Tough Times Are Good News for Discounters

When times are tough, retailers are among the first to feel the pinch as consumers watch their wallets.

Nowhere is this more evident than in Germany's high-end stores, which have been suffering under the weight of a sluggish economy and high unemployment for months now.

But discounters such as Aldi and Lidl – which offer deals on everything from canned tomato sauce and pasta to doorknobs, nail files and computers – are reaping the benefits.

A consumer study released in Hamburg on Tuesday reported that 76.4 percent of Geman heads of household had shopped at Aldi in the past three months, up 8.8 percent from 1997. Competitor Lidl saw an increase of 14.1 points, to 43.2 percent. The increase came at the cost of traditional supermarkets, according to the survey of 30,547 Germans by the Axel Springer Verlag and Bauer Media.

What's in a name?

The study also found that consumers are paying less attention to brand names than in the past. In 1992, 59.7 percent of those asked agreed with the statement that "brand name products are better than generic products." Now, 54 percent of the study participants found brand name products better.

Aldi sells almost exclusively no-name products, while Lidl sells a combination of brand names and generics. This concept is keeping their cash registers busy. Retail food sales in Germany dropped by 2.4 percent in the first half of 2002, while Aldi's sales climbed by an estimated 12 percent in the same period.

New stores planned across Europe -- and abroad

Bouyed by the upswing, both Aldi and Lidl, household names in Germany, are now taking their shows on their road. They are opening new stores across Europe – and in Aldi's case, in the United States and Australia as well – as fast as they possibly can.

Aldi was founded in 1948 by brothers Theo and Karl Albrecht from their mother's store in Essen. The press-shy brothers have not been photographed in decades. Their business, however, speaks for itself. Forbes Magazine estimates that the company has annual sales of $27 billion (27.6 billion euro) at 4,000 stores worldwide -- and lists the Albrechts among the 20 richest people in the world.

In the past several years, Aldi has entered the U.S. market with its own Aldi stores. But the company has been active there for decades, having purchased the Trader Joe's gourmet discount chain in 1979 and controlling 7 percent of the Albertson's supermarket chain.

On the lookout for real estate

Growth is not always easy. Indeed, just looking for new sites is a huge task for this multinational concern. The solution: Aldi has a "real estate" section on its website and asks readers – or Realtors – to write in with offers of raw land or retail space in areas with a population of 15,000 or more.

Lidl, founded in the 1930s in Baden Wurttemberg, has a similar expansion strategy. Perhaps as press shy as Aldi, it's nonetheless clear that Lidl is also planning massive expansion in Europe. Its website notes that it has more than 4,000 stores in Europe and that it's seeking real estate in areas with a population of at least 5,000. Offers should be sent in via email.

Lidl's latest target is northern Europe. The company recently opened 10 stores in Finland, and competitors there expect the company to open 100 to 200 stores within the next year.

Lidl eyes northern European market

In Sweden, meanwhile, Lidl has been trying for years to gain access to the tightly controlled grocery market. There, just five chains control 94 percent of the market. A European Union study recently revealed that grocery prices are 18 percent higher in Sweden than the EU average, leading Swedish officials to push for market liberalization. But so far, Lidl's attempts to gain ground in the Scandinavian country have faltered.

Industry observers say the company is also eyeing Denmark, Lappland and Estonia. Lidl's annual sales hit 13,675 billion euros in 1991, according to Die Welt's report on Germany's Top 500 companies. This year's sales are expected to hit 16 billion euros.

Steep competition for brand names

The aggressive expansion plans by these stores, whose focus is selling no-name discount products, spells trouble for companies selling traditional brand name products.

German food products giant Unilever Bestfoods, which controls more than 60 percent of brand name food sales in Germany with annual sales of 3.29 billion euros in 2001, is launching a multi-million euro ad campaign as a counter-offensive.

The company, whose products include Knorr soups, Iglu frozen foods, Bertolli olive oil and Langnese ice cream, announced in August that it will boost its advertising budget by 50 percent to approximately 100 million euros in the second half of 2002.

It's a hard sell in today's economy. But Wilfried Wenzel, director of market research at the Axel Springer Verlag, said it's possible.

"Brand name producers can withstand the flood of store-branded products if they clearly tell consumers about the specific uses of their products so that its clear that they can't be compared with generics," Wenzel said. "Product uses must also be clearly communicated through advertising."

Advertising has its own pitfalls, however. Aldi recently suffered a public embarrassment in Germany after offering carry-on suitcases for 10.99 euro in an advertising flyer dated September 11. The weekly news magazine Der Spiegel reported on this under the headline "Aldi's Tasteless Deal."