Lidl expansion targets CEE region

The German retail chain, which is part of the Lidl & Schwarz group, opened an impressive 790 stores in the year ending February 2004 and increased sales by 15 per cent to €18.9 billion; twice as fast as its closest rival and fellow German retailer, Aldi, according to a report by retail research group IGD​.

The report says Lidl is now well-positioned for further growth across Europe, and with the chain's launch in Hungary and Slovakia in 2004 "it has succeeded in gaining a substantial lead on Aldi, which has yet to prioritise Central and Eastern Europe as a target market"​.

Hungary is Lidl's 18th European market and it has recently opened 12 stores in the country, serviced by a 30,000 square metre distribution centre in Szekesfehervar, central Hungary, with a view to at least doubling this number in the next couple of years. IGD also reports that the discount firm is planning to target the other EU accession countries of Lithuania, Latvia, Estonia and Slovenia in the short to medium term.

Lidl, whose retail prices are around 20 per cent lower than the EU average, obviously has great potential in these new markets to repeat its existing success in western Europe, especially as consumers' disposable incomes are generally lower in the new EU states. Average gross domestic product (GDP) per head across the 10 new EU countries is only 46 per cent of that across the older 15.

But some food producers see the chain's discount deals as poisoned ivy and worry they will be priced out of business at both ends. In Hungary, many domestic food producers already face rising energy costs and lack a national distribution network. The country's accession to the EU in May also ended state agricultural subsidies, pushing up vegetable prices.

József Galambos, secretary of the Hungarian Canning Industry Association, said Lidl was already harming domestic food canners by using cheap bulk imports of Thai sweetcorn. Galambos said he was concerned that some domestic companies might begin cutting corners to compete. "The conditions of food safety are quite good in Hungary but this threatens the system,"​ he said.

On the other hand, Lidl's advance in Hungary and the rest of Eastern Europe should offer larger suppliers with branded products substantial opportunities, according to IGD, which says the discount chain is "increasingly adding leading brands into its assortment"​ to try and attract more customers.

It is a tough challenge for suppliers, who would have to reach agreements with Lidl on its reduced price policy and also abide by the chain's strict trade principles, including highly centralised procurement structures and 'when it's gone it's gone' sourcing agreements on national brands. But, "suppliers that can help Lidl to access new categories and drive same store sales, without adding complexity to the business model, will therefore be viewed favourably"​, says IGD.

Hungary itself has already become one of the most important expansion markets for western retail groups since the early 1990s, and many of the continent's big names are present there, such as market leader Metspa, a joint venture between Germany's Metro group and the Austrian Spar, and second placed Tesco from Britain.