Aldi and Lidl's growth doesn't come without risks

The low-cost German supermarkets plan to add hundreds of new sites.

by Adam Gale
Last Updated: 25 Sep 2017

It took Aldi and Lidl two decades of persistent wooing to convince the British public to give them a chance. Over the last four years, the German supermarkets finally outgrew their awkward dweeb phase, blossoming into genuine rivals of the established Big Four of Tesco, Sainsbury’s, Asda and Morrisons.

In 2016, Aldi’s revenues in the UK and Ireland rose 13.5% to £8.7bn, a figure it could only have dreamed of when it first entered the British market in the early 90s. Operating profits meanwhile fell 17% to £211m, though that still leaves it with enviable margins for the groceries sector, of which it has a 6.9% market share. Lidl is behind but if anything catching up.

There are two forces behind this growth, which apply to both companies, despite their differences. The first is sheer popularity: the British public have warmed to Aldi and Lidl, so stores are fuller. The second is a response to the first: Aldi and Lidl have been building new stores at a dizzying pace.

In late 2013, Aldi had 500 stores. Today, it has 726. By 2022, it wants 1000. Market share meanwhile has risen from 4% to 7%, with little sign of stopping.

It makes sense to expand your geographical reach when the business is just waiting for you in new locations, and both Aldi and Lidl have the room to expand. But it comes at a price.

In the coming year, Aldi plans to invest £459m, as it builds 70 new stores. That’s far more than the UK subsidiary could afford simply by reinvesting local profits – it marks a deliberate and expensive push by the parent company to exploit the current favourable conditions in Britain.

Yet Aldi and Lidl wouldn’t be the first retailers to expand too fast, only to fall victim to a sudden change in consumer tastes. Tesco and the others now dearly regret their huge, half-empty out-of-town hypermarkets from fifteen years ago. Who’s to say Aldi won’t one day say the same about their current period of expansion?

The obvious danger is online, an arena in which neither Aldi nor Lidl have meaningfully contended. If the sluggish shift to online groceries shopping accelerates – particularly if driven by Amazon – it’s not hard to see how it might leave Aldi and Lidl with serous egg on their face.

Then there could be a legal ruling or post-Brexit regulation covering very-similar-looking packaging, which could upend Aldi and Lidl’s private label strategy. Or maybe Tesco and the gang will somehow reignite the affections of the British public. It’s fundamentally impossible to know.

We shouldn’t therefore take Aldi and Lidl’s growth for granted. It’s a bold expansion strategy they’ve adopted. Time alone will tell whether it’s celebrated for its bravery or lamented for its hubris. 

Image copyright: Stephen McKay/Geograph (cc-by-sa/2.0)

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