Lidl PESTLE and Micro Environment Analysis

Executive Summary

The supermarket industry is in constant change as multiple players battle to gain market shares, making it a highly competitive environment. My research is focused on information found on the internet and more specifically in articles as well as financial reports. Supermarkets keep expanding and now focus on differentiation to appeal to customers and grasp a wider part of the population.

The supermarket I chose is Lidl, a German supermarket belonging to the Schwarz Group and implemented since 1973 and present in 30 countries with a total of $85.7 billion in global sales in 2016. I specifically chose to focus on the UK market as Lidl has gained a significant amount of market share recently, and is challenging superstores like Tesco and Sainsbury with its discounted characteristic. The supermarket is known for its low prices, and faces the challenge of proving to consumers that cheap prices do not mean bad quality.

This assignment will focus on the macro and micro environment of the company as well as the advantages and the strategies to tackle the challenges it faces. It will also provide recommendations on how it can improve its operations to gain more market share without giving up on its discounted business model.

Introduction

In our globalized world, it is becoming more and more challenging for companies to differentiate and offer an exclusive experience. Due to fierce competition, the grocery industry is seeing multiple new initiatives from players.

The grocery sector is an oligopolistic environment and the main aim of each player is gaining market share and providing unique and excellent services to consumers in the hope of captivating loyal customers despite the low switching costs they face.

In the UK, low-cost retailers such as Lidl have entered the market and now accelerated their growth leading to the turmoil of established supermarkets such as Tesco.

After a recession, people turned towards discounters increasingly, causing disruption in the industry. Rises in prices have not caused a drop in quantity but did influence the consumers to turn to cheaper alternatives. Today, Lidl has 650 stores in the UK with 10 distribution centres and employs 20,000 people. It is slowly detaching from the initial goal of aggressive pricing and wishes to increase its sales by targeting price-sensitive shoppers and tackling the low quality etiquette they have in consumer’s minds by focusing on their new quality standards, demonstrated by their Grocer of the Year award in 2015.

Lidl’s Macro-Environment

UK market

The market value of grocery retail in the UK is expected to rise from £163.8billion to a forecasted £196.9 billion between 2011 and 2021. This underlines the importance of this sector and how it is experiencing continual growth. (Statista, 2017)

Furthermore, according to figures from Kantar Worldpanel, the Big 4 (Tesco, Sainsbury’s, Asda and Morrisons) have lost some of their market shares in 2016 while discounters have gained. Lidl has been the fastest growing supermarket with the highest rate of change between last year and this year, again showing that there is an opportunity for growth and Lidl should embrace it. (Appendix 2). In fact, IGD has forecasted that by 2022 one in every £7 will be spent at a discounter instead of one out of £9 in 2017. Thus, increasing their value from £20.1 billion to £30.1 billion (Appendix 1). Also, Lidl sales in the UK have plummeted since 2010, they increased from $2.9 billion to $5.66 billion in 2015 and are forecasted to reach $8.15 billion in 2020. (Appendix 4) These forecasts are beneficial for Lidl as they present an optimistic view for the future and confirm that Lidl should focus on developing strategies to make them a reality as their current position provides the conditions to expand.

Lidl has now a market share of 5.1% while it was at 3.5% in March 2015. (Appendix 3) Lidl has elaborated a strategy which has led to an increase in its shares and enabled it to grow and become a threat to not only other discounters but also to established supermarkets as “four in five (79%) shoppers say they have visited a variety discounter for some of their grocery shopping in the last month, while two-thirds (62%) say they used a food discounter” according to Joanne Denney-Finch, Chief Executive of IGD.

PESTEL Analysis

Political and Economic

Incomes and government policies affect a person’s disposable income which directly affects the amount of money spent on groceries. The economic crisis has affected consumers and left them with less income to spend, however as it is a necessity, people continue to buy despite a rise in prices.  Consumer spending from 2012 to 2017 has been relatively constant, varying around £20,000 million. (Appendix 5) This reinforces the idea that despite difficult times, spending on food is constant, what might change is the consumer’s choice regarding the supermarket.

It is a trend that a rise in prices, or even a recession leads to people turning to cheaper alternatives enabling discounters to see their market share become more significant. (The Guardian, 2010/ Wood, Z)??

Recent events in UK politics such as Brexit may lead to discounters facing a new challenge as a fall in the pound can lead to a rise in prices. (The Telegraph, 2016/ Armstrong. A) This can influence Lidl as it sources a wide proportion, approximately 70% of its products in the UK, hence making them more expensive after Brexit. (Lidl website, 2017). With a weak pound and rising prices, discounters may find it hard to keep their price as low as they are. (The Financial Times, 2016/ McClean P)

On the other hand, Lidl will be less impacted by import tariffs, as it focuses on local products and will capture more consumers as people will switch to cheap grocery shopping. Lidl stays positive and responds to Brexit by keeping its original plan to invest 1.45 billion pounds to expand in the UK by opening between 50 to 60 shops (The Telegraph, 2017/ Butler. S)

Lidl’s response to Brexit displays its capability to counteract changes in the environment in which it operates.

Social

Lidl is faced with the challenge to attract more customers and show all generations that their products bring value to them. Lidl had been focused on targeting low-class consumers in the past decades, but is now turning towards middle and upper- middle class to develop and compete with other retailers. (The Telegraph, 2015/ Dan Hyde) It intends to change the perception consumers have and make their experience memorable. To achieve this, it has:

• Put efforts in delivering healthier products, for instance it has removed artificial colours from a large number of their label products. Also, they decided to remove own-label products containing hydrogenated fats.
• Taken the initiative to sustainably source wild fish and aims for a 100% of their fresh or frozen fish to be MSC (Marine Stewardship Council) certified.
• Developed initiatives to offer vouchers to entertain families, these include free entries for kids to LEGOLAND, Sea life Centres, or even amusement parks.

All these emphasize on Lidl’s relationship with its customers, its desire to appeal and demonstrate their roles at a wider scale than just being a supermarket.  Lidl has understood that the relationship and value it brings to consumers reinforce their brand image and reputation.

Technological

Lidl needs to focus on technological improvements to maintain its place and market share. In fact, in 2017, Lidl has put in place a contract to build the largest regional distribution centre in Peterborough, 754000 sq. ft. The particularity of this distribution consist of using the latest energy efficient methods and zero-carbon technologies while creating around 500 jobs. (Birmingham Post, 2015/ Brown. G)

However, it can be argued that Lidl’s investment in newest technologies is limited. Being a discounter, it has to minimize its costs, thus making it too expensive to invest in technologies such as self-scanning and implementing them in all their stores. More importantly, as mentioned later, the fact that Lidl does not offer an online service in the UK, is a massive disadvantage as online shopping is a method that is growing, it underlines Lidl’s lack of ability to truly adapt to the trends in the environment. ( IGD, 2017/ Robert. L)

Environment

Consumers are becoming more aware of their footprint, and sustainability has become a way for companies to differentiate. It is essential to develop initiatives to tackle environmental issues to captivate more consumers. Lidl is focusing on initiatives to benefit the environment and promote their message of “A Better Tomorrow” (Lidl website, 2017), these include:

• Promoting reusable carrier bags and charging 5p for each bag sold to donate and recycling around 40,000 tonnes of cardboard and plastic.
• Protecting the environment by investing in motion sensors and intelligent lighting systems in warehouses, staff areas as well as offices to conserve energy and reduce consumption.
• Using efficient delivery procedures by focusing on optimal planning and usage of full capacity for every short or long-haul journey.

Concentrating on such initiatives enhances the brand image Lidl portrays and allows Lidl to insist on their values of responsibility and respect.

However, on the other hand, Lidl needs to keep its costs down to provide consumers with their value unit, cheap prices. Hence, it does not have the resources to invest in a vast amount of green technologies and eco-friendly initiatives. This is underlined by the fact that it was ranked second most unethical supermarket, on a ranking based on environmental efficiency as well as product sustainability. (The Independent, 2016/Broomfield, M)

This shows that despite its efforts, Lidl is not doing enough to get involved in sustainable behaviours, which that might affect the perception customers have of Lidl.

Legal

In a fast-paced environment such as the grocery industry, it is vital to be able to respond to laws and regulations to avoid negative consequences and reputational costs.

In this part, the GMB union’s battle with Lidl at Bridgend in South Wales can be mentioned. In fact, Lidl considers that its employees are given support in the organisation, thus engaging in unions is unnecessary. This started a legal battle in August 2016 which was lost by Lidl, forcing the supermarket to allow hundreds of warehouse workers their right to union representation. (Morning Star, 2016/ Lazenby P)

This indicates that Lidl encounters issues and is ready to respond to them and come to a compromise when it is needed, in order to avoid reputational costs and negative impacts.

Lidl’s Micro-environment and Strategies

Lidl also needs to focus on internal forces which directly impact its strategies and successes, as well as its ability to gain customers.

Customers

Customers have power in the sense that it is extremely easy for them to switch from one supermarket to another without facing high switching costs. If the price is lower in one place, customers adopt impulse buying approaches and will buy it there. Often, consumers are not loyal to a brand but sensitive to a price, small switching costs give them the opportunity to widen their choices and makes it hard for retailers to have a constant customer base.

Lidl is now focusing on repositioning by altering the image Lidl has in customer’s minds in order to attract a broader spectrum of shoppers. In fact, it no longer wishes to attract low-class people but also middle class without alienating its existing customers. This is slowly working as middle income families began shopping at cheaper stores and the proportion of middle-class shopper has risen when Lidl introduced premium products such as lobster, smoked salmon and award-winning wines (The Guardian, 2016). ??

Lidl has also developed an online community called MyLidl where consumers leave reviews on products they buy and on deals that Lidl offers. This enables consumers to talk to other consumers, thus increasing Lidl’s consumers and sales. (Lidl website, 2017)

Competition

The grocery sector is flooded with competition as a significant number of retailers battle on the same market, underlining the need to be innovative. Lidl being a discounter supermarket faces an intense rivalry with Aldi, a German discounter present side to side with Lidl and who developed similar strategies. Aldi possesses a bigger market share in the UK, 6.7% compared to Lidl’s 5.1%. (Appendix 6)

One difference, is the discount models they use. Aldi focuses on hard discounts, they sell a small number of products at a cheap price to increase profit in relatively small stores.  (The Financial Times, 2014/ Felsted) On the other hand, Lidl adopts soft discounts, they sell a larger number of items, including branded products, at a lower price. To compete against Aldi, Lidl should add an edge to their customer experience in store either by reinforcing its customer service or by developing an online service.

Nonetheless, Lidl also faces intense competition from supermarkets offering wider ranges of products and better quality products such as Tesco, Sainsbury’s and even Marks and Spencer. These have a bigger market share and higher sales because despite their higher prices they still acquire the sceptical consumers that will avoid Lidl products and choose to shop at more prestigious supermarkets.

Competition creates the potential to create price wars and these have the ability to disrupt the market as they make customer shift from one supermarket to another, a price war is negative for Lidl as their competitor’s price drop, meaning that their competitive advantage diminishes. (UK Business Insider, 2016/ Smith. M)??

Suppliers

Supplier provide the products needed for Lidl to operate, thus they are essential and relationship with these need to be maintained. It is hard sometimes for Lidl to change suppliers as some do not want their products in Lidl shops as they associate Lidl with cheap and low quality. To keep its margins, Lidl emphasizes on bulk over brand and on price over range. (Marketing Week, 2017/ Vizard, S)

Also, Lidl is trying to move away from the low quality preconceptions, by shifting to local British products and building long-term relationships with their suppliers. In fact, 70% of the products are from British growers and suppliers. This enhances Lidl’s will to build strong ties with suppliers with the aim to bring quality products to its consumers.

Public

Lidl has developed partnerships with charities to enhance its image and contribute to the wellbeing of the local community.

• National Society for the Prevention of Cruelty to Children (NSPCC): national charity that delivers workshops in schools to teach children about the issue of abuse and why they should speak up. Lidl aims to raise £3million for this partnership.
• Feed It Back Network: food redistribution programme to avoid waste and use surplus food to tackle food poverty. In March 2017, Lidl signed a contract with Neighbourly, to prioritise the battle against food poverty over waste as approximately 7 million tonnes of food are thrown away each year. (The Independent, 2017/ Cowburn. A)
• Keep Britain Tidy: brings active people together to improve their local environment by reducing waste. The sales of carrier bags contribute and Lidl has already donated £5000,000. (Lidl website, 2017)

These collaborations impact Lidl’s ability to create a new image of responsibility and aid in order to counteract the criticism on environmental and quality flaws they might receive. It manifests Lidl’s goal to become more than just a discounter.

Company

In 2016, Lidl UK’s CEO changed, Ronny Gottschlich decided to step down and Christian Härtnagel, 34 years old from Lidl Austria, was chosen to replace him. It seems that he was fired because of his reliance on marketing as a strategy which was becoming increasingly detached from the discounter’s model.

It is the second change of CEO in 3 years, underlining Lidl’s lack of consistency regarding strategy. This needs to be addressed if Lidl intends to put all its efforts in growing and repositioning their brand by increasing their store and product portfolio.

Härtnagel’ s mission is to continue Lidl’s increase in market share by targeting middle class as much as low class with new products such as prosecco but by keeping their low prices as the main focus as it is “Lidl’s DNA” (The Telegraph, 2017/Armstrong.A)

When he started, he precisely stated that he believes many people do not shop at Lidl because access to their shops is not as easy as competitors. Hence, he wishes to invest at least £1.45billion in an aggressive roll out plan to open “at least one shop a week”. (The Telegraph, 2017/Armstrong.A)?? (This is Money??)

Lidl UK’s profit after tax between 2015 and 2016 has increased by 32%, (Appendix 7) deriving from successful strategies, however it is most likely that in 2017 such investments will lower profits, but long-term profitability is what Lidl is desires to achieve.

Successful Initiatives

A business model which permits them to achieve low costs, hence offering low prices. It enacts this by:

• Developing private label brands, cutting out the middleman and empowering Lidl with the control over prices and manufacturing costs.
• Providing a limited number of products by prioritizing price over range.
• Focusing on everyday items such as cereals rather than niche products, giving Lidl the ability to raise sales and attract customers.
• Investing in relatively small stores (20,000 sq. ft. with around 6 aisles), and cross training employees to reduce expenses.
• Presenting products in the boxes in which they are shipped, making restocking rapid and efficient while reducing costs.

Lidl develops such strategies to fulfil their promise of low prices to consumers and to keep offering affordable and quality approved products, in the hope of captivating a bigger part of the market. (UK Business Insider, 2017/ Hanbury. M)

• Using marketing as a weapon to attract customers

Lidl’s recent growth is partly due to their marketing enabling the brand to expose to customers what it stands for. Lidl has spent £78.3m in 2016 on advertising via radio, TV, press and outdoor, 89% higher than in 2014 ( Campaign, 2016/ Gwynn. S) Lidl uses advertising to tackle with preconception of low quality and to target new customers. They aim to do this without forgetting and abandoning their “discounter” image as it gives them an edge compared to competitors.

Their latest strapline “Big on quality, Lidl on Price” brings to life their brand and exposes their goals by reinforcing their quality positioning. (European supermarket magazine, 2017)?? It was set up to introduce campaigns based on comparing Lidl products to other equivalent items, highlighting their low prices. Also, Lidl uses real life consumers to make sure that customers relate and identify themselves with Lidl’s current consumers. This is used by Lidl to target every consumer regardless of their background and to turn doubters into advocates.

For instance, Lidl worked on a campaign featuring real life mums promoting Lidl’s Toujours nappies. The main aim was to give an accurate review on the product and show using the image of mums provokes an effect as what they are looking for is ultimate comfort for their children.

Finally, Lidl has started a collaboration with Heidi Klum to release a fashion collection at highly competitive prices. The collection was launched on 18th of September 2017, and was a success with approximately 100 items sold every minute around the country. (UK Business Insider, 2017/ Peterson.H) Ryan McDonnell, Commercial Director, Lidl UK states “In such a competitive market place this is exactly the type of initiative that brings new customers flocking to our stores’. Showing Lidl’s wish to target new customers and show its efforts to become a provider of quality as well as value. This partnership highlights Lidl’s ambition to shake off its discounter tag and show its interest for innovative projects to entertain consumers. (CNBC, 2017/ Thomas L)

• Their employment approach

Lidl desires to raise the pay of 16,000 employees in order to be aligned with the Living Wage Foundation. This raise will cost £3.5 million and is a technique to motivate workers and make them work with more passion as they are correctly rewarded.  It shows commitment and in exchange, Lidl expects the same commitment from the employees (City A.M., 2017/ Cahill. H)

Recommendations

Online Service

The UK grocery industry is well established and extremely competitive, making it hard to find innovative ways to differentiate from others. In spite of Lidl’s improved position in the market, it is necessary for Lidl to continue its expansion and promote strategies to develop a wider customer base and a larger grasp on the industry by increasing its market share but also by maintaining it.

In a world where technology has taken over almost every action we do, it is necessary to target customers also via technology. Lidl UK should reflect on developing an online shopping service to see a surge in the number of customers. Online shopping as well as ‘Click and Collect’ require capital but lead to long-term profitability. (The Economist, 2017)

Research has shown that 40% of all British shoppers say they have already bought food online and 6 in 10 say they are most likely to shop online (IGD, 2017). This underlines the importance and the relevance of such a service to get an edge but also to remain in competition with others already using it.

Loyalty Scheme

In the UK, Lidl does not have any loyalty scheme as they believe their prices are already incentives for buyers. However, in this industry, customers have a wide range of choices and gaining loyalty is a challenge. Creating a loyalty scheme can provide them with more recurring customers to prepare for a future which is uncertain, as a strong economy might make some Lidl consumer search for more luxurious products in other supermarkets. Loyalty will be obtained if Lidl manages to accommodate what buyers are looking for. Some shop at Lidl due to cheap prices but the average customer might choose Lidl occasionally, a loyalty program furnishing advantages might make this average customer shop at Lidl more.

Lidl has been growing and setting its place in the market despite challenges such as critics for its unsustainable behaviours and difficulties in grasping a large number of customers due to the etiquette of low quality that people still associate to the supermarket. To reposition their brand and continue their expansion Lidl is focused on developing their stores and advertising as well as products and on offering quality products by keeping their prices low. To further expand, Lidl should also get up to date with the technology around our daily lives by providing an online service as well as a loyalty scheme. Expansion and growth are important but keeping their market share and sustaining their current position should be a core preoccupation.

References

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Appendices

Appendix 1: Forecasted growth in value between 2017 and 2022.

Appendix 2: Grocery Market Share change vs last year

Appendix 3: Grocery Market Share comparison between 01/03/15 and 05/11/17

Appendix 4: Value of edible grocery sales for Lidl (Schwarz Group) in the UK from 2010 forecast to 2020 (in million US dollar)

Appendix 5: Consumer spending on food in the UK from 1^st quarter 2012 to 2^nd quarter 2017 (in million GBP)

Appendix 6: Grocery Market Share on 05/11/17

Appendix 7: Lidl UK Financial Statement for year ended 29 February 2016