The international activities of discounter Lidl are growing strongly, and according to a review of the figures, they are quite profitable. Yet the challenges are not to be underestimated: the retailer risks missing the e-commerce train.
Respectable growth
The turnover discounter Lidl realises outside its German home market is already close to 57 billion euros. These results come from the latest annual accounts of Lidl Stiftung & Co KG, the company coordinating the discounter’s international activities. Those markets account for more than 60 per cent of the total turnover. Analysts at Barclays looked at the figures for the 2019 financial year, which ended in February 2020. Just before the coronavirus outbreak, that is.
International sales grew by a more than respectable 11.8 per cent. That’s slightly more than planned, according to the report. The retailer did not enter a new market in 2019: the previously planned entry into Latvia got postponed. In its existing markets, however, Lidl continues to open new stores at a rapid pace. It is also revamping and enlarging older stores. However, this comes at a cost: the investments (Capex) amounted to 4.5 billion euros or 7.9 per cent of turnover, which is high compared to other retailers (at Colruyt it is 4 per cent, at Carrefour about 2.3 per cent). The lion’s share of that sum went into real estate.
A changing consumption behaviour
As a result, gross margin decreased for the fourth year in a row, after a record year in 2015. However, 25.85 per cent is still an excellent performance. The group manages to keep wage costs under control and increase productivity. The EBITDA margin also fell slightly, to 6.36 per cent, but the EBIT margin did increase to almost 4 per cent thanks to lower depreciation costs. Again, compared to industry peers, these are excellent figures. Net profit rose by 24 per cent to almost 1.6 billion euros, which was also beyond expectations.
Despite the promising report, Lidl is very cautious in its outlook. Not only does the uncertainty of the pandemic play a role, but the retailer also points to changing consumer behaviour, favouring sustainability and digitization increasingly. The growth of e-commerce, in particular, poses a challenge for discounters, given their business model focuses on a streamlined cost structure and low prices.
Mixed prospects
In six countries, Lidl shoppers can now order their groceries online. The group is also testing click & collect in Poland and is cooperating with third parties in Spain (Lola Market) and Ireland (Buymie). Apart from that, the discounter is also rolling out its Lidl Plus app and the Lidl Pay payment application in an increasing number of countries.
But the roll-out does not happen very fast. The outlook for Lidl is therefore somewhat ambiguous: on the one hand, the discount concept can probably benefit from the deteriorating economic situation in most countries; on the other hand, the chain risks missing the online train. In Germany, for example, rival stores Edeka and Rewe grew by as much as 26 per cent while Lidl ‘only’ gained 20 per cent – and, thus, lost ground.
Disagreements with parent group Schwarz regarding the digital strategy may be at the root of the retailer’s many changes at the top: since 2017, three CEOs have already replaced each other. Barclays notes that Schwarz Group absorbed Lidl’s digital division at the beginning of 2020, which may mean the discounter no longer decides autonomously on its digital initiatives. Will Schwarz push the digital accelerator further?
Price war
Lidl is also doing very well in its home market: sales grew by 5.7 per cent last year, which is quite impressive given the chain’s strong market position. But discounters did lose market share in Germany during the coronavirus crisis, so they sought refuge in a tough price war, after the German VAT rate adjustments. This may affect margins. In Britain, the retailer recently reported sales growth to 6.9 billion pounds (7.8 billion euros) but also a pre-tax loss of 25 million pounds (28 million euros) due to high investments and recruitment. The chain wants to have as many as 1,000 British stores by 2023.
What lies in store for the near future? In any case, the retailer confirms they will enter Estonia and Latvia this year. A 51,000 square metre distribution centre in Riga is ready to be used. The results of Lidl Stiftung & Co KG in the 2020-2021 financial year are awaited eagerly. Just one more year of patience…