The financial performance of Irish supermarkets has long been a mystery to all but industry insiders. Their profits are guarded like the contents of the Vatican archives – often speculated upon, reportedly legendary, but few know for sure what they really are.
Tesco reveals its Irish sales, but not its profits. Musgrave, which owns SuperValu, reveals the chain's gross sales including those of franchisees. But it only reports the profits of Musgrave group, bundled up with all its other brands and its wholesale division. And that is about the extent of it. The detail of the once-in-a-generation boost to the bottom lines of Irish supermarkets from the lockdowns of 2020 remains unknown.
Lidl's Irish sales and profits are contained within the results of a German-registered company. Financial information on Marks & Spencer's Irish grocery operation is as spotty as its post-Brexit stock. Meanwhile, the performance of the family-owned Dunnes Stores group, one of the most secretive companies in the State, has long been concealed behind a bewildering array of unlimited entities.
You can thank Aldi for the fact that prices have risen so little over the last 20 years. We brought manners to the market
Aldi, the German discounter with a 12.7 per cent share of the market, has always wrapped the financial performance of its Irish operation into its British unit as an accounting job lot. Until now.
In an interview with The Irish Times, the group managing director of Aldi Ireland, Niall O’Connor, reveals for the first time its Irish revenues and profits over recent years, including the blistering first 10 months of the Covid era. They show a 46 per cent rise in its Irish profits for 2020. Its outlets here also were more than 70 per cent more profitable than Aldi’s stores in Britain, when measured as a proportion of sales.
“All of those profits are going back in to the business,” says O’Connor, as he confirmed Aldi will invest €320 million in 30 new stores over the next three years, on top of €1.6 billion it has invested since it entered the market more than 20 years ago. The company says it will also break the €1 billion barrier this year in purchases from Irish suppliers, as it reorients its supply lines after Brexit.
O’Connor says that Aldi, which operates 149 stores in the Irish market and employs 4,600 staff, posted sales “just shy” of €2 billion in 2020. This was up 14 per cent on 2019, the last pre-pandemic year of normal trading for the sector.
It recorded pretax profits of €71.2 million, up from €48.8 million in 2019. It paid corporation tax of €10.9 million, hired about 480 new workers in 2020 and its payroll rose 14 per cent to €149 million.
Its 2020 pretax profit margin of 3.6 per cent compares to 2.1 per cent for Aldi in Britain, O’Connor says.
“Profits have always been the subject of curiosity in the Irish market,” he says. “The increase in sales [from the pandemic] is what really drove profitability. In the year that was in it, yes it is correct - we were [more profitable in Ireland than Aldi in the UK]. But I would caveat that by saying the UK is a different market with more players.”
O’Connor argues the heightened profitability of Aldi’s Irish stores compared to those in Britain is not just a function of increased competition in the UK market. He says Aldi is also able to cut costs here by “riding on the coat tails” of the British operation by utilising its back office functions, such as technology.
“It doesn’t make any sense for us to have, for example, our main IT team in Ireland. We’d be just duplicating what we have in the UK. So we try to have a skeleton team here. That allows us to benefit from the economies of scale of the UK business, and we don’t have to take on all those extra costs. That feeds back in to our business and it is better for our customers.”
It is Aldi Ireland’s inextricable links with the British head office that have pushed it into the financial sunlight to break out its Irish performance for the first time. O’Connor says that a legislative amendment means companies in Ireland whose effective head office is registered outside of the European Union must now reveal their Irish results. Aldi’s Irish headquarters is registered in Britain. Following the end of Britain’s Brexit transition period, the rule applies to the German supermarket chain.
“I don’t think we will be the only one [to release figures], although I’m not sure everyone will. It depends on how their business is structured. The rumour is Tesco will and M&S will. It is great for the consumer.”
Overseas chains, in particular, were in years past suspected of squeezing higher profits out of supine Irish customers compared to their operations in the UK. The numbers suggest the extent of this may be diminished these days. Locally-owned Musgrave reported a profit margin for 2020 of 2.1 per cent for the group. Aldi’s 3.6 per cent profit margin is up from 2.8 per cent in 2019, but it is still a modest return compared to some other sectors. How does it compare to its other grocery rivals?
"This would represent a strong result [for Aldi]," says Owen Clifford, the head of the retail sector for Bank of Ireland, and a former Musgrave executive. "Profit margins of 2.5 to 3.5 per cent would be the norm across the industry."
O’Connor recalls the “eye-watering” cost of groceries at Aldi’s Irish rivals before it (and its German discounter counterpart Lidl) entered the market. Higher prices meant higher profits.
"You can thank Aldi for the fact that prices have risen so little over the last 20 years. We brought manners to the market," he says. It is a bold claim, but Clifford agrees with him that the economics of the Irish grocery sector, including prices and operators' profitability, were fundamentally altered by the arrival of the discounters – Aldi in 1999 and Lidl in 2000.
“Prior to the entry of the discounters, the net profit margins being delivered by many of the larger operators exceeded 6 per cent,” he says.
“As the former Aldi UK chief executive, Paul Foley, once stated, they ‘sucked the profitability out of the industry’. This has led to Irish-owned operators such as Dunnes and SuperValu recalibrating their offering. You will now find they have both a basic offering competing on price with Aldi and Lidl, and a premium offering focused on high-quality Irish produce,” says Clifford.
In response to the German discounters, other operators invested heavily in store design and Aldi and Lidl chose to follow them, Clifford says. The discounters have also in recent years moved beyond their initially perfunctory ranges and now stock far more more premium items. Aldi, for example, has boosted its range to 1,800 items and has invested in a “Project Fresh” revamp of its stores.
Overall, Clifford says, Aldi (and Lidl’s) entry to the market raised standards for customers all across the board and was the “catalyst for a marked evolution of the Irish grocery sector”.
There is currently upwards pressure on prices, however. Inflation in the grocery sector is still below 1 per cent, according to market research firm Kantar. But O’Connor warns he cannot rule out price increases at Aldi in the near future as operators struggle with higher costs, such as transport and energy.
“The industry doesn’t operate in a vacuum. We’ve mitigated [cost rises] to a certain extent. Can we mitigate it all? I’d be lying if I sat here and told you we can. It’s just not possible. I can’t rule out price increases. It is beyond our control. But we will minimise it for the customer. We still won’t be beaten on price – that is our raison d’etre.”
One of the reasons we didn't so well in the pandemic – and I still think we have done very well – is that we didn't have the number of stores in Dublin that we would have liked
Aldi’s 14 per cent sales spike in 2020 was slightly behind the market’s overall growth of 16 per cent. O’Connor insists he is delighted with Aldi’s financial performance. But he concedes it was “outgunned” for a period in the Dublin market during the busiest lockdown periods last year, due to its smaller footprint in the capital, where the largest critical mass of shoppers and the most affluent reside.
“We didn’t explode or inflate in the way that some others did – the Kantar numbers would suggest that,” says O’Connor. At the end of 2020, its market share had slipped back slightly to 11.2 per cent while Lidl was at 11.8 per cent, and Dunne, Tesco and SuperValu were each close to 22 or above.
“One of the reasons we didn’t so well in the pandemic – and I still think we have done very well – is that it is clear we were outgunned because we didn’t have the number of stores in Dublin that we would have liked,” he says. Aldi has about 24 stores in the capital, but it wants to open as many as 20 more.
“The availability of land in Dublin is difficult. Planning is difficult. We have stores coming in Dublin but, for me, it is not enough because there is a great market there. We have the smallest footprint of all of our competition. On that basis, we were really happy with 14 per cent growth.”
O’Connor says it may be struggling to get sites in Dublin, but Aldi is also on the verge of moving into other areas, such as parts of the west, where it has been trying to get in for years. It opened five stores in each of the years 2020 and 2021. It plans to open nine more in 2022, including Cahersiveen in Kerry, Ballina in Mayo, Clonakilty in Cork and Athenry and Tuam in Galway.
Aldi has previously suggested it wants to grow its network up to 200 stores in Ireland. Clifford warns there is a risk this could eat into the performance of some of its own network as it grows further.
“We have seen in other markets that the incremental rate of market share growth per store decelerates linked to increased market saturation. In other words – new stores start cannibalising sales from existing discount stores,” he says.
Clifford highlights that Aldi is “especially focused” on major urban areas and is offering 1.5 per cent “referral fee” incentives to be shown appropriate sites.
"This will support an increase in market share but the rate of growth will not be as rapid [as its growth until now]. There is still a perception that you can't do your full weekly shop at Aldi linked to the limited range on offer. As shoppers revert to more normalised shopping patterns – greater frequency of store visits – I expect that the volume of complementary visits to Supervalu, Dunnes and Centra from Aldi shoppers will increase compared to 2020/2021 levels.
“This will also stifle growth of market share. I do expect that Aldi will increase its market share linked to the expansion of its store footprint – however the increase will be marginal over the next 3-5 years.”
One area of the grocery market that grew strongly during the 2020 lockdowns was online shopping, through delivery and click and collect. In the busiest periods of the pandemic, online’s share of the Irish market grew from less than 3 per cent to above 5 per cent. In the UK, it is above 13 per cent.
Aldi launched click and collect services in February and has rolled it out to 25 stores, while it also provides home delivery from an urban selection of stores through Deliveroo. He sounds ambivalent, however, about whether online will be a major part of its strategy. He says online’s share of the market is now “below 4 per cent again, and falling”.
“You can measure anything in the heat of a fire and say it is successful. But as things normalise, what shopping patterns will customer adopt in future? Is this a service that our customers need? Because, we try and listen to our customers and give them what they need. We don’t want 96 per cent of our customers having to overpay to facilitate a much smaller proportion. We are being very careful. We don’t want to subsidise [online grocery shopping].”
Clifford says online grocery shopping will grow in the medium term, but Irish supermarkets were not properly set up to do it at scale in 2020: “Existing platforms were unable to deal with the unprecedented volumes during lockdown, leading to some consumer disengagement with the channel.”
Looking ahead for Aldi, O’Connor’s focus is on its bricks and mortar stores. He says it is gearing up for a bumper Christmas – “our best yet”. It has introduced a new vegan range, and it is also investing in more fresh Irish products.
“We’re hoping we can deliver a much more normal Christmas for our customers in 2021. The indications so far are it is going to be pretty good.”
He concedes the overall market this year has slowed down from the frothiest days of the pandemic lockdowns, may not be quite as good as the previous year. But it is still well ahead of 2019.
“Year-on-year comparisons are challenging at the moment. Growth is settling in the market and there is likely to be a decline on 2020. Kantar had market growing at 16 per cent for 2020 and we were a little bit behind that, but there were also good reasons for it.
“What is happening now is – we are at our highest share ever, and we are performing much better than the market once again.”
From now on, Aldi’s financial performamce will be conducted in the open. It must wait and see which of its competitors follows suit.
This copy was updated on Friday, November 19th to correct Aldi-Ireland’s profit-before tax figure for 2020.