Aldi and Lidl Essays

Aldi and Lidl Essays Aldi and Lidl Paper Aldi and Lidl Paper In our globalized world it Is becoming more and more challenging for companies to create their own unique brand. Competition is high and companies have to decide which strategy is the best for their business evolvement. This report is focused on two different companies Lidl and Aldi operating in the food retailing industry. Lidl and Aldi mostly was entering markets through Greenfield investments. These two companies chose greenfield investment as they wanted to have a full control over their business, promote their own brand and manage their business on their own. Advantages and disadvantages of entering market through greenfield investment is included in this report. Aldi’s main objective, when entering other market like UK and Switzerland, is ‘recognising customers needs and meeting the requirements of the demand in that country’. Lidl and Aldi have completely different strategies in global expansion. Aldi was entering big markets like the USA and Australia and this was good strategy for company’s expansion as target markets of such countries are much bigger than European target market. But it takes much more effort to control such big markets. As for Lidl’s future I would recommend to expand in other European countries before entering big markets like Russia, although it would be a great opportunity for Lidl to enter Russian market. About Aldi and Lidl Both companies Aldi and Lidl were founded in Germany. Aldi was founded in 1946 by two Albrecht brothers and Lidl was founded eleven years after Aldi was founded by Dieter Schwarz. These two companies were opening and still open, grocery discount stores which means selling products at the lowest price possible reducing its costs on companies promotion, rental fees or purchasing prices of properties as well as having a basic outlet format stores. German company Aldi started to go global after Second World War, time characterised by common market in European countries, which means it was time when trade barriers were reduced and goods and production factors ( labour, capital, technology) could freely move from country to country. As this company was already big enough to invest in other country it firstly invested in Austria, country which borders on Germany. Austria was mostly influenced by Germany culture, so it was a good idea for the company’s first experience in investing abroad as the culture differences were not so big. The same as Aldi, Lidl company focuses on discount markets, larger supermarkets and cash and carry wholesale markets. At first, Lidl copied Aldi as much as possible, although in time Lidl took completely different strategy and added more articles to their assortment and new innovative approaches. 1. a Market entry strategy of Aldi and Lidl FDI (foreign direct investment)is an equity mode for companies which want to export their products or services. Aldi and Lidl decided to invest abroad to expand their business and some of the benefits of doing so are : cheaper labour costs, infrastructure quality , economic growth or market size of the host country. Aldi and Lidl are both ‘grocery discounters’ and to save money these companies build up their stores in suburban areas and remote districts where they can save money on rent or on purchase prices of properties and being a ‘grocery discounter’ Is a good strategy to expand their business abroad. Economic and political environment in the home country is influential on company’s decision to go international. Power and prestige is another influence on Aldi’s and Lidl decision going global. The companies want to become successful, popular and powerful. They want to become an example for the rest of the world and gain global market power. That is why Aldi and Lidl decided to go global. Aldi and Lidl were mostly entering other countries markets through Greenfield investment. Greenfield investment is a form of foreign direct investment which means setting up an entirely new foreign facility in the host country. These two companies wanted to keep their brand all over the world and have full control over their business. Although Greenfield investment is not always the best way to enter the foreign market. Although in Aldi’s and Lidl’s case it was the best way to enter the foreign market, as the primarily aim for these two companies was to promote their own brand and to manage their business in the way these two companies wanted. So in some cases companies should go for Greenfield type investment and in other cases acquisitions are more beneficial. Advantages and disadvantages of entering market through greenfield investment are discussed further. . b Advantages and disadvantages of greenfield investment For the host country, it is beneficial if a company invests through greenfield type of investment, although the effects of FDI (foreign direct investment) differ in different regions and countries. For example, Brazil have attracted foreign direct investment but mostly it was non Greenfield, while India attracted mostly Greenfield investments although it is possible to suggest that generally it has failed to attract any FDI. But Indian economy is growing whereas Brazil has remained without any improvements. So some examples also show that Greenfield investments are more beneficial for the host countries. Although such point of view can be argued. As, for example, in Aldi’s case entering different countries markets in 1950th (after the Second World War, when the time faced shortage of goods) was beneficial for host countries as such companies as Aldi was bringing market growth to the host country at that time. Comparing to acquisition’s type of investment Traditionally acquisitions or privatizations of stated-owned enterprises were considered as evolvement of developed countries , although in years the situation had changed. It became beneficial for developed countries invest in developing countries through cross-border acquisitions , as these countries could buy enterprises assets at cheap prices . But it was also beneficial for developing countries for their opportunity for market growth. Investing through cross-border acquisitions can be beneficial for those who want to enrich their multinational experience, international strategy , cultural differences between the home country and host country and other. That is why Aldi entered Austria (first country abroad) via acquisition. This company did not have any multinational experience and entering through acquisition helped them to learn a lot about different country, understand how other markets operate and gain experience in creating new international strategies. Andersson and Svensson (1996) came to the conclusion that a firm with strong organizational skills prefer acquiring an existing company in the host country, while firms with strong technological skills favour greenfield operations. Applying this study it is possible to consider that Aldi and Lidl have strong technological skills. Investing through greenfield investment means operating fast, being organised and meet the requirements of the demanding customers. And case study proves that: ‘with their altered product and service strategies, Lidl and Aldi are trying to meet the requirements of their demanding local customers. ’ Another interesting finding is that Greenfield FDI has a stronger positive impact on GDP compared to that of domestic investment, (as in Austria where Aldi invested. It is one of the richest countries comparing Gross domestic product per capita ), a country with strong and stable economy attracts Greenfield investment more, whereas Greenfield investment is more attractive for underdeveloped countries. Advantages of greenfield investment The economic growth of the host country is one of the most important determinants for Greenfield investment considerations. Such investment was primarily considered by Aldi and then by lidl because the companies wanted to promote their own brand, and they promoted their names in the host countries. These companies did not need to share any profit with anyone else as well as controlled and operated their business and organizational culture in their own way and in the way they wanted it to. They also created new production capacity and linkages to the global marketplace. For the host countries where Lidl and Aldi invested, greenfield investment was beneficial as such investments create new job opportunities , the companies invest in research and development and invest in additional capital programs. Disadvantages of greenfield investment  Although starting from the scratch ( investing through the Greenfield type investment) was not easy for them. Aldi and Lidl did not understand anything about the host country’s culture, market or country’s regulations in which they wanted to invest. Investing in the host country through the Greenfield investment was also risky because the companies did not know how well local companies were established in the country, they did not understand how did everything work in that country , so it took a long time for them getting to know that country. So reactive reasons ( actions for getting the information about the foreign market) were not enough to get understanding of the foreign market. Also Greenfield investment costs much more than cross-border acquisition investment, so mostly only big companies ( like Aldi and Lidl) which can invest good amount of money in another country can afford to invest through the Greenfield investment. Also such investments were dangerous for domestic companies, as competition was growing and domestic companies could lose their market share while international companies Aldi and Lidl were growing and expanding in the home country. . a Aldi’s strategy in the UK and Switzerland Entering such markets as UK or Swiss high-price market, meant creating a new strategy of enlarging Aldi’s products and offering higher level of service. As for example, Switzerland market was mostly shared by three largest companies Micros, Coop and Denner ( 80% of market) , so it was firstly, brave enough entering such market, and secondly, if entering such market that meant creating new more attractive product offers for customers with high level of services. Aldi in UK and Switzerland was trying to concentrate on 700 products for daily use in these two countries as well as adapting to new eating habits and consumption habits typical for the customers. As from the case study, director Martin Bailie explained : ‘It’s not all pan-European buying; we have to look what UK customers want’. Also it is important to note that entering Swiss market meant making prices higher so that they could adapt to Swiss market and provide necessary level of service. Having said so, the company had strategy to become the cheapest underclass-discounter in UK and Switzerland fulfilling costumers needs. Buying goods in great volume from the same supplier , not spending money on brand promotion and fancy displays approach helped Aldi to achieve their guaranteed price range and become successful in the markets. Buying goods from the same supplier gave them opportunity to investigate product quality in special test kitchens and improve products quality if it was necessary. Saving money on fancy displays and advertisements helped them reduce goods prices. As from the case study, Aldi realized that by adaptation to local needs the company can successfully develop a foreign market and become prospering in different countries, as Switzerland and UK. 2. b risks of taking such strategy It is clear that UK and Switzerland have different culture than Germany, so customers approach to shopping also differs. As from the case study : ‘In Germany, cheap equates to value. By contrast, in the UK low prices are not necessarily equated with value and are more associated with poor quality. ’ That is why grocery discounter may seem suspicious for them. People might think that low price goods means not really good quality, especially if customers realise that the company grows and prospers. So customers might not want to buy bad quality products (especially food) even knowing that it is cheaper. So the biggest risk for grocery discounter in such countries is bad reputation. 3. a Aldi and Lidl Internationalisation Although it is possible to say that Lidl copied Aldi’s business their strategy became completely different. Achieving strategic advantage was primarily influence on Aldi deciding to open stores in Europe, Australia and in the USA or on Lidl restricting their expansion in particular European countries till 2009. Strategy decision-making depended on company’s targets , planning and volume of expansion . Aldi and Lidl are competitors so it was obvious that these two companies would try to differ their strategies in different ways. It is possible to consider that Lidl was trying to build its strategy decision-making on Aldi’s experience, but Lidl’s strategic advantage achievements became more adventurous . So Aldi’s and Lidl’s strategies were focused on different goals. As from the case study, Lidl was focused on expansion in markets where ‘no competitor had been present previously’, whereas Aldi would wait till retail sector matured. Also as it was said previously, Lidl was mostly focused on expansion in European countries whereas Aldi expanded in USA, Australia and Europe. There are advantages and disadvantages of Aldi’s strategy. Advantages The USA and Australia are very big countries and these countries have huge target market. Exporting there means selling more than in Europe. Consumers in these countries are generally interested in products as in UK, and Aldi has experience in selling its products in UK. So selling in these countries for Aldi means selling more goods and better promote the brand. Disadvantages So Aldi promotes its brand worldwide, but to that the company needs a lot of resources to control it. It is much harder to control the business in the USA and Australia as these countries are very big. Whereas selling in Europe is easier to control and manage. Also controlling the company in such countries as USA and Australia means creating strategies for each region separately whereas selling in Europe Lidl can create only one strategy for all countries . So it is a huge responsibility for Aldi to manage its business all over the world. 3. b Lidl strategy until 2020 The impact of the Lidl name outside the German borders is astonishing when considering that very little information is leaked to the publicity about its future plans. ’ (M. Moesgaard Andersen Flemming Poulfelt, 2006) Although from the case study it is clear that Lidl plans are to expand its business in Brazil, Mexico, Russia and the USA. The countries where Lidl want to export are culturally completely different as well as geographically much bigger than Europe. So internationalisation to these countries needs new and well-organised strategies to each of the countries. As Lidl was mostly focusing on Europe it will be a big challenge for the company to enter these markets. So considering this, firstly, I would recommend to expand its business in countries where its main competitor Aldi hasn’t stores. Countries in which Lidl operates at the moment. This map shows in which countries Lidl operates at the moment. There is a list of countries in which ALdi operates at the moment: Australia Austria Belgium Denmark France Germany Great Britain Hungary Ireland Luxemburg Netherlands Poland Portugal Slovenia Spain Switzerland USA As from the map it is clear that Lidl was mostly focusing on Western countries, so I would recommend to enter Baltic countries markets and other Eastern European countries first. There is no Aldi in Baltic countries as well, and if talking about these countries markets they are not as competitive as other European countries. So it would be a great opportunity for Lidl. Entering the Baltic countries markets and other Eastern European countries would help Lidl to gain recognition of European countries as ‘strong brand throughout Europe’. Afterwards, I would recommend to enter Russian market. Russia is the biggest country in the world and target market is huge. Russia doesn’t have very competitive market and supermarkets, I would say , would become very popular over there. Also Aldi doesn’t have any store there. Although this country’s culture differs from other European countries and at first it would very challenging for Lidl. Conclusion To conclude with, the grocery retailing industry will always be profitable, especially knowing that worldwide annual sales volume ofâ‚ ¬ 3. trillion in 2007 and an average annual sales growth is 2. 7 percent during the past ten years. And it is obviously the most important sector in the world as people cannot survive without food , drinks and other groceries. Although companies operating in this sector and considering going global must decide which strategy would be best for their expansion, promotion and prosperity. Lidl’s and Aldi’s expansion became very successful and for the future these two companies must consider their expansion very carefully to achieve their goals and enlarge their revenues.