Lidl: Hard Discounter Private Label Strategy | In Practise

Lidl: Hard Discounter Private Label Strategy

Former CEO, Lidl UK

Learning outcomes

  • Hard discounter business model pillars: high quality at a low price
  • Lidl’s approach to range architecture: how reduced range and process efficiency drive down costs versus competitors
  • How Lidl chooses which private label categories to compete in
  • Private label Muesli case study: how Lidl keeps store and logistics costs low
  • In-store bakery case study: how Lidl drives relentless cost optimization and cost discipline
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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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Can we talk about the way in which businesses such as Aldi or Lidl approach range architecture compared to mainstream retailers?

This is how discounters afford to be much cheaper, aside from cost efficient processes. Imagine the shopping behavior of customers is a curve which builds up the number of products they shop for throughout the week and year. Discounters try to offer a range of 70% to 80% of what a typical shopper in a given country wants to eat or drink at any given time. In a category such as muesli, they have seven to 10 different types available, whereas the big four would have up to 100, to cater to every individual's taste at the end of this curve.

This is great for that individual, but if you are in the mainstream of that curve, then you will pay for those extremities of taste. Discounters have a principle of only offering 70% to 80% of mainstream tastes in their assortment, which brings a major advantage. Negotiating on seven or eight products will not cost more if the volume increases in future, but will if you have to negotiate on 100 products, from possibly 100 different suppliers.

If you are ordering almost the same volume behind seven or eight lines, that equates to a cost saving in your buying headquarters as you do not require as many buyers to negotiate those products. Thinking one step further along the supply chain, there will be a saving on transport to, and storage costs at, your depots. With a reduced number of lines at depots, shipping larger volumes of each line is more efficient from depot to store and store to shelf. Once the handling is optimized so too is the efficiency of operation throughout the supply chain. A limited range is both easier and cheaper to negotiate.

Another big thing discounters do is around quality, which as a CEO, I had to convince customers there was nothing hidden or any sense of dodgy business happening. We were doing the opposite, striving for better quality than major leading brands but at a cheaper price. Here is an example of a 750 gram premium muesli Lidl stocks across Europe, with fruit and nut content of 53%.

A private label of a leading UK grocer has 50% fruit and nut content. This may be a marginal difference, excluding price or quality of ingredient, such as which type of fruit or nut is used, but this is the detail the discounter would go into. Taking that a level further, there is a lot of maneuvering and potential to save costs, whether from a hypermarket or discounters point of view. Our buying teams in the commercial departments would investigate and compare the quality of our private label muesli against the branded products.

Every three or six months they would analyze what our supplier delivered and check if it was in the prescribed ratio of raisins, hazelnuts and dates. Some fruits and nuts are more expensive than others and it is not a priority for a supplier to stick to the negotiated contract. Comparisons between brands and private labels reveal many opportunities to cut costs.

As a consequence of savings from reduced range and process efficiency, discounters invest in product quality by increasing the fruit and nut content and/or by using more expensive ingredients.

How does Lidl choose the private label categories to compete with?

There is no general rule to decide which private label categories to get involved in. In several categories, discounters find it more difficult to convince customers to switch because of the strength of a brand and their marketing expenditure. In certain areas, the technological speed of innovation is so high and brands are receiving higher prices, that discounters cannot replicate this with their private label producers. Discounters usually try to penetrate their private labels in categories with mass consumption and customers shopping with similar tastes.

Eggs, flour, sugar and salt are examples where there are no taste differences between many different products. They still have choices available but these are areas where streamlining the processes result in efficiencies. More difficult areas include branded beverages and spirits, or health and beauty. The advertising expenditure of those brands suggest to a consumer they will treat themselves to something better by buying those lipsticks and/or spirits.

One category where Lidl and Aldi have had favorable press is alcohol and specifically wines. How is that category strategically approached and the supply chain set up?

How did the Aldi and the Lidl guys get such positive press about the wine area? 10 years ago, the discounters in the UK and Europe had a boring range and not many people were drinking Liebfraumilch regularly. Lidl concentrated on mainstream tastes and did not look left or right to understand the mechanics of wine. By offering higher quality wines to customers with extra deep pockets, they would spend more in the stores on other products.

Aside from standard listed wines, Lidl brought in a special selection several times a year. The buying between specially selected and standard wines is not much different but the praise came from the specially selected wines. In the background, Lidl went back to their central organization and for all 30 countries where they currently operate in, would order nine to 12 months before putting the product on sale. They would visit vineyards and look at wines on offer from the current or previous year, from certain regions or a whole country.

Imagine the size of a football pitch, in which different vineyards offer their wines to the Lidl group, with sometimes only 8,000 to 10,000 bottles available, which would not be enough for the UK, but perhaps perfect for Slovenia. Individual countries would look at the wines from France and different vineyards for the Schwarz Group to buy. They sometimes clear out complete vineyards in buying events exclusive to the Schwarz Group alone. This gives them an individual taste rather than pre-defined standard wine. Sometimes the taste between years hardly fluctuates, so if you buy the full quantity, which could be 50,000 to 100,000 bottles, you create more buying advantages.

The individual vineyard does not have to sell 2,000 bottles at a time, so for them, the advantage is a big group taking them all. Those wines are not listed permanently in an Aldi or Lidl, and customers have the advantage of buying very good wines at affordable prices, but with a rationale of, if you come too late, they are gone.

How does Lidl price that category?

Lidl would bring in wine connoisseurs for testing during the buying season. They give an indication to which price range wines would feature, depending on a quality and points received. They will also research the market. So for a Chablis or red vintage for example, where are other retailers trading those and they would position themselves 15% to 20% below.

So benchmarking and 15% to 20%; is that all?

Not in every case, but most likely due to the organization described. With wines, one farmer might have 5,000 bottles of one vintage and 6,000 of another, and has a chance to clear large volumes to different Lidl countries. For that reason, he is willing to give discounts rather than clearing only 2,000 bottles.

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Lidl: Hard Discounter Private Label Strategy

September 3, 2020

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