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Hard Discounters vs Mainstream Grocers

Former CEO, Lidl UK

IP Interview
Published on May 14, 2020

Why is this interview interesting?

  • Why its crucial for mainstream retailers to fight off discounters before they reach critical mass
  • Fighting off hard discounters means in large part competing aggressively on price
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.

Interview Transcript

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?

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.

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.

This is a machine and if this machine, the discounters, start rolling, it is a very, very expensive way to fight 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.

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.

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?

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.

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.

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