MOVE OVER, WALMART
German discounters take over the world
The U.S. is the next frontier in a global battle between the world’s biggest retailers. Why do Germany’s legendary discounters seem to have such a big edge on the competition?
Rock-bottom game plan: German grocers Aldi and Lidl take on their global rivals with their successful no-frills formula.
When Janel Weaber went to check out the new Aldi supermarket opening in her hometown of Harrisburg, Pennsylvania, it was a very different shopping experience from the Walmart or Sam’s Club next door. She was surprised by the shopping carts requiring a coin deposit, the slim selection of brands, and the extra she had to pay for grocery bags. Most products — including produce and meat — were still in their cardboard shipping boxes, and the only staff in sight were a few cashiers. But the event planner and mother of two hadn’t gone there for convenience. She’d come for Aldi’s promise of super-low prices.
Move over, Walmart. Europe’s most successful chain of discounters, Aldi, has its sights set on conquering the nearly $700 billion U.S. market with its basic low-overhead, low-prices formula that has triumphed wherever Aldi sets up. The German chain has been relentlessly expanding into Europe and across the world at a time when other global retailers are retrenching and pulling out of foreign markets. In January, Walmart — the world’s largest retailer — announced the closure of 269 stores worldwide. France’s Carrefour, another global retail giant, has abandoned 19 foreign markets in recent years.
What makes Aldi’s worldwide rollout even more remarkable is that a second German discount retailer, Aldi’s archrival Lidl, is following right on Aldi’s heels, blanketing the globe with its own no-frills stores as well. Do the German retailers have a formula that has eluded Walmart and other competitors that have attempted to go global? Or is their leanand-austere business model better suited for the global economy’s new normal, as consumers struggle to make ends meet in the worldwide economic slowdown?
The U.S. is the next big frontier in the global race for discount supremacy. With their arrival, Aldi and Lidl pose the biggest external threat so far to a U.S. retail landscape that largely invented the supermarket generations ago. Aldi has been present in the U.S. since 1979, when it bought the Trader Joe’s chain of grocery stores. Now, it’s Aldi’s own stores that are expanding, at a rate of nearly 200 per year. There are now more than 1,300 stores concentrated along the East Coast, in Florida and in Texas. By July, the company plans to have made its first foray into southern California. Lidl is testing the waters with 50 stores over the next two years, but promises a more rapid expansion to come.
Together, they hope to unleash in the U.S. the kind of fierce price wars that have transformed traditional grocery markets all over Europe and other corners of the world. Wherever the two set up shop, Aldi and Lidl become for the food trade what OPEC has been for the oil market. When Aldi cuts the price of butter, its competitors follow suit. If Aldi charges more for coffee, its competitors gratefully mark up their prices.
If Germany’s retail market has the reputation for being the toughest in the world for its razor-thin margins, that’s largely the work of Aldi, Lidl and other German discounters. Their market share keeps growing as they apply their no-frills, low-margin formula to formerly high-end products from organic produce to French champagne. It’s a lesson competitors ignore at their peril. It was Walmart that tried and spectacularly failed to expand into the German market. In 2006, a bloodied Walmart closed the last of its German stores. Now, Aldi and Lidl are taking their victorious fight abroad.
Even though they are global now, the two companies have home-grown, local roots. Both are privately held by German families, and publicity-shy about their financial results. Their rivalry is most often measured in relentlessly rising market share and the rapid surge in store openings wherever they set down stakes.
Aldi’s deeper roots reach down to just after the end of World War II, when the Albrecht brothers Karl and Theo returned from fighting in Russia and North Africa to run their mother’s small grocery store in Essen. Amid the postwar hardships and food-shortages in Germany’s bombed-out cities, Karl and Theo added more branches of the Albrecht family store, and in 1961 founded the modern company, whose initials stand for Albrecht Diskont. Their rapid spread across Germany
Aldi has its sights set on the $700 billion U.S. market with a no-frills recipe that has paid off wherever the discounter sets up.
was based on an uncompromising mantra of low-overhead and ruthless price competition.
The brothers’ vision was based on the assumption that lower-income consumers will always want to stretch their paychecks, while the middle class will turn to discounters in economic hard times or just for convenience. In 1962, the brothers split the family empire — as well as the German and global markets — into two divisions that work in tandem and do not compete. In the U.S., Trader Joe’s is owned by one division and the Aldi-branded stores by another. Lidl copied the Aldi discount model in the 1970s and has almost equaled Aldi’s €63 billion in annual revenue.
Britain is Exhibit A when it comes to seeing how the arrival of German discounters can upend a major consumer market. Through rapid expansion and aggressive pricing that bigger stores can rarely match, Aldi and Lidl have doubled their U.K. market share to 10 percent in the past three years. The German onslaught has left established British chains — long used to higher margins — badly scarred. Tesco last year reported its deepest annual loss in the company’s 96-year-history as it tried unsuccessfully to defend its market share against the German incursion. Asda, owned by Walmart, is considering job cuts and lower prices to match the German discounters. Meanwhile, Lidl is adding new stores in the London’s posh Westminster and Kensington neighborhoods, a further sign that discount groceries are increasingly attracting wealthier customers.
But much of their success still comes from the traditional formula: stack ‘em high and sell ‘em low. That formula is still widely in evidence today from Harrisburg to Berlin to Melbourne. There are no service counters, everything is packaged or laid out in cardboard boxes, and staff are reduced to a bare minimum — a few cashiers plus a forklift operator to bring in new palettes.
Another cornerstone of the Albrecht brothers’ model was simplifying selection by, well, not having much of a selection. In Germany, a standard mid-market supermarket like Rewe or Edeka stocks 20,000 products, compared to Lidl’s 2,500 at most. Even today, more than 90 percent of the products on Aldi’s shelves are labeled with its own store brands. Often, the packaging is a knock-off of the market leader. Aldi’s Frosted Flakes breakfast cereal, for example, closely mimics— from the color scheme to the design of the logo — the familiar cereal sold for generations by Kellogg’s. Instead of Kellogg’s tiger, you only get Aldi’s bear. But you also pay about one dollar less.
Aldi’s strategy goes beyond mere copycat behavior. Supermarket strategists say that by mimicking the major brands in such exacting detail, the whole idea of a brand is undermined. According to the Hartman Group, a retail consultancy, “Aldi has perfected [this strategy] like no other.” In a recent shift, Aldi and Lidl have added a smattering of top brands like Coca-Cola.
The discounters’ market power is immense, even with big nationwide brands; in their German home market, a brand-name product’s average price plummets by 17 percent across the country once the discounters start stocking it on their shelves. When Lidl introduced the popular energy drink Red Bull at €1.49 per 0.33-liter can, it set off competition that brought the price down to €0.95 soon thereafter.
Another major change has been the addition of organic food to the product range, though under Aldi’s own brands.
The discounters have also scored surprisingly high on quality. In Germany, their deals on, say, French champagne or extra-virgin olive oil, are legendary among upmarket urbanites. All these steps are part of a move to attract more upmarket customers.“Even if people are poor, they want to shop in a store where they don’t feel poor,” said Boris Planer, a retail analyst at market researcher Planet Retail. “That was likely one of the big lessons of the financial crisis.”
With this strategy, Aldi and Lidl are blurring the line between discount and conventional grocery chains. This has been especially important as they expand abroad. In Germany, a no-frills discount culture is long established. But overseas shoppers are choosier. In Australia, where Aldi is rapidly expanding market share, it has launched what it calls “Project Fresh.” Its stores are getting an upgrade. The produce section — usually a bare minimum at other stores — looks more like a normal supermarket’s. Gourmet products have been added to the line.
Lidl has also gone upmarket. At two outlets in Verona, Italy, Lidl has built stores with high ceilings, wide aisles, a huge glass facade and designer walls in warm brown tones. Wine and veggies are displayed in wooden crates, not trashy cardboard.
The store smells of fresh bread. There are even such novelties as customer toilets and diaperchanging facilities, something unheard of even at better supermarkets in Germany. Lidl plans a similar layout at its U.S. stores.
Aldi already created a stir in the U.S. retail industry as it rolls out its current $3 billion expansion. At the start of this year, Aldi drew industry-wide attention by removing unhealthy candy and snack offerings from checkout lanes, breaking from a common supermarket practice to encourage impulse buying. Aldi’s American stores have also introduced a broader selection, including more brandname products as well as organic meat and produce, but still undercutting the competition by up to 50 percent. “Walmart, the everyday-low price heavyweight, is getting beat at its own game,” writes trade publication Supermarket News.
The German discount kings also have been experimenting with giving their stores an aesthetic facelift. Aldi’s new concept store southeast of Munich is part store and part retail laboratory. Gone are drab store fronts and gloomy warehouse-style interiors. Shoppers are greeted with towering glass windows, LED lighting, espresso machines electronic displays and — a real first — customer rest rooms. Lidl is adding self-checkout, fine wines, wider aisles, in-store bakeries and even fresh fish as part of its “store of the future” project.
The German discounters will still have to show they can go the distance in the U.S. supermarket landscape. When taking aim at U.S. icons like Kroger and Safeway, Aldi and Lidl are seen sticking to the low-cost, lowprice formula that has helped them slay giants before. Small regional retailers will likely be the first to feel the pinch. “Weaker retailers there will be the first to lose market share,” says Mike Watkins, a retail specialist at Nielsen. “They will steal sales and they are in this for the long haul.”
But the U.S. has bloodied foreign invaders before. Britain’s Tesco chain, the world’s No. 3 after Walmart and Carrefour of France, in 2007 began its assault on the U.S. markets with 200 of its Fresh & Easy store chain that ended in failure and a $1.6 billion loss six years later. Analysts at the time blamed Tesco’s failure to understand how Americans shop for food. Tesco also was unlucky in its timing, launching just ahead of America’s subprime mortgage crisis and an economic recession. By contrast, the U.S. economic downturn worked in Aldi’s favor as households looked to pinch pennies.
Lidl might be a latecomer in the U.S., but its global expansion has been just as relentless. The company is spending an amount in the three-digit million euros to modernize and enlarge its stores in France. Lidl also plans to spend €1 billion by 2020 to expand in Italy following Aldi’s own plans to expand south of the Alps. Each has about 10,000 stores worldwide, and both consistently rank in the world’s top 10 largest supermarkets by sales. Lidl CEO Seidel said that his own company’s entry into the U.S. market will be focused and brisk. Nor is he bothered by Aldi’s substantial head start. “The United States is a big country,” says Seidel. “We won’t get in each other’s way.”
Yet if the experience in other countries is any guide, the two German discount giants could soon change America’s supermarket landscape forever.
Favored visitor: Volkswagen CEO Martin Winterkorn often called on Angela Merkel before resigning in the wake of the scandal.
The German auto industry has always had close ties to government. But since the Volkswagen scandal, the coddling has come under scrutiny, as has the cheerleading role played by the chancellor.
It was a high-level meeting on April 14, 2010, at the Four Seasons Hotel in Beverly Hills, California. Chancellor Angela Merkel sat with a delegation of seven people on one side of the table, facing California governor Arnold Schwarzenegger and a small entourage on the other. The topics for this working breakfast were climate change and renewable energy sources.
The leaders smiled for the photographers, and when the latter left, the conference room’s double doors closed. Then Merkel stopped smiling. She turned to a woman sitting at the table’s far end and snapped at her: “Your nitrogen oxide standards in California are too strict,” one of the participants recalls Merkel saying.“They are hurting our German diesel carmakers.”
The woman addressed — Mary Nichols, the chairwoman of the California Air Resources Board (CARB) — was surprised that Merkel knew her. Europe’s most powerful woman had informed herself about the emission problems German carmakers were having in California. She was not only bluntly standing up for her country’s carmakers, but at the same time questioning California’s rigorous environmental laws.
Nichols rose to the defense. “Our environmental laws are essential for air pollution control” was her reply to Merkel, she later told reporters. “I think your car producers are most certainly in a position to comply with them.” Later, she said in an interview: “I have never experienced a similar intervention of a politician against our environmental laws, neither before nor since.”
Five and a half years after Merkel’s undiplomatic performance, everybody knows at least one German carmaker that hasn’t been able to comply with environmental laws in the United States: Volkswagen. The company faked its nitrogen oxide emissions testing in order to meet strict U.S. guidelines and is now sinking ever deeper into a morass of scandal. Merkel’s intervention during her state visit to California was to no avail.
When CARB and the U. S. Environmental Protection Agency (EPA) went public with the VW scandal in September, most were taken by surprise - including the public, company shareholders and probably most VW
employees. Only a few in the car industry knew what problems U.S. emission standards had caused the Volkwagen Group, which includes the VW brand, Audi, Porsche, SEAT and Skoda.
This casts a dubious light on Merkel’s attack at that breakfast in 2010. How much did she know back then, and from whom? What drove Merkel, a former German environment minister who helped draw up the original Kyoto Accords to battle climate change, to take such an abrupt stand against environmental laws?
The chancellor’s office has declined to clear up the issue. When queried, a government spokesman said only that“we don’t give any information about the federal chancellor’s non-public conversations.”
That is all the more critical since Merkel’s attack more than five years ago fits into a chain of interventions on behalf of domestic car producers to the detriment of both the environment and the health of citizens. Since taking office in 2005, the chancellor has continually torpedoed stricter environmental rules — most likely in the belief she is serving carmakers and the common good. Instead, she could be urging Germany’s carmakers to use high-tech to build the world’s most environmentally friendly cars.
Merkel and her cabinet made sure that stricter CO2 limits would be delayed and that the car industry could get around standards with numerous tricks. Eventually, these inadequate controls created the foundation for fraud at Volkswagen. Gerhard Schröder, the former German chancellor, was nicknamed the “auto chancellor” because of his support for the industry. Today, he has been replaced by Merkel, the Volkswagen chancellor.
Between 2009 and 2013, few industrial leaders visited the Berlin chancellery as often as former Volkswagen CEO Martin Winterkorn. Also visiting Merkel almost 10 times were the directors of VW subsidiaries Audi and Porsche, as well as members of the Piëch family, who together with the Porsche family control 50.7 percent of VW shares. Only Daimler CEO Dieter Zetsche paid more visits to the chancellor, 15 in total during the same period.
But whatever Merkel wanted to preserve with her friendly overtures to the carmakers — jobs, profits, tax revenues — is now threatened by the VW scandal. Her years of dedication to easing the laws has proven to be a disservice not only to the environment and health, but also to the German car industry.
In July 2007, the German newsmagazine Focus reported on a new draft bill by Wolfgang Tiefensee, a member of the Social
Democratic Party of Germany and transportation minister in Merkel’s first government, that called for lowering the cost of mandatory auto emissions testing. A precondition was that cars must have a so-called on-board diagnosis, or OBD, system.
The OBD electronic device was designed to check the proper functioning of the exhaust system. Because pollutant emissions were complicated to measure in the exhaust pipe, the idea was to have faults read out by computers in cars equipped with an OBD. If no fault was recorded there, the car inspector assumed the emission control was functioning and the car was certified for another two years on the road.
Ostensibly, Tiefensee wanted to reduce the cost of testing emissions and save car owners money for the mandatory test. But in reality, switching from actual measuring to a selfcheck by the OBD opened the door for fraud in testing pollutants.
A visit to a car tuner in a small German town shows how it’s done. The automotive technician explains how an engine control works. He doesn’t want his name made public, because he is operating in a legal gray area with the performance-enhancing changes he makes to his customers’ cars. He connects a control system, a little black box, to his
“I have never experienced a similar intervention of a politician against our environmental laws, neither before nor since.” Mary Nichols, Chairperson, California Air Resources Board
Stack ‘em high and sell ‘em low: Aldi and Lidl are crowding out smaller grocers and taking on the giants.
Florida shoppers line up at the opening of a new Aldi store in Royal Palm Beach. The German chain is expanding in Florida, Texas and California.
The OPEC of groceries: Whenever Aldi changes its prices, competitors usually follow suit.
Keeping pace with local tastes, Aldi has repeatedly adapted to shopping habits wherever it goes.
Organic foods at generic prices are part of Lidl and Aldi’s strategy to meet shifting consumer tastes. Terence Roth is a business journalist in London. Handelsblatt’s Annkathrin Frind, Henryk Hielscher, Florian Kolf, Kirsten Ludowig and Tim Rahmann contributed to this article.
Angela Merkel met regularly with Volkswagen‘s ex-CEO Winterkorn and major shareholder Ferdinand Piëch (right).
Don‘t tread on me: EPA chief Gina McCarthy is tightening the screws on Volkswagen despite Berlin‘s lobbying.