If you listen carefully, you may just hear champagne corks popping in supermarket boardrooms. Because yesterday, Lidl announced it was scaling back its UK expansion plans. It was an unexpected move from a discounter that is stealing shoppers from the supemarkets in their droves thanks to the cost of living crisis.
But instead of capitalising on that opportunity by accelerating store openings, Lidl is curbing its plans. Quite dramatically, too. For years, it has opened about 50 stores annually. But yesterday, it told The Grocer it would open only 25 in 2023.
It’s a significant move considering just 15 months ago, former Lidl GB CEO Christian Härtnagel set a target to reach 1,100 UK stores by the end of 2025. And it was previously working to a target of 1,000 by the end of 2023. Considering Lidl has about 950 stores currently, the slowdown suggests it will certainly miss the latter.
It also seems at odds with latest Kantar data, which reveals nearly £11m in spend switched to Lidl from Sainsbury’s, Waitrose and M&S alone in the four weeks to 22 January. Lidl also overtook Morrisons in market share data from NielsenIQ this week, at 8.9% versus 8.3% in the four weeks to 28 January.
So what could be going on?
LinkedIn posts from construction graduates made redundant by Lidl GB point to the reason behind the sudden u-turn. “Forced redundancy is not what I expected six months into my grad scheme with Lidl,” wrote one. “Unfortunately, the current financial climate has meant a serious cut in funding for the company’s construction programme.”
Lidl, meanwhile, has presented the move as a refocus on a different area of its estate – warehouses – rather than a financial cutback. “Whilst this is a slowing on store openings, we are focusing on investing heavily in our warehouse capacity: opening Luton, completing extension works on our Bridgend and Belvedere sites, and looking for a new site for the south,” said a spokeswoman.
The investment in warehouses would make sense in the wake of the industry-wide supply chain issues last summer. When speaking to The Grocer in November, Lidl GB CEO Ryan McDonnell pointed to the “well documented” issues. There had been “certainly localised issues from time to time throughout the summer” but “nothing fundamental”, he added.
It came after Lidl twice tweeted in September that it was “experiencing some issues in our DCs” in reply to complaints about empty shelves.
Independent retail analyst Nick Bubb thinks Lidl may well “need to let the warehouse distribution structure catch up this year, after all the recent store growth”, including the 54 branches opened in 2022.
“And I think that’s a sensible step to take, given the reported supply chain issues that they’ve experienced,” he adds.
After all, Lidl would not be the only retailer looking for a bit more storage space. The Grocer reported last July stockpiling had replaced e-commerce as the biggest driver of warehouse space take-up, as retailers sought a greater buffer against supply change disruption. The trend has not reversed: third party logistics accounts for the biggest share of take-up by sector in 2022 at 33%, according to recent data from CBRE.
However, property industry sources who first alerted The Grocer to the scaling down of the plans point to an alternative explanation. They suggest it is the result of pressure from Lidl’s parent company, driven by the wider economic outlook.
One grocery industry source, who has intimate knowledge of the world of discounters, also thinks “this may well be nothing to do with the UK and more to do with international issues”, including interest rates.
“The most likely explanation is the ‘cost of money’,” says the source. “In both Lidl and Aldi, there is fierce competition internally for capital expenditure for investment. The profits, cashflow and borrowing are allocated internationally based on which market can make the best return, and what competitive headwinds the business faces.
“When money is cheap, like in the last 15 years, there is almost enough for every land. When money becomes more expensive, the borrowing part tightens up.
“Or, if profits from the mature countries are less than expected, then also budgets are trimmed.”
The source believes it would be a mistake to see this a permanent change to Lidl’s ambitions, though. They argue both Lidl and Aldi will be looking beyond the current targets, to ideally reach 1,500 stores each in the UK.
“They have never believed that will fail to happen, nor do they feel the need to be in a hurry,” the source adds.
Be that as it may, Lidl has relied largely on estate expansion for sales growth. In its latest full financial year, to 28 February 2022, revenues increased 1.5% to £7.8bn, while its estate grew by 6.1% to 918 stores, thanks to 53 new openings. Pre-tax profits of £41.1m meant “you’re still talking about a business model that’s running lean and mean”, McDonnell told The Grocer as the results were announced last year.
So, the question for Lidl now will be how to sustain that growth in 2023, while opening half the number of stores.
And in the meantime, as the pool of prime sites suitable for discounter stores grows ever smaller, there may well be some champagne corks popping at Aldi, too.