International growth rate does not slow down at Lidl: this year, the discounter will enter two new countries. The retailer is becoming more and more successful in keeping costs under control and is focusing more on e-commerce and sustainability, as we can conclude from an in-depth analysis of recently published financial results.
Double-digit growth
The recent news that Lidl wants to open about fifty new stores each year in France in the next few years does not come out of the blue. The discounter is accelerating its international growth ever faster, which is reflected in Lidl Stiftung’s latest annual accounts. That is the company that manages the discounter’s activities outside Germany, accounting for more than 60 % of the total turnover. Analysts at Barclays took a close look at the recently published figures for the financial year 2018, which ended in February 2019.
Once again, Lidl was able to achieve a decent international growth: turnover rose by 10.3 % to 50.85 billion euro – an increase of 4.8 billion euro in absolute figures. That performance was better than expected, Lidl says itself: all countries performed better, thanks to a combination of store openings and enlargements of existing stores. The company does not communicate results per country, but we do know that revenue growth in Spain rose by as much as 11.5 % to 4 billion euro and that the discounter opened more than forty new stores in Italy. The retailer started operations in Serbia at the end of 2018 and acquired 27 Best Market stores in the United States to strengthen its presence in New York, Long Island and New Jersey. Lidl started its international expansion as early as 1988 and is now active in thirty countries.
International turnover Lidl
Costs under control
For the first time in years, the group was able to improve its EBITDA margin, which rose to 6.5 % – despite a further gross margin erosion to 26.1 %. The group owes this result to the reduction of staff costs (now 9 % of turnover) and other operating costs. This is a respectable performance given the dynamic expansion, says Barclays: it indicates that the retailer is managing to keep costs under strict control and is even increasing productivity. Turnover per full-time employee increased from 352,000 euro to 375,000 euro per year. However, the operating profit margin (EBIT) decreased to 3.84 % due to start-up costs – the chain opened almost 400 new stores – and depreciation.
Turnover per FTE – Lidl International
Lidl International’s capex investments rose slightly to 4.15 billion euros (+ 2.4 %), most of which went to real estate: new stores and distribution centres. In addition, the existing stores are constantly being renovated, for example with the addition of a bakery. Investments account for 8.2 % of turnover, which is high compared to peers.
Nevertheless, there are signs of a stricter policy: for example, the retailer scaled down its online strategy and slowed down its expansion plans in the US. For the coming financial year, Lidl is positive: the company expects a moderate sales growth and a stable net income, in line with the previous year. The retailer will continue to expand and modernise its store network and will enter two new markets: Estonia and Latvia.
Capex-investments compared to turnover
Sustainability and e-commerce
Although Lidl continues to focus on low prices, analysts see that the business model is changing slightly. For example, the company is paying more attention to ecological and social aspects: it sells more organic products and can thus attract shoppers with a higher purchasing power. Moreover, organic produce justifies higher prices and therefore better margins. In many product categories, the retailer goes for fair trade: coffee, tea, cocoa, palm oil… Shops and distribution centres are built according to more sustainable standards, which in turn leads to lower energy costs.
Worldwide online sales increased by 56 %, although it remains a tiny share of sales at around 1 %. In an increasing number of countries, the chain sells both food and non-food online. Last financial year, the retailer opened a webshop in Poland and entered into a partnership in Spain with online supermarket Lola Market, which delivers the entire Lidl range, including fresh products, within one hour. The discounter also set up similar partnerships in Italy and Ireland. Lidl is also rolling out its loyalty app Lidl Plus and its payment application Lidl Pay.
Tactical acquisitions
Lidl sees great potential for growth in the United States: the company learns quickly and has meanwhile ‘Americanised’ its store concept. The retailer is opening smaller stores in busier locations and is looking for tactical acquisitions to accelerate growth. By the end of 2020, the chain aims to have more than 100 stores in nine states. However, it will be another decade before the company has any significant scale there: rival Aldi already has 1,900 stores in the US and wants to have 2,500 by the end of 2025.
Another notable change of course is the increasing vertical integration in the field of packaging and recycling. Following the acquisition of waste management company Tönsmeier, parent company Schwarz Group is already the fifth recycling company in Germany. In Austria, too, the group took over a waste processing company, Sky Plastic. Perhaps a smart move in view of the increasingly strict European rules on packaging waste…
