ReachX logo

Aldi and Lidl to continue increasing grocery market share faster than incumbents

Publication Date: 19 Apr 2018 - By Gaurav Sharma (Editor ReachX) By Gaurav Sharma (Editor ReachX)
Actionable
Differentiated

Equity Fundamental Equity USA UK EU ex-UK Consumer

German discount supermarket giants Aldi and Lidl will grow market share and revenues faster than many competitors for the next several years, in the process constraining the credit quality of incumbents in many of the regions in which they are expanding, says Moody's. 

In new report for its clients, the ratings agency noted that Aldi and Lidl's market share gains in developed markets will be driven by gearing their shopping experiences to more affluent customers and by improving product quality. 

However, they will continue to preserve their historical strengths, with a focus on private labels, cost efficiency and low prices. Their limited online capabilities will not hinder their growth, at least in the next two years.

Vincent Gusdorf, Vice President and Senior Analyst at Moody's, said: “While Aldi and Lidl do not publish consolidated accounts, we believe their revenues will grow faster than traditional food retailers, particularly in the UK and Australia, where they are investing heavily.

"Aldi and Lidl's rapid expansion is credit negative for a lot of traditional retailers as it will push them to keep prices down to retain customers, in turn depressing profitability." 

Aldi and Lidl's market share gains in developed markets will be driven by gearing their shopping experiences to more affluent customers and by improving product quality. 

However, they will continue to preserve their historical strengths, with a focus on private labels, cost efficiency and low prices. Their limited online capabilities will not hinder their growth, at least in the next two years.

While UK and Australian incumbents' credit quality will remain stable or improve in 2018, discounters' expansion will continue. 

In the UK, the credit quality of retailers Tesco Plc (rated Ba1 stable by Moody’s) and Wm Morrison Supermarkets plc (Baa2 stable) should improve in the next 12 months thanks to cost savings and new revenue streams. 

“That said, even their credit quality could begin to feel the strain in two to three years if they continue to lose market share to unabated German discounters' growth and they are not able to offset it with new revenue streams and further cost efficiencies,” Moody’s said. 

In Australia, Woolworths Group Limited (Baa2 negative) and Wesfarmers Limited (A3 stable) should improve their credit metrics over the next 12 months after increasing their market share in 2017. However, Aldi will continue to expand, depress prices and squeeze incumbents' profitability.

In continental Europe, price competition will curb discounters' expansion, limiting credit quality erosion for most incumbents. In France, Spain and Belgium, pressure to cut prices or keep them low mostly comes from market leaders such as Leclerc, Mercadona and Colruyt. This leaves little room for discounters, although Lidl should continue to expand.

In Germany, market share gains are unlikely for Aldi and Lidl, but fierce competition will limit margin gains of other retailers. Moody's does not expect Aldi and Lidl to make much progress in their home market because the discount segment is already mature. However, despite economic growth, competition will mean only a limited increase in METRO AG's (Ba1 stable) margins in 2018.

In the US, German discounters will have limited effect on the large incumbent retailers, which already face tough competition.

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Gaurav Sharma Editor ReachX

 

Most read

ReachX
1-15 Clere Street, EC2A 4UY
London, United Kingdom
info@reachx.co
ReachX
1-15 Clere Street, EC2A 4UY
London, United Kingdom

info@reachx.co
Sign up to our newsletter