The Lidl Deception

Applying Sun Tzu's The Art of War to understanding Lidl's strategy for Australia

The following comments are my own and are not sponsored by Deloitte, Amazon, or any university. The information below comes from an article I wrote while a consultant with Deloitte, as well as comments I made at several grocery retail conferences in 2015 prior to my joining Amazon. Some of my comments have appeared in publications recently so I am printing the full article here to ensure clarity of my opinion regarding Lidl's potential strategy for Australia. What you are about to read is only my opinion.

One of the most read and quoted books on military strategy and tactics is called The Art of War written by Sun Tzu, a Chinese General, philosopher, and military strategist. One of Sun Tzu’s most famous observations is that “All warfare is based on deception.” Although not warfare in the traditional sense, Australia’s grocery retail landscape is being impacted by a form of deception as practiced by the German retailer, Lidl. Although non-committal on entering Australia, industry analysts believe that Lidl is actively working on a strategy for not only entering Australia, but actively competing and winning in Australia.  

Why Australia?

Lidl is owned by The Schwarz Group, one of the largest retailers in the world with global revenues in excess of $100 billion. With more than 9,900 stores, Lidl is on a non-stop path of growth. Based on a review of Lidl’s operations and geographic preferences, all signs indicate that Australia is a geography that meets Lidl’s requirements for entering a market. In addition, due to the size of Australia’s grocery market, estimated to be in excess of $90 billion, Australia offers significant opportunities for generating revenue.

In addition to Lidl, The Schwarz Group owns and operates hypermarkets under the name of 'Kaufland' that offer shoppers access to a multitude of products such as groceries, sporting goods, furniture, appliances, and so on. It is entirely plausible that The Schwarz Group could enter Australia first with their Kaufland brand, and then strategically open Lidl stores to generate additional revenue and market share. It is also plausible that only Kaufland stores could be opened or only Lidl stores could be opened. Regardless of the brands, The Schwarz Group has their sights set on Australia.

If ALDI can, we can too

Another reason for believing that Lidl will enter Australia is the success of ALDI operating and currently expanding across Australia. ALDI has proved that consumers are attracted to low prices in a no-frills environment. ALDI has also proved that they can take market share away from Coles and Woolworths with alarming ease. A truism within grocery retailing is the saying “Wherever ALDI goes, Lidl is soon to follow.” When it comes to Australia, Lidl is certainly soon to follow as ALDI has provided the playbook for success.

What’s in it for Australia?

A question some may be asking is whether or not Australia can support two discounters? The answer is an unequivocal YES. Based on the results from multiple consumer surveys, Australian consumers have a desire for options and low prices. After years of having no choice but to choose between Coles and Woolworths, consumers embraced ALDI’s low prices when they entered the market in 2001. Every metric indicates that Lidl will find similar success in attracting consumers when they enter the market.

Winners and Losers

First and foremost, Australian consumers will benefit from having the two best discounters in the world operating throughout the continent making the consumer the biggest winner. What’s unique about ALDI and Lidl is that they have learned to operate and compete in close proximity of each other without causing undue harm to either. It helps that ALDI and Lidl are so different in appearance. Lidl has larger and brighter stores whereas ALDI operates what many consider to be excessively plain stores. Lidl offers consumers a larger number of SKUs whereas ALDI offers a smaller selection. Simply put: ALDI and Lidl know who their customers are and each has perfected a business model that attracts the customers they desire.

Suppliers will win as they will more than likely find willing partners in ALDI and Lidl who will want to expand sourcing locally as much as possible including potentially manufacturing their private label products in Australia. It goes without saying that suppliers are hoping for Lidl to enter Australia. Note: a question that regulators in Australia will soon have to answer is this - What is better for Australian suppliers, a grocery industry controlled primarily by Coles and Woolworths but who purchase most of their products from Australian suppliers. Or, a grocery industry controlled by foreign-owned retailers who will import the vast majority of the products they sell? Industry analysts believe this could become a source of friction in the coming years. Suppliers would be wise to actively engage ALDI and Lidl and agree to making any and all investments necessary to be able to manufacture products according to ALDI and Lidl standards.

By far, the biggest losers will be independent grocers followed by Woolworths and Coles. ALDI has already proved they can take market share and Lidl will find similar success. Using history as a guide, when ALDI and Lidl both enter a market, traditional supermarkets immediately attempt to compete on price with little success. All indications point to an all-out price war breaking out as Coles and Woolworths will attempt to hold onto market share with neither being successful over the long run. Independent grocers will slowly but surely disappear from the landscape unless they can find a way to compete on service and differentiation instead of price; no easy task.

Will Lidl win in Australia? Yes, against independents, Coles and Woolworths. Will Lidl beat ALDI? It remains to be seen but globally where ALDI and Lidl compete, only a few points separate each in terms of market share.

Once more to Sun Tzu

All retail is competitive but few places in the world offer a more competitive grocery landscape than Australia; only the U.K. can be considered to be more competitive followed by the United States. Could Lidl end all speculation about their plans for Australia and announce their intentions? Yes. Would doing so be wise? Not according to Sun Tzu:

“All warfare is based on deception. Hence, when we are able to attack, we must seem unable; when using our forces, we must appear inactive; when we are near, we must make the enemy believe we are far away; when far away, we must make him believe we are near.”

Just as a military operation involves deception so too must business strategy. If Lidl articulates their strategy, ALDI, Coles, and Woolworths will immediately go to work formulating counter strategies to minimize Lidl’s chance of success. By providing as little information as possible, Lidl is ensuring that they’re keeping their future competitors off balance and guessing. Coles, Woolworths, and ALDI all have the advantage over Lidl as they are currently operating successfully in Australia.

“If your enemy is secure at all points, be prepared for him. If he is in superior strength, evade him. If your opponent is temperamental, seek to irritate him. Pretend to be weak, that he may grow arrogant. If he is taking his ease, give him no rest. If his forces are united, separate them. Attack him where he is unprepared, appear where you are not expected.”

Lidl has no choice but to be deceptive. As with all deception, however, at some point the truth becomes known. Odds are high that within 12 to 24 months, the deception will end and the truth will be told – Lidl is coming to Australia.