Lidl in Ireland: from 0 to 12% market share in 20 years

Paul, could you help us set the scene for our conversation today with a sense of Lidl's history in Ireland and the market it entered? Could you include a feel for the market structure and the existing competitive landscape, which Lidl found itself in as it was opening?

Lidl entered the Irish market in 1999, in a place called Cookstown. That was in the heart of Northern Ireland, right bang in the middle. If you were to imagine Northern Ireland as a circle, Cookstown would be in the very middle. That was serviced from Scotland and it was very much dipping its toes into the water. The market back then would have been unaware of Lidl. It was an unheard-of German discounter. People would have believed all the products, whether that be the milk, the meat or the tins of beans, all came from Germany. A certain amount of that was true, but also a large amount of that wasn't true. The perception would have been very much of a discounter, offering rock bottom prices, rock bottom quality and if you were spotted in a Lidl car park then you might be having financial difficulty. It certainly wasn't a cool or hip place to be seen.

Then in the year 2000, they entered the Irish market and it would have been a period of rapid expansion, get a site, get four walls put up, get some pallets in and start trading. The evolution of the model and the shopping proposition has very much changed in those 20 years; it is night and day. In terms of the core model, that is unchanged. There have been little tweaks to it here but the absolute fundamentals of cleanliness, friendliness, availability and good customer service have not changed. They're in a position now where they have 200 stores going from strength to strength as far as market share is concerned, so it absolutely is working. When you consider that initial customer perception of the brand back then, to be where they are now 20 years later, is pretty good going by anyone's estimation.

It is pretty serious growth. How well do you feel the incumbents understood the model and what they were really up against?

The internal employee would have understood the model because, in terms of our conversation here today and the examples I can cite and stories I can tell on the explanation behind that, we are talking about something that is exceptionally simple. I remember in the interview I had to join the company, it was made clear to me in the following terms: Do you know what Paul, you don't need a degree in nuclear science to work here, you just need an exceptional attitude and be willing to work hard and add value every single day you are here. In terms of understanding the model of, not necessarily as simple as, pile it high and sell it cheap, people did understand what they were trying to achieve in those days.

How would you account for Lidl's impressive growth – going from a near zero in 2000 – to 12.7 market share today?

The major breakthrough was in 2010, when Lidl introduced a marketing campaign based around Northern Ireland called “Proud to Serve You”. What that campaign essentially did, was communicate to the customer a bit more detail about who Lidl was, what they stood for and what they could offer. A large part of the repeat customer, in the early days, stemmed from people going into Lidl out of curiosity. It was more of a, what's this all about, as opposed to, I'm going in for the Bellarom chocolate or the Strathvale meat. What “Proud to Serve You” achieved for the Northern Irish consumer was the understanding that Lidl had been around for over a decade by that time.

We sourced our milk from Omagh and that milk was sourced from Omagh from day one, not later. We bought beef from Northern Ireland, it's Northern Irish beef, and then they coupled that with some taste tests and various awards that were won. All of a sudden, you started going from a reasonably successful model and business, to people now having huge amounts of credibility with it and understanding that this was local food made by local people. The wording of quality was also important and carefully worded, so that whatever the item might be, sparkling water, olive oil, chocolate or cereal, it was never pitched as, this is the best cereal that you can buy in the United Kingdom. What it did communicate very well, however, was that this cereal, or whatever the item was, was as good as, if not better than its comparative.

Whenever you compare the price of like for like, whether that be Kellogg's cereal versus own brand cereal, these were coming out as well as Kellogg's but at a fraction of the price, so that really ramped it up a gear. If I was to pinpoint one particular game changer in the Northern Irish market, that would be it. The difference between the Northern and Southern Irish markets was the absence of ALDI as a competitor. In the South, there is more of an understanding about the German discounter, due to the similarities. It is not exactly the same but there are definitely similarities. ALDI have bent on a few things whereas Lidl have absolutely stuck to what they are about.

Could you go into more detail about what the two hard discounters are doing differently in Ireland?

ALDI set out that this is all our own brands, so there was no going in for Cadbury's chocolate or Kellogg's cereal. Lidl said, we're going to offer you two types of cornflakes, Kellogg's or our own Crownfield brand. It is your choice to pay £2 or £2.50 for the branded one or £1 for the unbranded one. We are not going to offer you 17 different types of cornflakes. We will offer you our own brand and an alternative, and that brand will be as cheap or cheaper than Tesco or ASDA. The own brand will be so eye-wateringly cheap that you are not going to be able to ignore it, even from a trying perspective. Once you try something and realize, you understand and become a fan or hero, and you will not move away.

What percentage of the Lidl assortment, in an average store, was own label versus branded?

It is very difficult to give a percentage on that because it is a changing product group. Some items are discontinued and some are coming in, so every day or every week that changes, but probably around 10% to 15% as a rough guide. When you look at the shelf. you have your top shelf, middle shelf and bottom shelf. Sometimes there are four or five shelves, but the own brand will always be at eye level, first in flow. The brand will be on a shelf but always hidden. It might even be on the floor. I remember Nescafe coffee never ever made it off ankle height, but there's a reason for that, that was always to promote the own brand and give it the best possible chance.

What was ALDI's ratio of branded to unbranded?

Once upon a time, it was zero but now that is changing. It is continually increasing, so yes, that is an example of how Lidl has absolutely stuck to what they believed in and continue to improve. 20 years ago, there was no bakery, but today there is near enough one in every single store. That was a phenomenon in itself from how labor intensive it was going to be to have an in-store bakery. If you imagine an item of non-food at £25.99 or a croissant at 39p, which needs to be handled several times, it is very labor intensive. Managing and developing that to become a profitable string to the bow was difficult, but it was achieved by taking little steps. First by trimming hours, then minutes, then seconds, it becomes the personification of a well-oiled machine operating like clockwork, with as close to zero waste as possible.

In terms of the share of international sourcing versus local sourcing, how did that evolve over the period you were at the business?

There are certain types of fruit and veg that cannot be grown in an Irish climate, so that cannot be sourced locally and no one can claim to change that. When you move into chiller items such as meat, poultry and bread, the majority is Irish-bought. If we take the chiller as an example, long-life cheese and yogurt will be internationally sourced. The French are the best at cheese making so we source from them. When it comes to the bakery, milk, ham and cooked meats, then there always was and still is, a big emphasis on Irish sourcing. All our meat and poultry is sourced from Northern Ireland, so is our milk, and we use a well-known brand to make our bread.

When it comes to an ambient product group such as a long-life tin of beans, Lidl has a phenomenal amount of buying power. You are not going out and saying, hi, we are a small business in Northern Ireland with 38 stores and we want to stock tins of beans, we will take a pallet per week. You are saying, we have 10,000 stores that will be selling 20 to 40 cases per week. Suddenly you are filling containers with one item and the economies of scale you can benefit from are astronomical. It is a very fine balance between consumer demands, sourcing local meat and poultry, and bread from the bakery down the road. When it comes to a standard product which was never sourced locally, whether that be biscuits or coffee, then it is all about being price sensitive and being able to provide fantastic quality at the cheapest price. That is where you need to have big buying power behind you.

EBITDA margins in the early 90s were double digit in the UK, when ALDI first entered the country. They have since come down dramatically as the discounter's market share has risen. There has been a subsequent massive re-basing of pricing in mainland UK over the last 30 years, across the industry. How has that played out in Ireland?

Certain items have an exceptionally high margin, such as non-food items, own brand confectionery, perishables and wine. Where the margin does get hurt is on things like fruit and veg because, ultimately, it does not matter what price ASDA and Tesco are selling bananas at. Lidl has to be cheaper, even if that means running at a loss. There is no decision such as, milk is 99p in Tesco, how much should we sell it for? It has to be less than 99p. There is no big science behind that. When it comes to own brand and non-foods then yes, there is a bit more science to it. The fresh offering cannot be that you can get an own brand loaf of bread at ASDA for 19p and Lidl's own brand white loaf is 25p; that cannot happen, full stop.