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Anonymous

{audio:0:00:10} Ronny, very briefly, before we dive into your career history and your experience in operating discount retailers, could you tell us a little bit about your background and your career experience?

{audio:0:00:21} I’ve worked, throughout my career, for the Schwarz Group. I started in 2000, after I graduated with a degree in business, from an East German university; I’m originally from East Germany, near Leipzig, in a place called Halle. Part of the business of Schwarz Group is Lidl, which some of you may know, which is a discount chain, and Kaufland, a hypermarket chain. They are the biggest retailer in Germany and the fourth biggest retailer in the world. I worked for them from 2000 until the end of 2016. From 2010 until 2016, I was the CEO for the UK operations.

{audio:0:01:12} To set the scene, in terms of the pillars of a hard discount business model and, I suppose, we could relate it, specifically, to Lidl, could you take us through, on a strategic level, on an operational level, what really constitutes the core of these businesses?

{audio:0:01:37} The discount format is already quite old, if you look at it in terms of how quickly retail and grocery retail is developing. In Germany, it is more than 100 years, since some members of the Aldi family and the Lidl family started. The core and the key difference to the standard retailers, which you maybe know, is that this is a model where you are happy with less range in a store. You are probably dealing with 10% of the normal range of a hypermarket. But the key driver to get customers in, has always been the price message. The discounters are proud of themselves for offering all the products required for weekly or daily needs, but at the lowest price in the market.

{audio:0:02:32} One thing which, in my view, has been mistaken in a few countries, was that the assumption was that the products are so cheap because the discounters are selling poor quality. The opposite is the case. The discounters pride themselves on putting very high quality of product – I’m not saying always the top, highest quality – on their shelves, at the lowest price in the market and that allows them, really, the success that they’ve seen, over the last couple of years, in particular.

{audio:0:03:13} We have this high volume per SKU model, we have this pillar of attractive value for money, for the customer. To get into a bit more detail on this low SKU count and what that actually does for the model and maybe, how customer understanding has developed? It seems that we’re pushing a lot of sales volume through a very small number of products.

{audio:0:03:42} If you take a customer in the UK, 10 years ago, the assumption, aside from the quality assumption, would have been, I cannot do my weekly shop in a Lidl or an Aldi store. The reason was that they don’t have everything. Maybe they don’t have all the brands and the discounters would, usually, stock much fewer brands. They pride themselves on putting the high quality into their private label. 80% is private label. To give an example, I keep asking people how many different types of water do you stock at home? Most people answer, maximum one or two different types of water, which they buy. They have it at home if they don’t drink just tap water. If you look into a hypermarket, you maybe find 40 or 50 different types of water. The same water, from the same brand, sometimes in four or five different sizes, with the yellow top, with the pink top or whatever.

{audio:0:04:43} The point is, that the extra space this needs, the extra negotiation, the extra people this requires, in terms of negotiating that. The extra space, not just in the store, but in the warehouse. All of that adds to the cost. If you are not prepared to pay for the choice of someone else, then the discounter says, listen, we have five or six different types of water. We have a sparkling water, we have a lightly sparkling water, and we have a still water. They leave it there and just simply say, this is all you need and, trust me, with those types of water, you will survive, but it’s maybe not the feelgood factor for everyone and maybe not for your neighbor. But if you’re not prepared to pay for your neighbor’s choice, then this is the cheapest way of getting the products, because the discounters are saving on all those little steps I’ve described, on the supply chain, from the negotiations, through the warehouse, into the stores. You can actually put a pallet out of the product, because they are selling so fast, rather than one case of the one-liter pink lid bottle. The discounters are putting a Euro-pallet out and it sells much, much faster and it’s obviously more efficient to put a pallet out, than individual cases. This is a huge cost saving and that adds to the point that they can allow themselves to sell the product so cheaply and by no means, in that instance, are they selling a cheaper quality.

{audio:0:06:16} In terms of pricing, this fundamental pillar of being very attractive, in terms of value for money. How does a discounter look at a price gap, versus a mainstream retailer?

{audio:0:06:34} Firstly, you would say, the bigger the price gap, the more advantage for the discounter. Full stop. That’s self-explanatory. The discounters would be looking at that, not in a sense of, we need to have that percentage price gap and they just apply that across all the categories, across all the products. It’s rather more, individual product, by individual product. To give you an example, there are commodities, like milk, sugar and flour, where some of the established players, the big four players in the UK, probably only have a price gap of 1% or 2%; sometimes zero. But then, if you apply that across the assortment, you’ll find products where there is, sometimes, a price gap of 20% or 25%. The discounters will really make sure that no one undercuts them, on price. It’s clear that, on some very fast-selling lines, it hurts both types of retailers – the big four retailers, as well as the discounters – as the margins are usually much thinner, on those products. The way the discounters approach that is, obviously, they try to take a look and see, where can I afford, myself, to sell a product, still with profitability and still with a small margin, maybe? They would probably not want to go with the margin higher than 50% on any product – that might be the opposite at some of the big four supermarkets – just simply because they’re saying, we want to be attractive in our pricing and we want to offer the customers real value for money.

{audio:0:08:28} If some products are really on such high margins, then they will be living with 30% or 40% or something like that, but not trying to improve that to 80% or 100%.

{audio:0:08:45} You have direct experience, over a number of years, in the UK market. How has that price gap evolved, over the years? In particular, during your leadership of Lidl’s UK business?

{audio:0:09:00} That price gap goes up and goes down. But I think, as a trend, it’s fair to say that the price gap has narrowed. If you were to take it back 15 years, then the price gap was about 20% to 25%, on an average basket, probably. These days, I would argue it’s only around about, maybe, 10% to 12%, on an average basket. Again, that’s not on every product. That’s a weighted average basket of weekly shopping. But you can see the pressure has been increasing, from the big four. I think they’ve realized that the price gap, for too long, was allowed to be at that level. Maybe, for too long, some of the established players have been living with too high dividends and too high earnings. That’s just meant that the long-term perspective was closing and has caused them quite some pain.

{audio:0:10:06} I’ve seen some of the retailers really fighting back on that one, with private label, but also price investment. That meant that the price gaps narrowed. Saying that, I feel as if there is not much more room to be made, from a big four point of view, in reducing that margin further, if they want to stick to their usual shareholder value for money proposition. I believe, they could narrow that margin down to zero; it would not be an issue. At zero, I feel that they would be loss-making. But let’s say they were to bring that down to, maybe, 5% or 8%, which would put them within striking distance, then maybe the profitability, the bottom-line, net result, for some of the established players would not be 3%, 3.5% anymore, but rather 1% or 1.5%, if anything.

{audio:0:11:13} No. That would be on the net bottom-line result.

{audio:0:11:21} Maybe just building off what you’ve just said, in the evolution of this market and the response that’s typical of incumbents, when a discounter comes into the market and seems to grow from a very small base, off the radar, to an explosive market presence. In the UK, I think, we’ve seen 6%, 7% market share increase, for the discount channel, just over the last five or six years. We’ve seen this happen time and time again, across markets, that Aldi and Lidl enter. They are ignored, they’re described as irrelevant by the incumbents and within a matter of years, it’s all anyone can talk about, especially on the downside, for the shareholders of incumbent retailers. Why is it that incumbents keep missing this, across markets, where this playbook has been executed on, time and time again, by the discounters?

{audio:0:12:30} I’ve been thinking long and hard about why they do it? It’s not such a difficult exercise. One answer I’ve come up with is the ownership structure. The discounters and many of the German retailers are in, let’s call it, private ownership; the discounters, in particular, Aldi and Lidl, are. The other discounters are partially privately owned. None of those retailers are publicly owned and in many shareholder’s hands. Many shareholder’s hands mean that many people have different interests. Many people want to get a high return on their investment into that retailer.

{audio:0:13:15} There were times when some of the big four retailers got those bottom-line results of 5% or 6% on those lines. Of course, if you, as an investor, as small as you may be, get used to those kind of returns, it would be difficult to say, at some point, we need to be happy, for the next five or 10 years, with only 1% or 2%. But that difference is what would be needed to fight off the price investment with investment into your store portfolio, capex, etc. to make sure that you don’t allow the discounters, early on, to start breathing.

{audio:0:13:57} This is a machine and if this machine, the discounters, start rolling, it is a very, very expensive way to figh them off. In the instance of the UK, I believe it’s too late. They’ve reached a critical mass of about 500 stores each. For every store they open now, their fixed costs, if you were to take the headquarters, they don’t need additional people anymore. This is just adding to their profitability now. I’m not saying that they are always, constantly profitable, because the pound exchange rate is causing headaches, as well. But you have to say, back to your question, fight them early on, if they were to enter the market. Do not ignore them. I think it’s just that game of, if you’ve seen that a retailer is really successful somewhere else, take them seriously, very early on and do not ignore them just because they only have 10, 20, 50 stores. Fight them and take them seriously, as if they already had 1,000 stores. I think that would have to be the lesson.

{audio:0:15:05} The only country that I could see that this might still be possible would be the US. It’s too late, in the Aldi instance. In terms of Lidl, they’ve reached a little bit more than 100 stores now. There were price investments, from the biggest players in grocery, but for how long and how adamant they are in investing and really scrutinizing and making sure that they are not allowing the discounter to breathe, remains a question.

{audio:0:15:39} This point on critical mass or when a discounter really does become dangerous, in a market dominated by incumbents and, I suppose, the US does come to mind as an interesting example of this or as an applied case study. What is it about 500 stores? Could you talk us through the scale that is reached and what that actually means, for the discounter model to really fire up?

{audio:0:16:10} That example has been taken by me, for the UK. Obviously, that critical mass will be different for so many reasons and points, for every country. The general price level will play a role in every country. The strength of your competitors will play a role. The number of stores of your competitors will play a role. The supply base will play a role, as to when you reach that critical mass. What I’m trying to say is, the discounters will have a certain level. They might reach that, in some smaller countries, at a 100, 150 stores. You, as the established player, should be aware of when that could be. It’s easy enough to rebuild that model, in terms of calculating that, given the price levels the discounters are operating on and just take that fight very early on, rather than just waiting.

{audio:0:17:22} What I mean, in very clear terms by that is, every new store opening, of a discounter, would have to be with an individual attack of my own stores, against that opening of a discounter. Whilst we’re talking about working against that competitor, let’s be honest, for me, that’s not even something different if any other supermarket was opening. But in particular, with the discounters and them reaching their critical mass, it’s so important to not allow them to get to that point.

{audio:0:18:00} On this critical mass then, I take it’s a function of reaching a certain scale in buying, that allows the discounter to take the most advantage of its model, to price at the biggest discount? How does that work, in terms of reaching this critical mass, market by market? Is it simply a function of, the flywheel starts operating at a certain scale, supplier relationships are established and the discounter can really drive hard on the price proposition, with a certain scale in its supply base? Is that a fair description?

{audio:0:18:36} I think it’s clear, of course, that you’re reaching a critical mass, in terms of your buying side. But the discounter, going from one country to another, would initially, also bring a lot of good in through their international buying power. They already have a critical mass there. But as they go, they are trying, more and more, to establish a national buying function. Yes, it’s clear, if you open with 10 or 15 stores, your leverage won’t be as big as it might be with 50 stores.

{audio:0:19:09} In terms of the fixed costs, let’s say you were to do some TV advertising, for one or two stores or you’re doing it for 50 stores. The effect it will have on 50 stores is 50 times the increase in revenue, but it’s the same cost, than if you were to do that for only one or two stores. The same thing goes about operating, having the lighting on in your warehouses, having a head count – your accounting department, in your headquarters. You have all the personnel costs, attributed to two stores or to 50 stores. At some point – and again, that’s individual, country by country – this reaches that critical mass. The discounters will know well enough, for every country, where they want to and where they have to go. That sometimes can be one and a half or two years from opening. Sometimes it can be 10 or 15 years from opening. That is simply a decision for the local leadership but, also, the potential of the country. That’s where they go and how they go about it.]

{audio:0:20:34} What’s the payback period on a discounter store, typically?

{audio:0:20:40} Again, that depends, country by country. You have different labor costs, different property costs, etc. You could probably say that you’re paying between 15 and 20 years, for one store built. You’re paying for about that time, for all the shell and the equipment that you’ve invested. Saying that, with the increase you would have seen in the instance of Lidl UK and the average revenue per store increasing, that dramatically reduces the payback time. What does not make that case so simple is – and it’s part of the success story of Lidl and Aldi – they keep investing 1% or 2% of their bottom line, constantly, into refurbishing their existing stores. What I mean by that is, to make that really tangible, I remember a time when we had just refurbished all our refrigeration units, in our stores. We’d extended the chillers in the stores, where we offer the cheese and the yoghurt, from 20 bays to 25 bays, but we were developing so fast, that we said we needed to go from 25 to 30 bays. In the meantime, some of the electricity consumption of some of the units had developed into a more advanced unit and, after four or five years, we’ve written the units off, and reinvested into some newer units, which we’re paying back, on that individual example, much, much quicker. But you can only do that, if you’re prepared to take off your bottom line, write certain things off, much earlier than you would have thought to have written them off. Aldi and Lidl do the same things with their buildings, with equipment. It could be easy, for four or five years, to have a bottom-line result of more than 4% or 5% in some countries. But the point is, they are okay with making less of a result, and investing the difference, I would argue, to some of the established players, constantly bettering their offer, bettering their stores, investing in their stores, investing in staff, investing in equipment, investing in the shell of the stores. Knocking down stores which are only eight years old and making the offering better. That just means that they are constantly ahead of the curve or on top of the wave, if you like and that’s something that some of the big four retailers [in the UK] are missing.

{audio:0:23:38} How much of a factor is adapting the model on a local level? You mentioned, a bit earlier that, as a discounter’s presence matures, in a particular country, that the share of local foods might increase and there’s less of a reliance on the international supply chain. Are there any format changes by country? Are there any further ways in which presence is adapted, on a local level?

{audio:0:24:10} Well, the one thing I’ve seen and, in particular, for the time I was responsible for the UK, is the that discounters had to learn, in some countries, some tough lessons in knowing where they needed to [adapt] Lidl and Aldi. For example, in Greece and Norway, where they were just trying to make a German offering for some Greek or Norwegian customers. They learned that they have to adapt their offering, to what the British customers, what the Swedish customers want. That’s down to a national level. With that, the buying side has shifted from about 70% being bought [sourced] internationally, at the time, to nowadays, maybe only 30% or 40% being sourced internationally.

{audio:0:24:57} That’s different, again, country by country, but you would know that the British customer is quite demanding on British produce etc. You would still source pasta from where it’s meant to originate from – Italy – but you would focus more and more, to make sure that everything the customer can taste, can feel, can see and eat, that the customer gets the feeling of Britishness, in that instance But still have, what I always call, the German engine, the procedures, etc. running silently in the background and making sure the cost savings are there.

{audio:0:25:37} I believe that offering will be continued to be driven into the countries. That is actually something that customers are demanding more and more, these days, down to a regional and local level. In the instance of Lidl UK, we had Aberdeen strawberries on offer. I think Aberdeen strawberries might only grow for one and a half weeks a year, but we had to have them available, for our customers. This is a way that, even the discounters, needed to go and if the products are selling, then of course, the discounters are also willing to live with the customer’s will.

{audio:0:26:26} I’d like to move to questions on leadership and your experiences. Maybe beginning, first of all, quite a personal question, which is, if you could describe your journey in developing your leadership style, and what that meant in the context of so many years, within the discounter business?

{audio:0:26:51} That’s a good question about the development of leadership style and mine definitely has. If you were to look back, the organization, when I left, had about 20,000 employees. When I started with the organization, I was a student. I was hardly able to be responsible for myself, when I was a student, I remember my parents needed to remind me, many times, what a good student should and should not do. But when I started with Lidl, I was responsible for five stores. I was 25 at the time and that was a head count of about 30 people. Ladies and men, who were 10, 15 years older than me, with all their family troubles, etc. Still, I was their boss.

{audio:0:27:55} There are a lot of leadership seminars. There are a lot of things that you can add and you can learn about leadership. But if I look back, the one thing I have to say is, I feel that you have certain things in your DNA, about how you get on with individuals, or you do not. I think you can be reminded, but I feel that some people might find it difficult and some people enjoy working with people. This has been part of my key drivers as to why I joined such a business. I enjoy working with people; I enjoy interacting with people. I actually enjoy praising people. I enjoy it when people have a career, they make another step and I’m participating in that step, or I allowed them to make that step. But not everyone feels comfortable with being in front of people and, actually, sometimes telling them that certain things have gone wrong or right. I think it’s easier to praise, but there are difficult elements there, as well.

{audio:0:29:26} Through my time as an area manager, the position I described, of course, there were times that were difficult. There were times that I made many mistakes in how I’ve interacted with individuals. But I kept looking back and thinking about what I felt I had done right or wrong and I was talking to people at my level, below me, above me and asking what they felt about it. I valued opinions about my leadership, down to the point that I’ve had two or three members of the board, when I was the CEO, who sometimes, after we had a board meeting, came out and said, listen, Ronny, I think you overshot the line here. I simply needed to apologize, for the way I had spoken, for the way I had been questioning people. By no means, the 16 years meant that I had become faultless. It just meant that I was constantly reviewing what I was doing. That also means, if you look back now and you thought, okay, that was what I did at the time. I look at my leadership now and would do things differently, because you, hopefully, as a leader, are still learning and are keen to learn. I think this is what I would describe as a key leadership skill. You’re keen on learning and you’re keen on getting better about how you lead. Not just about your general knowledge.

{audio:0:31:07} Here and there, in my life, in my career with Lidl, I’ve had bosses who seem to be not able to learn or you sometimes wonder, how on earth could they get into the position that they were in. The minimum you would have expected is that you could talk to them about it. I feel that I’ve kept an ear open, so someone could talk to me about. That’s got nothing to do with my skillset in actually being able to do the job. It’s more about enabling myself to get the input from others.

{audio:0:31:49} So really listening. I’m hearing clarity from the importance of open feedback channels. How does a leader cultivate that? How do you, as a leader, encourage people to come forward with feedback, about yourself, but also, for example, information about the business, that might be problematic or uncomfortable?

{audio:0:32:14} Easier said than done. I’m pretty sure, and I’ve had that feedback as well, that sometimes people told me, listen Ronny, you need to be aware you are in that position and people may not tell you what they should tell you. Even that is an achievement, that they told me that. I think the point, sometimes, will start with the individual that you keep asking that question, to get the feedback. I’ve had, as I mentioned, individuals who, from an ego point of view, could not live with that feedback. I think, throughout my career, I have found it difficult to turn such people around, if their leadership DNA, let’s call it, has been set up in that way. You could tell them, again and again, please allow some other people’s opinions into that, but sometimes it’s also, you asking the people you lead a question. Leading the people, by asking a question, means that you make the people think. You share the knowledge across more shoulders and when you ask the question, ultimately, you want to hear something back.
{audio:0:33:41} I’ve seen people, who don’t care about other people’s opinion, asking the question, asking the question, asking the question and then just ignoring it, because they could save time. They don’t want to actually hear the other opinion. But if you keep asking the question, if you keep listening to what other people are saying, and if you actually enjoy that, sometimes, other people come up with a better solution than what you had in mind, I think this encourages people and, ultimately, leads to more knowledge, across more shoulders.

{audio:0:34:17} What do you think is particularly important in the retail industry, for leadership styles and characteristics?

{audio:0:34:29} In retail, obviously, you have to work with a lot of people. Aside from e-commerce, the retailers usually live off many people on the field, on the ground, who need to be working on certain procedures and need to be compliant. What that means is, you have to have a very strong leadership culture in place, in terms of driving compliance into your system. Let’s be honest, sometimes that system doesn’t mean that everyone can fly a rocket to the moon and have the intellectual challenge, every single day.

{audio:0:35:13} In the instance of the discounter, with all the love in the world, the job is probably not the intellectually most challenging job, I feel. The people are challenged by making sure they can apply the things that have to be implemented, in an intellectual way, in a managerial way, and telling the people the things that they have to implement and explaining things in a way that the people implement them with a high degree of compliance, but the individual things they do, might not be complicated. You may just be saying, please work the fruit and veg delivery in that way, and as this has been tested, in five or 50 stores before, maybe you don’t need an opinion from the people who work the fruit and veg delivery in the other 9,500 stores. But you still need the person to be motivated and the knowledge to be given to them. You are leading and you are explaining and educating, but what you are educating about, let’s be honest, is probably not rocket science.

{audio:0:36:24} The one thing which is difficult, in retail, may be the many different domino pieces which have to fall in line, the many different procedures and you have to try and get that knowledge across a very broad base of workforce. The retail jobs are probably not the people with the highest skilled workforce in the whole environment, so you have to make sure you have systems in place and managers in place, who can apply that and who are also happy with applying that, but maybe with not everyone giving an opinion about everything, every single day.

{audio:0:37:16} What’s also striking me is, the importance of communicating, in a clear way. You have this distributed labor force, this large body of frontline staff. What can you share with us about what great communication means, in that context?

{audio:0:37:40} What great communication ultimately means is, if you sit at the top of an organization, and you have 20,000 people and you say, listen, we want to develop in that direction, that this resonates all the way through the different levels and everyone understands. Ideally, a majority of the workforce stands behind the idea – your reflection of what the workforce believes, as well – and puts it in place, with a high degree of compliance. That’s what I would describe as a big achievement in leadership, which isn’t easy. You’ll see many, many businesses, with a large workforce and they will struggle to get things in place. Sometimes, it’s Chinese Whispers and you don’t have the systems, you don’t get the people to understand. The people feel as if they are not being taken care of, explained to enough and many times, let’s be honest, I have struggled to do so, because of myself, first of all, because of not having the right systems. Sometime, maybe, having some people in between, who felt it was not so important or it was communicated too complicatedly.

{audio:0:38:59} If I have a great idea of where to develop this big tanker of business to, I also need to keep in mind how the small 20,000 wheels, how fast can they roll? What I mean by that is, what can they digest? If I communicate, we’re changing our strategy from here to there, why are we doing it? How are we doing it? I cannot have a 50-page presentation for them. It needs to be in a more simplistic, but still a way that is appropriate for that workforce. I think learning about that and finding the right way for communication, for the right topic – because it is different for every subject and every topic – is not easy.

{audio:0:39:51} When I started, I probably would have said, internal business communication, it’s just a function we can leave out or we can cut those jobs. But, I think, it’s got quite some leverage, to ensure you’re hitting higher compliance, higher satisfaction and a workforce that enjoys the job more. The way I have seen that, this is sometimes, something that the discounters have left too much on the side, maybe. I think there have been quite some movements to try and engage the workforce more, because the success has been seen. I have to say, I enjoyed the days in the stores, the most, when you can speak to the lady or the man who sits at the checkout and you’re talking with them about certain things you’ve launched and, actually, they agree or they disagree, but they heard about it and they know what you’re talking about. I think that’s an achievement and that’s something that a big leader should show, as well.

{audio:0:41:05} Ronny, thank you. On that note, I think that’s a wonderful moment to conclude our conversation today.

Former CEO, Lidl UK 

Lidl: Hard Discounter Business Models

The pillars of the hard discounter business model (approach to product assortment, customer value proposition, low cost operating model)