Aldi and Lidl inspire a massive shake-up in retailing

Discount Supermarkets: German discounters have captured 5 per cent of the retail market and are aggressively seeking more outlets. Gretchen Friemann reports

The first encounter with a German retail discounter can be a cheap and cheerless experience for consumers more familiar with the savvy marketing techniques employed by the standard supermarkets. Rather than a whiff of freshly baked bread or an arresting display of fruit and veg, the discount shopper confronts what looks like a combination between a jumble sale and a well-stocked warehouse.

Boxes are often strewn around various corners of the store; the produce stacked unimaginatively on bare shelves appears strange and uninviting, while the speed check-out system, which demands shoppers move their goods as swiftly as possible to a designated packing area, borders on the Stalinesque.

All of this is of marginal importance to a growing number of consumers who are animated not by customer service, well-known brands or aesthetically laid-out stores, but by price and value.

In less than four years Lidl and Aldi have cornered 5.1 per cent of the market, according to retail analysts Taylor, Nelson, Sofres; a figure that is directly related to the combined number of stores the two firms operate in the Republic. And if former retail tycoon Ben Dunne is correct, their combined market share will jump to 25 per cent within five years.

On the basis of Taylor, Nelson, Sofres's calculations, this means the number of stores in the Republic would have to more than quadruple to 250 - a figure that implies there will be an Aldi or Lidl in every significant urban centre throughout the country.

Since these supermarket chains are amongst the wealthiest firms in the world, the financial resources needed for such a roll-out are not in doubt.

But the aggressive expansion policy here is exposing a nasty fault-line between consumers determined to have the option of cut-price groceries and local council authorities eager to retain or attract the higher margin supermarkets which buy and source products from the local supply chain.

At present, Lidl has 40 stores in the Republic with a distribution centre of around 32,516 sq m (350,000 sq ft) in Newbridge, which industry experts believe is capable of servicing between 50 to 75 outlets.

Aldi, meanwhile, only has 11 stores in the south along with a distribution centre of 32,516-34,374 sq m (350,000 to 370,000 sq ft) under construction in Naas. Ironically, these two intensely competitive and notoriously secretive companies have housed the heart of their Irish operations within a few miles of each other.

According to Michael Conroy, associate retail director with CB Hamilton Osbourne King, the German discounters have snapped up market share faster than many people would have thought possible but he believes delays in the planning process have stymied the desired pace of both company's store expansion.

He said: "Generally speaking, the good sites are difficult to pick up quickly as the local councils work off development plans which only come up for renewal every five to six years."

And integral to most development plans is the growth of the local economy. IBEC's Food & Drink Federation has warned up to 20,000 food manufacturing jobs will be lost if the German discounters achieve their desired market share.

Rival supermarket owners argue retail jobs, too, are under threat as the discounters employ between 15 to 20 people in each store, a fraction of the standard supermarket's workforce.

Superquinn deputy chairman, Eamonn Quinn, acknowledges that on "on certain lines the discounters are offering good prices" but he claimed consumers are more interested in good service and a quality range of products offered at a fair price.

He said: "Most of our produce is manufactured in Ireland and I think the quality and source of ingredients is important to customers. We're not claiming to be the cheapest but we are reassuring existing customers that they are getting a fair price for very high quality produce."

Supermarket owner Luke Moriarty of the Moriarty Group owns three Supervalu stores in Palmerstown, Balbriggan and Skerries. Next year his Balbriggan outlet will be pitched in direct competition against what will be Lidl's sixth north Dublin store.

It's a prospect he doesn't relish but he claims his group's investment within the community offers him "greater consumer loyalty" than the discounters who repatriate profits abroad.

"We know from SuperValu colleagues in rural areas that discounters are positioned as doing nothing for the Irish farming community, whereas SuperValu has a very loyal customer base among Irish producers."

However, the former Dunnes Stores chief argues this reasoning cuts little ice with consumers resentful of Ireland's perceived "rip-off" culture.

In an interview with a Sunday newspaper, Mr Dunne claimed the discounters hadn't really done their damage yet. "But they will get there," he said, "because the consumer will want them. The consumer will win if there is somebody giving the consumer the right product at the right price."

The recent dispute over Lidl's planning application for a site outside the growing Co Meath commuter town of Trim illustrates what looks set to become a familiar story over the next five years as consumer anger at rising living costs is offset against the economic and community planning objectives of local councils.

Trim's residents reacted with fury last November when Meath County Council rejected Lidl's application for planning permission, claiming that people were travelling to shop at Lidl stores in Blanchardstown and Mullingar.

Within a couple of weeks a local committee was formed and a petition of more than 2,000 signatures was submitted calling on the council to change its planning guidelines in favour of a discount supermarket.

Taken aback at the sheer level of demand, the council promptly changed the guidelines and the German firm submitted an amended application for the same site.

The town's residents won't discover whether their campaign for a discount supermarket has been successful until next month. Council members are understood to be unhappy over the German firm's new proposal to construct additional retail outlets alongside its own store, which would effectively turn the site into an "out of town shopping centre", according to Meath County Council's director of planning, Oliver Perkins.

Mr Perkins claims Lidl was initially refused planning permission because Trim's development plan "concentrated on establishing a supermarket in the town centre". The second reason was down to the "abysmal Lidl store design". He said: "Architecturally, the discount supermarkets contribute nothing to the town. They are ugly, squat concrete boxes." He maintains the council is in favour of a cut-price supermarket as long as the standard of design is improved. It's understood Lidl submitted an alternative store design in its second application.

According to Mr Conroy the "unsightly designs" which litter Germany - where Aldi commands a 40 per cent market share - have been moderated to "fit in with Irish planning restrictions". However, he points out that neither Aldi nor Lidl will ever be an anchor tenant in a main shopping centre.

"That's not their objective," he said. "Their stores are basic because their primary concern is to reduce costs. So both prefer an out of town site where the freehold costs are cheaper. They look for sites between one to two acres which will accommodate around 100 free car-parking spaces. Lidl's ideal store size is 17,000 sq ft (1,579 sq m) while Aldi stick to slightly smaller outlets of around 13,500 sq ft (1,254 sq m)."

Last year was one of the busiest on record for retail property, due in large part to the consumer credit boom. But James Quinlan, a former property manager for Lidl and now assistant retail director at Insignia Richard Ellis Gunne, claims the competition between the two German discounters for market share is pushing upthe price of small patches of development land.

He said: "They don't really compete with the main supermarkets like Dunnes or Tesco for land as their stores average around 30,000 sq ft (2,787 sq m). But the aggression with which they are snapping up smaller lands is keeping prices buoyant."

Property experts claim the discounters, who both operate their own in-house property teams, typically pay between €1 million to €1.25 million for a site. However Lidl's race to roll-out its store network means it will pay up to €5 million for a suitable site.

According to Mr Conroy, Lidl is anxious to establish a "critical mass" of stores before its far richer rival - Aldi's owners, brothers Karl and Theo Albrecht are the third wealthiest men in the world, according to Forbes magazine - chews up market share, as it has successfully done in Germany, the Netherlands and Denmark.

Lidl has 37 more stores in the Republic than Aldi. But Mr Conroy claims Aldi is biding its time until the right sites become available. He said: "Applying for planning permission is expensive and it's obvious Aldi is more conservative about costs at the moment than Lidl."

Curiously, despite the spread of discounter stores across the country neither Aldi nor Lidl have succeeded in opening a store in south Dublin, although Lidl has two applications for planning permission for stores close to Dunnes Stores's Cornelscourt flagship outlet.

Mr Conroy claims the lack of stores on Dublin's southside is down to planning restrictions and the high cost of land in the area. However, he points out that consumers are now prepared to travel long distances for cut-price produce.

"Kilkenny residents are so determined to shop in one of the discounters that people are car-sharing to do the weekly shopping in Carlow's Aldi. Their popularity here is incredible and I think we're looking at a massive shake-up of the supermarket industry," he said.