Forget Kaufland, Lidl the one to watch

Kaufland picThe impending launch of German hypermarket giant Kaufland is just an aside and Lidl is the one to watch out for, according to Bettina Kurnik, research analyst at Euromonitor International.

Speaking to Inside Retail, Kurnik said Kaufland has a smaller range of private label products than Lidl, and deep discounting on brands is already the well-established realm of the “Big Two” supermarkets in Woolworths and Coles.

While Kaufman’s success in Eastern Europe has been largely based on fewer players competing within its unique hypermarket discounter category blend, the Australian market hasn’t even gone down the hypermarket path – as yet.

Kurnik anticipates Australia’s retail battles are thus more likely to be fought over the discounter space, and the entry of Lidl “would certainly further disrupt an evolving grocery landscape”.

“According to conventional retail wisdom, we simply don’t have the instore foot traffic to sustain a successful hypermarket business model in Australia, particularly when it comes to covering the significant overheads such a venture would entail,” said Kurnik.

“Additionally, a company would need enormous market power and scale to eliminate the competition of other types of retail outlets, whilst still competing with online prices and discounters”.

Commenting on why the hypermarket format has not previously worked, Kurnik said previously there had been little incentive for the leading grocery retail players in Australia to explore the format.

“Woolworths and the Wesfarmers Coles group have made a concerted effort over the years to develop unique brand positioning by channel for their supermarket, mass merchandiser – and casting our memories back – department store brands,” she said.

“Any push towards the hypermarket channel and the companies risk cannibalising their own sales”.

When asked if Schwarz Group could be playing smoke and mirrors by announcing Kaufland’s entry while actually lining up an entry for Lidl, Kurnik said whether the German parent would launch some sort of venture in Australia has long been considered a case of when, not if – but speculation has been rife for over 16 years now.

“Lidl is the more likely candidate, given the success of Aldi’s expansion in Australia, the ready acceptance of the discounter model by Australian consumers and the inroads the brand has made around the globe,” she said.

“Kaufland, on the other hand, presents customers with a new model of grocery retail – the chain is smaller than the average hypermarket and is considered to be, in many ways, closer to a discounter-hypermarket hybrid.

“This could be a game-changer on the Australian market; but it could also prove incongruous as it’s not a logical fit.

Kaufland’s geographical presence is currently limited to its domestic market of Germany and Eastern European operations that are within striking distance of the company’s German headquarters: Bulgaria, Croatia, Czech Republic, Poland, Romania and Slovakia, leading to Kurnik asserting that “the geography of the move is strange, to say the least”.

“In contrast to Lidl, private label accounts for a minor part of the Kaufland hypermarket chain’s assortment, however its K-Classic economy private label, which spans a large number of food and non-food categories, plays a central role in the hypermarket’s low-price positioning,” she said.

The average size of a Kaufland store in Germany in 2016 was 4,278sqm while the average store size of a Kaufland in Eastern Europe in 2016 was 3,456 sq m.

“The comparative simplicity of sourcing its non-proprietary brands could explain why Kaufland seems to be making quicker progress than Lidl in conducting its local market feasibility study, but it also prompts the question of how the brand will have the scale and networks to offer unbeatable prices in the Australian market,” added Kurnik.

Meanwhile, Schwarz Group plans to open its first Lidl stores in the US in 2018.

It has already broken ground on a US distribution facility and headquarters in Virginia, and has staked out four possible store locations in the Richmond, Virginia, area. It is following in the footsteps of Aldi, which operates 1,375 Aldi outlets as well as the Trader Joe’s chain of supermarkets. “Lidl comes well prepared to the market, but the US is competitive and will be a challenge” said Kurnik.

Recent media reports indicate that Lidl will open its first store earlier than planned, in summer 2017, in Fredericksburg, Virginia, and aims to have a total of 20 stores in operation by the end of the year in Virginia, North Carolina and South Carolina.

Euromonitor analysts say Lidl continues to expand at speed in its domestic and international markets – in the UK, for example, it is set to open 40-50 stores a year from 2016, up from the 30-40 previously planned and the 20 opened in 2014, as well as refurbishing up to 150 existing sites. The company is committed to further expansion beyond Germany, with Russia and Australia apparently set to be the next wave of international growth after the US.

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