Discounters in Baltic Countries: Weak Results and Clear Underdevelopment

Lidl Set to Make First Steps in Baltic Market in 2015

The discounters channel showed a subdued vague performance in Lithuania, Latvia and Estonia during the last decade, with local and regional retail players lacking experience to utilise this channel. However, the situation could change significantly in the near future. Although discounters have so far failed to make major inroads in the Baltic markets, Lidl is confident that it can change this when it enters Lithuania in 2015.

Sensitivity to prices has long been a key criteria for consumers in Estonia, Latvia and Lithuania. As far as brands are concerned, producers acknowledge the importance of promotions and that any brand accompanied by the dull and unglamorous word “discount” and a slashed price, is often the best-selling brand in the country.

Yet for all the talk of frugality, shoppers remain unused to the idea of going to stores where prices are, at least theoretically, the lowest of all channels. Discounters remained an afterthought in the Baltics, as retailers devised plans for expansion. In fact, the darkest years of the recent economic crisis saw the number of discounters stall and even decline; store closing started in Latvia in 2011 and in Estonia in 2012, with only Lithuania bucking the trend. While there are still some stores matching Euromonitor International’s definition of a discounter (chained retail outlets, typically with a selling space of between 400 and 2,500 square metres and with a primary focus on selling a limited range of food/beverages/tobacco and other groceries at budget prices, regularly under private label brand names), their impact on retailing overall has been marginal.

Clear Underdevelopment of Discounters in Baltics

In Latvia, 56 Supernetto stores belonging to ICA Gruppen AB were the only discounter outlets surviving in 2013, following the closing or rebranding of Cento stores by Coopernic. Coopernic remained committed to discounters in Lithuania, where it operates alongside ICA’s Supernetto and the total number of outlets was 112 at the end of 2013. All of Estonia’s 53 stores were also owned by ICA Gruppen, although it chose not to use the Rimi brand name, going with Säästumarket instead.

Discounters usually outperform the broader category of modern grocery retailers, as they only sell popular product categories and use selling space more efficiently. This has been the case in Estonia as well, with discount stores generating nearly 60% more revenue per square metre (EUR5.51 against EUR3.44). The discrepancy in Latvia was even greater, with discounters bringing in a revenue of EUR4.51 per square metre compared to EUR2.68 on average via modern grocery retailers. Lithuania’s discounters stood out, as here sales were actually lower compared to all modern grocery retailers (EUR3.04 and EUR3.16).

Following their initial introduction to the Baltic markets, new discount store openings did not keep pace with the expansion of other modern grocery stores. In Lithuania, discounters accounted for 10% of all modern grocery stores in 2003 but only 5% a decade later.  Similarly, in Latvia only 2% of all stores were classified as discounters in 2013, compared to 9% in 2003. These figures contrast sharply with developments observed in other markets. For instance, in Poland the share of discounters rose gradually from 9% to 10% in 2003-2013 whereas in Germany one in every three grocery stores is now a discounter, up from 27% in 2003. Estonia seems to be following the path of more advanced economies, with discounters’ share slowly rising from 3% in 2003 to 5% in 2013; however, still marginal.

Discounters’ Market Dynamics in the Baltic Countries: 2003-2013

EU-Baltic markets-Discounters-AUG14.jpg

Source: Euromonitor International

 

Reasons Behind Discounters’ Underperformance

One of the possible explanations for retailers’ reluctance to expand the network of discount stores is that their target audience is too “tight-fisted” even for discounters’ offerings, and often turn to bazaars for their groceries, food in particular. Lower prices offered in bazaars in cities, both big and small, are often a result of suspect accounting and the sale of smuggled or counterfeit goods. As a result, bazaars generate far greater sales than discounters.

Another possible explanation for the unsatisfactory performance of discounters is a lack of business continuity. There has never been a pure discounter player in the Baltic markets, as all stores were operated by Royal Ahold (before it was acquired by ICA Gruppen), Coopernic and Vilniaus Prekyba. These same companies also operate supermarkets, hypermarkets and convenience stores. Judging by the outcome, this has brought anything but synergy. Therefore, the arrival of Lidl might disrupt the market, by bringing a more aggressive pricing strategy supported by its efficient operations and global supply chain, and exclusive focus on the discounter format.

Leading grocery stores have also contributed to the poor fortunes of discounters, taking away their biggest advantage. Whilst constantly improving the appearance and shopping experience of outlets, supermarkets, hypermarkets and convenience stores all relied heavily on price slashing to attract footfall. High market concentration and resulting bargaining power over suppliers allowed these retailers to push prices down, reducing the price gap between these stores and discounters, despite the latter’s heavy reliance on cheaper private label products. Moreover, private label brands are available in other channels as well, effectively limiting the appeal of discounters.

In hindsight, discounters were doomed to fail in Baltic countries, as market leaders were essentially competing against themselves, and with most marketing resources spent on modern stores other than discounters, results were unsurprising. Convenience stores in particular are competing against discounters, as they are no longer considered too pricey. Inconsistent branding did not help either: the usage of retailers‘ flagship brands for discounting stores made these outlets look like inferior versions of identically named convenience stores, only with significantly poorer product assortment. Newly-created store brands were rejected by consumers, as they lacked promotional support.

All Baltic markets have highly concentrated grocery retailing landscapes, with ICA and Maxima being major players. Until now, these retailers did not need to focus on discounter brands and generated healthy profits from other store formats, but the arrival of Lidl could make price competition more intense and force them to reconsider their format strategies.

Do Discounters Hold Potential in the Baltics?

Weak performance of discounters as a channel so far has not deterred potential newcomers from entering the market. Schwarz Group has announced a second attempt to open stores under its Lidl brand in Lithuania, which left long-established industry players nervous. As yet, no plans have been made public about the firm’s intentions to step into Estonia or Latvia. The company’s first move into Baltic countries in 2003 was over before a single store was opened, as it sold out all of its sites by 2007 after changing strategic direction. The company is known for its secrecy and has shed little light on how it sees itself in the mature and consolidated grocery retailing landscape. Competitors, with perhaps some inside knowledge, estimated in 2012 that up to 97-98% of Lidl’s assortment will consist of its own private label brands. This, however, would go strongly against recent change of direction all over Europe, where Lidl struggles to move from hard discounting to soft discounting in order to improve its image amongst shoppers.

Lidl’s chances of success should not be underestimated. To begin with, it can focus solely on discount stores, without cannibalising its own sales. Secondly, current market leaders have invested heavily over recent years in the design of their stores, and now offer not only more fresh food, but also fresh juice or coffee to go. Given these investments and ongoing maintenance costs, Lidl will likely have a tangible cost advantage with its no-frills approach. The financial might of Schwarz should not be overlooked, as it certainly has resources to disrupt the pecking order of any market it enters.

As Estonia is projected to see discounters’ retail value sales to decline by a CAGR of 4% from 2013 to 2018, it might be revealing that there is a gap in the market, which no company is successfully exploiting, and Lidl may be able to succeed in this by undercutting ICA and local retailers on price.

Latvia is expected to experience a slightly softer decline, down by a CAGR of 2% over the same period. At the moment, in both countries discounters are being remade into supermarkets and convenience stores, hence the projected decline. Lithuania should move in the opposite direction, with new stores being built and therefore gaining on average 6% in value until 2018, fuelled by Lidl’s entrance into the market. Still, in all three Baltic countries discounters will have a much lesser role in modern grocery retailing than other European countries.

On a final note, Aldi will be closely watching the progress, or lack of it, of Lidl in Lithuania and may eventually enter the market as well. If it does, then the “Baltic exception” in discounters not thriving would get challenged.

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