A Look at Lidl - The "Other" Discount Store

Despite running more stores than fellow discounter Aldi, (nearly 600 versus Aldi’s 400)  Lidl remain smaller in market share, and have not managed to achieve Aldi rates of growth. In the last quarter Aldi’s market share was 3.6% and its sales grew 30% year on year. Lidl’s share was 3%, and it grew by 9%.

Why might there be this disparity in performance? I visited the Lidl store in Penicuik in the Scottish borders to find clues.

Both Aldi and Lidl sell products at prices far lower than available in mainstream supermarkets.( The dark chocolate pictured sells at 79p versus the branded equvalent at £1.85p).   Lidl follows many of the practices embraced by Aldi, designed to make the cost of operating the stores very low, and passing the benefits of the low cost base on to shoppers. Both sell a small range of products under brand names that few have heard of, many of which are imported. The small range means smaller stores which are cheaper to run. Products are displayed in their outer cases as opposed to being unpacked and placed on the shelf, saving staff costs. Costs are also saved by having fewer checkouts, and employing super fast till checkout operators. Both stores encourage those with alot of shopping to pack away from the till, again speeding up the process.

Lidl differs from Aldi in that it offers more big name brands and it is difficult to judge whether this deviation from the standard discount model results in increased sales by attracting shoppers who like to buy known brands or whether the added cost means that prices are possibly not quite as low as Aldi.

Lidl’s fresh food offer seems more attractive than Aldi’s. Many breads are baked on the premises, and attractively displayed in wicker baskets. Most of the meat on offer was produced in Scotland, well displayed in stand alone  chiller cabinets, and accompanied by an explanation of Lidl’s animal welfare standards. Some ham was imported but British product was available. Certainly the Scottish produced pork chops purchased at the Penicuik store were excellent.

The fruit and vegetables looked fresh enough, but do not display a sell by date (another cost saving action employed by both discounters as once a sell by date is reached product has to be sold at a heavy discount.) It was therefore disappointing that my Jersey Royal potatoes, albeit  costing 18p per kilo less that Sainsburys, had turned green by the day after purchase.

Overall though, the combination of availability of major brands and generally good quality fresh food made the  shopping experience in Lidl Penicuik  more like that in a major supermarket than does Aldi  and the company embraces more consumer trends like attention to animal welfare and supporting local produce.

So why would Lidl be growing more slowly than Aldi?

One answer could be that Aldi are opening more stores than Lidl.

It could be that prices are not as sharp, or product quality in general not as good. Aldi seems to do particularly well when it comes to food awards.

My guess is that Lidl’s marketing is not as good as Aldi’s.  Aldi generates more publicity in the papers than Lidl - it is always Aldi that journalists write about when doing a feature on discount stores.  And Aldi has promoted and advertised its products more heavily.

This could be why Lidl have embarked on two advertising campaigns, one talking about the quality of its fresh food, the other highlighting packaged products that consumers rate as highly as major brands, but which cost considerably less.

If Lidl wants to grow faster it needs to make sure its activities are squeaky clean.

Lidl, like Aldi, was caught up in the horsemeat scandal. There has been a recent allegation that Lidl only pays UK tax of around £12,000 on a business with a £3 billion turnover. Lidl of course claims that it complies completely with UK tax laws. Whilst unlikely to have impacted on sales growth to date, such an allegation will do little to enhance the company’s reputation. 

Which is unfortunate as it seems to have much to offer its customers, particularly in difficult economic times.

ALDI - Winning Awards but Misleading Consumers

Discount supermarket Aldi is in the news again. It scooped 16 gold awards at the supermarket industry magazine “The Grocer” s taste tests of various own label brands. And it has been criticised for misleading consumers by putting a Scottish flag on packs of beef and turkey from South America and the EU.

The awards story is impressive. Aldi came first, Tesco came in second with 12 golds, Asda scored 11, Marks and Spencer 8, Waitrose 3, and fellow discount supermarket Lidl achieved 4 golds. The awards come on top of Aldi’s Oliver Cromwell  gin winning silver in the International Spirits Challenge, beating  Bombay Sapphire which sells at twice the price, and collecting a silver award for champagne.

The Scottish flag story is shameful, and only came to light through the vigilance of NFU Scotland.  Aldi’s limp response was to say that no laws were broken but they recognised that featuring a Scottish flag could make shoppers think the products were wholly Scottish, and they have promised to re-label. At best their action was naive, at worst deliberately misleading.

Low prices combined with a growing reputation for quality mean that Aldi is showing the fastest growth of all supermarkets in the UK, up by 31% in the last twelve weeks according to Kantar Worldpanel, the company which monitors grocery sales. Fellow discounter Lidl grew by 9%. The only other grocer showing significant growth is Waitrose, which operates at the premium end of food shopping. The big four are stumbling along with growth in the low single digits.

The combined share of Aldi and Lidl now stands at a record 7.9%, and industry watchers are asking how far it can go. Conventional wisdom says that the strength of UK competition means that discounters will never touch the heady heights achieved in home country Germany where they enjoy a combined share of just under 30%.

But both Aldi and Lidl are raising their game. Aldi had just launched a trial convenience store in Kilburn, tapping int0 the growing tendency of shoppers to visit local stores to save petrol costs and  ensure they buy only what they need and not be tempted by the plethora of stuff available at bigger shops.

Lidl has just announced that it is increasing the shelf space it devotes to fresh meat and poultry by 50%.

Across the water in Ireland Aldi and Lidl together command a share of 13.6% of the grocery market, up from 11.6% last year. Their growth is coming from new customers as well as regular shoppers, which has not to date been the case in the UK.

There seems to be room for further discounter growth, but to achieve it requires continued rock bottom prices, whilst improving quality.

It also requires consumer trust, especially when it comes to buying fresh food. And here is where the discounters have stumbled. The Scottish flag issue reflects badly on Aldi, and both Aldi and Lidl were caught up in the horse meat scandal. Aldi and Lidl will be painfully aware of the need to take a firm grip on supply chain issues, and stop any erosion of consumer trust in its tracks.

More Evidence That Food Retailers Need an Online Operation

Hardly a day passes without reference to the rise of on line shopping and how it will affect the retail landscape.

Last week we heard that Morrisons supermarket are paying £170m to Ocado for their depot in Warwickshire, a further £30m to license their technology, plus 1% of any Morrisons online sales and 25% of any cash profits. They also threw in £46m to expand the Warwick depot, and a contribution to Research and Development costs.

Whether one thinks that Morrisons are out of their minds to get involved with Ocado, whose business model is far from a successful example of how to compete in online grocery retailing, or whether your view might be that this is an excellent  move for all concerned, what is unarguable is that Morrisons felt so pressurised about the adverse impact of not being on line that they were prepared to pay handsomely for a way in.

Today the Centre for Retailing Research heaped on the pressure by publishing a report claiming that the percentage of sales made on line will rise from 12.7% in 2012 to 21.5% sometime between 2018 and the end of the decade.

They make the chilling prediction that the rise will result in a loss of some 316,000 jobs,  that total store numbers will fall by 22% from 281,930 today to 220,000, and that a further 164 major or medium sized companies will go into administration.

As ever it is the consumer who is driving the change.  Shoppers’ way of buying has changed out of all recognition in just a few years. Nowadays, having read up all the reviews about a potential product on line, they can choose to visit a store and buy then and there, (having just checked on their smartphone that the prices on offer cannot be beaten by a competing store).Or they can use the store to see what a product looks and feels like and then go home and buy online. Even then they have a choice – to have the product delivered to their home or, rather than wait in, to collect at a convenient specified outlet.

As to food, the Centre concedes that purchasing food online has not exploded on the same way as other sectors, but predicts that online food sales will rise from 3.7% today to 9.5% by 2018, largely driven by the supermarkets investing heavily in this way of shopping.

There are substantial obstacles to overcome. There are reasons why shoppers have not enthusiastically embraced the internet to buy food.

The IGD tells us that consumers are still worried about the quality of fresh food bought on line, and that this remains one of the biggest barriers. 2 in 5 shoppers want longer shelf lives on products but this alone will not solve it. The taste and look of fresh products bought online continues to be highly variable.

Reliable delivery times are also critical, as is confidence that what is ordered will be what arrives on the doorstep. 90% of online shoppers report that a reliable delivery service is a major factor in deciding which supermarket to buy from.

And of course, prices and promotions must at least match what is happening in the store itself.

Buying groceries on line is not yet the ingrained behaviour that is evident in other categories. Most people shop online every now and then. Others have a more regular approach. But very few buy weekly, and the number doing so is dropping.

There are many problems to solve, not least that online as a way of retailing groceries is much less profitable than via the store.

It would seem though that all involved in selling food need to factor in the online issues when they review their business strategies.

Understanding the Consumer - How Pork Producer Cranswick is Responding to Food Trends

Cranswick, mostly known for its pork products, was once a farmer owned cooperative and is now a public limited company with a turnover of £875m. It has just announced full year pre tax profits up 8%, and sales up 5% (on a like for like basis).

Any company which operates with a heavy dependence on commodities is liable to have a roller coaster ride, and none more so than in the pig sector where prices fluctuate wildly and cheaper imports from countries like Denmark pose a constant threat. Indeed at least 65% of pork products eaten in the UK come from imported pig meat compared with around 36% for lamb and 33% for beef. (Source: EBLEX, BPEX)

Additional risk for a company like Cranswick comes from the structure of the UK grocery trade. Like many food suppliers it is reliant on a few major customers, and a change in trading relationships can mean a significant drop in sales and profits.

Cranswick has coped with this volatility through investment to help keep costs down, but also through innovation.  The company is committed to operating in the quality end of the market, and has been able to develop premium foods which command premium prices. It was one of the pioneers of the gourmet sausages sector and it claims to be the first company to sell air dried hams from UK bred pigs.

The acquisition in April of East Anglian Pigs illustrates the company’s consumer awareness. Cranswick now has end to end control of it’s supply chain – a move that is becoming more relevant to consumers who are seeking British produce in the wake of the horsemeat scandal, and to retailers who are quick to respond to consumer demands. East Anglian Pigs operates to RSPCA higher welfare standards, and has a major outdoor reared pork enterprise – both fast growing sectors in tune with consumer trends.

The drive to be consumer focussed is admirable, but as the business expands into areas outside of traditional expertise, and particularly in light of the EAP acquisition, Cranswick will need to be vigilant in ensuring that it does indeed have full control of all that goes on in its supply chain, whether this be product safety, quality of taste and ingredients, and animal welfare standards.

Advertising Provides Clues to Consumer Trends

What companies say in their advertisements can be a good guide to what matters to consumers.

The holy grail of a good advert is to be eye-catching, relevant, and persuasive. It has to stand out amidst the hundreds of advertising messages with which we are bombarded every day, it needs to address an issue that matters to consumers, and it has to affect behaviour, either by reinforcing the rightness of a decision made,  or encouraging a change in what or where a product is bought.

It is therefore interesting and instructive to see what the big advertisers are saying. That is not to suggest that they always get it right – frequently they do not, but, most advertisements are the result of thousands of hours spent listening to consumers and crafting messages which will appeal.

Many supermarkets have jumped on the British bandwagon in the wake of the horsemeat scandal. The IGD (Institute of Grocery Distribution)  tells us that trust in food manufacturers and retailers was dented by the issue, and their most recent research shows increased consumer interest in buying British with the proportion of people saying that “it is not important to me to buy British” dropping from 45% in 2007 to 22% in 2013.

Morrisons, as indicated by the advert above, have clearly decided, in the wake of the scandal that their unique position of buying direct from the farm and owning their meat processors, and their commitment to buying British beef, lamb and pork gives them a one up on competitors. They are undoubtedly right. So their message is relevant. Where it starts to fall down is that the way they say it is complicated. Consumers might ask themselves what exactly is meant by. Morrisons headline is “All the fresh meat we prepare in store is 100% British, 100% of the time”, but consumers might ask themselves questions like how much and what meat exactly  is not prepared in store, and they will be none the wiser if they take the time to read all of the words in the advert.

Morrisons also advertise the quality of their fresh food, as indeed they have done for some years.

The Coop takes a simpler approach to buying British with the headline – “All of our fresh beef is reared on British farms”.

And the Coop combines buying British with animal welfare in an advert saying that “All our fresh chicken is reared by British farmers to higher welfare standards”. Again, though, consumers might ask themselves what exactly is meant by higher welfare.

Which is not to say that price is unimportant. ASDA take the no holds barred approach – “We are 10% cheaper or your money back.”

Sainsbury by contrast go for the softer sell. Their message combines quality with a price, hence the beautifully photographed pictures with a teeny tiny reference to the price, so small it could easily be missed. It is difficult to criticise Sainsbury, their track record of growing sales and profits is sound. But perhaps here they are overly subtle.

What can we conclude?

Price will remain important to consumers but so, increasingly, will quality and provenance.

McDonalds Move to Freedom Food Pork - Understanding What matters to Consumers

A look at food sourcing policies of major companies provides useful clues about what matters to consumers.

Such companies spend tens if not hundreds of thousands of pounds tracking consumer trends and are keen to adopt those which they think will make a difference to the way they are supported by the public. It is therefore interesting to see that McDonalds have committed to serving only RSPCA Freedom Food pork. A call to the McDonalds helpline confirmed that by pork they mean their bacon and sausages.

Whether or not you happen to be a supporter of the RSPCA, particularly their recent overtly political moves on hunting prosecutions and stance on badger culling, there is no doubt that the Freedom Foods logo and standards appeal to the public, and are becoming more widely used. Sainsbury for example is a huge supporter of Freedom Foods chicken and pork based products, and charges a premium for them.

Sainsbury though is positioned as one of the more upscale supermarkets, selling pricey food. McDonalds aims at the value end of the market, yet they have sufficient belief in the appeal of higher welfare to incorporate such foods on their menu, despite the added cost this presents along the chain.

We do not know who bears the cost, and whether consumer prices have nudged up, or McDonalds take a hit on margin, or indeed the producers and processors are squeezed.

What we do know is that this commitment to providing more than basically produced food is a thread that has been running through McDonalds for some time. They still use only organic milk and eggs. They came out very well in the recent horsemeat scandal because they only use beef from UK or Irish farms. 

Their move to Freedom Food pork will mean that they see animal welfare as of sufficient interest to their customer base to make the change worthwhile in business terms.

The McDonalds move does not necessarily signal that consumer demand will lead to an upgrade of pig welfare standards across the whole food industry. But it does suggest that concern for animal welfare is no longer a niche issue.

Note to McDonalds's marketing department - the advert would have been much stronger if it referred to bacon and sausages, not pork which tends to mean chops or a roast.

Organic Sales Still Dropping - What Will Restore Growth?

The Soil Association’s recently published Organic Market Report shows that sales of organic products fell by 1.5% in 2012.

There are pockets of strength, particularly where brands are well known and promoted. Combined sales of specialist retailers Ocado, Abel and Cole and Riverford Organics grew their sales by 10%.  Rachel’s Dairy, noted for its yoghurts, grew by 15% and Yeo Valley who sell a range of dairy products grew by 6.6%.

 Under 35’s spent more on organic products than ever before. Sales to catering outlets are up.

But some core markets still struggle. Supermarket sales of pork, eggs, and poultry dropped by 30%, horticulture products (fruit and veg) dropped by 8%, milk sales are down 4%, lamb down 2%, and beef down 1%.

So what of the future. The Soil Association admits that difficult economic circumstances have hindered organic sales and we know that money will be short for a few years yet.  And herein lies the problem. Whilst many consumers like the idea of buying organic, they struggle to convince themselves that the organic premium is worth paying on a regular basis.

This nettle has to be grasped if supporters of organic produce want to see sustained growth.

It is not enough for the Soil Association to chastise government for not doing enough and lambast the big multiple retailers for turning their back on organics.

The government cannot address the fundamental issue of consumer demand. Scotland’s Organic Action Plan, cited by the Soil Association as a template that the English government should follow, is helpful in that it provides support for farmers to convert to organic and makes funds available for businesses to promote their products. But the Scottish plan acknowledges that at the end of the day it is consumers who are key to success.

Multiple retailers are close to consumers but in a low growth, highly competitive environment they will not offer up precious shelf space to products whose sales don’t justify it.

There are just two ways to overcome the consumer issue. Either, communicate a compelling reason to justify the organic premium –or - reduce the premium.

The first route is difficult. The organic story is a complicated one to tell, and getting across the idea that organic is an integrated way of producing food is difficult when funds are limited and consumers are used to picking up messages in sound bites or in 140 characters on Twitter.

So is there any mileage in the second route, namely reduce the price premium. This would be ideal because many consumers like the idea of buying organic. Indeed some 80% do so, but too infrequently to affect growth.

Reducing the price premium requires increasing yields.  And to increase yields requires solid science, and science needs funding. At the moment there appears to be just one project tackling production issues – a Duchy Originals sponsored initiative led by the Soil Association with the help of the Organic Research Centre at Elm Farm. Whilst welcome, its progress will be slow. Starting May 2012, it is not due to complete its initial findings until May 2015. Only at this point will it decide on research priorities.

Here is the question. Would the considerable funds currently available across British governments, the EU, the Soil Association itself, the industry groups Organic UK and the Organic trade Board be better spent on broadening and speeding up scientific work.

This is not to overlook the task of communicating with consumers.This is probably most effective when done by strong, trusted brands. The success of Rachel's, Yeo Valley, and Riverford shows that when done well the organic story translates into solid sales growth.