that more and more. They are not going after one key clientele. They really believe that they can be relevant to the whole population, not for every need but for the majority of what people consume. And their shopping mission is to give the best quality to the customers at the lowest price, the best value for money proposition in the market, it’s as simple as that. Always at the lowest price but always aiming to be the best quality proposition. What I mean by that, of course, is that you need to compare like-for-like. I would not be sitting here saying that for every private label product that you buy at the discounter, that this is of a Marks and Spencer quality, but of course, there is a bit of a price differentiation.

Right, so it’s a really big story about price, price leadership and value. Then, on a practical level, how is that brought to life for staff? Or how is that communicated and how does that fit into an internal communication strategy?

Well, an internal communication strategy probably works best if the people who start working with you understand that from the very first day. I needed to learn that the hard way when I joined Lidl in 2000. When you work on the shop floor, you really want to make sure that every single way you work in a store – because this is where your core workforce is employed – that every single way that you work and walk is of an effective and efficient nature. So the people in the store learn to think about cost in the way they operate the store right from the very start. They learn to walk at a pace which would probably be 2-3 times faster compared to the hypermarkets. When you watch the people in some hypermarkets, it just seems to me that the people in the discounters walk faster and work faster than the people in some of those. It’s the DNA that is being communicated to you: that this is a job which every day consists of running a little marathon in a store. You are exhausted after a day but if you push yourself harder in those stores, you get rewarded, I would argue. I believe the best way of communicating this is that what they’re doing is living and breathing the discount idea. One fundamental of that is saving costs in the way you operate a store and the best way an employee can do that is to work faster or work efficiently, to throw less away, to think. To make this tangible, if you’re going to pick something up from a warehouse, think about what you could take on your way into the warehouse so that you’re making your journey into the warehouse useful whilst you’re picking something up to go put it back on the shop floor. This is ingrained into what people get taught when they start with the discounters to make sure that every single way, no matter where you go, where you were, what you do is of an efficient nature because this ultimately resonates in a lower percentage personnel cost, which is the key advantage both retailers have in their operation over some hypermarkets: a 30-40%, sometimes 50% lower, personnel cost per store than what the established players have.

Right, so there’s this extent to which this focus on cost is embedded in the DNA of the business and trained into the employees. How do the harder incentives match up with that to really drive that reality into behavior on a daily basis?

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