Abstract
Lidl, a Germany-based international discount retailer that primarily focuses on food, is considering entering another country’s market. It has narrowed its choices down to either Norway, where it had tried and failed to expand previously, and Mexico. However, the chain struggles to make the final decision and develop a corresponding strategy. To that end, this report analyzes both nations using the PESTEL framework.
Upon detailed inspection, the situation appears to favor Norway as the superior alternative. Afterward, the report discusses Norway’s grocery retail industry using Porter’s Five Forces. It then considers Lidl’s principal resources through the VRIO model and proposes the most viable modes of entry. Ultimately, Lidl would likely fail if it tried to enter Norway directly through a subsidiary and should consider attempting a joint venture instead.
Market Selection Rationale
The initial score analysis appears to favor Norway heavily over Mexico, with a 20-point lead and higher or comparable scores in each factor. However, before the final decision, a more detailed analysis would be prudent. With regard to political considerations, Norway’s lower corporate tax rate is undeniably a significant advantage over Mexico. The 8% difference is likely to grow in the future, as Norway tries to achieve a similar figure to that of the rest of the European states.
Meanwhile, Mexico maintains a 30% tax rate, which has not changed for some years, and the nation shows no intention of reconsidering its stance. The fiscal policy difference compounds Norway’s advantage by providing it with stability compared to the other nation’s volatility. Overall, from a political standpoint, there is a substantial advantage to expanding into Norway.
The economic situation of each country has some issues that Lidl should consider before deciding to invest in a branch there. Norway has succeeded in controlling its inflation and keeping it at a level that is generally regarded as acceptable, while Mexico’s inflation has remained high for a long time. This figure could have been attributed to Mexico’s status as a developing country, but its GDP growth is lower than Norway’s, indicating instability rather than development.
The central banks of both nations tend to be careful, but Norway’s Norges Bank appears to be better at managing the economy through inflation rates. However, while these statistics all favor the European nation, Mexico represents substantial potential on which Lidl can capitalize, while Norway’s resources are running out, necessitating an expensive reorientation. An investment in Mexico may bring exceptional results, and a Norway venture can prove underwhelming.
The social factor is one where Mexico may have a substantial advantage, at least in terms of the venture’s ultimate results. The American nation’s population is nearly two orders of magnitude bigger than that of Norway, representing a far broader potential market. With that said, entry into Norway should be less risky because the population has a steady high income and should have money to spend on Lidl products. Norway is also closer to Germany geographically and culturally, making the entrance and adjustment easier than for Mexico. Moreover, Norway’s aging population and economic downturn prospects may increase their interest in the chain’s budget offerings.
Many Mexicans live below the poverty line and may not be able to afford Lidl’s products, which are inexpensive by European standards. With that said, the business can adapt its lineup, and the two countries represent a high-risk, high-return option and a low-risk, low-return one.
In terms of technology, the two countries are not particularly distinct, though Norway has a small and consistent advantage in most aspects. While it is noticeably higher than Mexico in the infrastructure rankings, the actual score difference, as quantified by Schwab (2019), is 3.4 points, indicating a small disparity.
The innovation and buyer sophistication aspects display a similar trend, with Norway having a slight advantage, but they are less important. Lidl uses a traditional brick-and-mortar model that does not benefit significantly from continuous innovation. Norway’s higher buyer sophistication may work against it in this case, as Lidl tends to focus on average-quality, average-price products. Overall, the technological factor for each country is high enough to warrant the investment without giving either a definite advantage.
Similarly, the environmental factor is minor in this case, though this finding is less due to the similarity of the two nations and more because of Lidl’s nature as a retailer. It does not create much waste and, thus, does not need to concern itself with recycling overmuch, particularly in Mexico. The company may have to introduce advanced recycling practices in Norway, though it likely has them already due to its operations in Europe. Neither country’s climate is severe or advantageous enough to hinder operations or assist them, though Norway’s cold may make storage easier. Lastly, Norway’s legislation regarding environmentally friendly cars can enable some savings if Lidl purchases electric trucks. However, this benefit is situational, and overall, the environment should not have a significant influence on the decision either way.
The last category, legal provisions, gives Norway a small advantage because of its status as a member of the European Union. Its general laws that affect Lidl should be the same as in the rest of the EU, making adjustments easy with minimal effort. Mexico’s relevant legislation is generally laxer, but some modification is still required, and the nation does not have the frameworks that would help Lidl establish its quality standards.
The free trade between the EU member states means that there would also be no difficulty delivering Lidl’s local products. The Union’s free trade agreement with Mexico incorporates tariffs that hurt Lidl, though they may be eliminated in the future. Regardless, while Norway’s advantage is not as substantial as indicated in the PESTEL analysis, it is apparent and warrants choosing the European nation as the expansion target.
Five Forces Model
Competition in the Industry
According to Ridder (2019), Norway’s grocery market is dominated by three companies: Norgesgruppen, Coop, and REMA. All of them are based in Norway and operate there exclusively, except for Rema, which is a Norwegian company that also retails in Denmark and Sweden (REMA 1000 Norge AS, n.d.). This structure would make the retail industry an oligopoly, where the dominant businesses do not necessarily have to compete to keep generating profits.
Instead, each of them can be satisfied with its current market share and refuse to encroach on the others’ territory, maintaining an equilibrium. However, since the products offered by retail food companies are mostly homogeneous, customers can easily switch to another outlet. As such, the ability of shops to charge higher prices is limited without coordinated efforts, naturally increasing competition as a result. Overall, competition in the industry is medium, with companies engaging in it naturally but having no incentive to escalate it.
New Entrant Potential
As is usual for an oligopoly, it is challenging for a new entrant to establish itself in the industry. As a retail outlet, it is easy to construct several locations and create a supply chain with some initial investment. However, the business would then have to convince customers to abandon their current brand loyalty, including the various rewards they may have accumulated as a result of marketing programs.
Even if it manages to establish an offering that is significantly better than what the current market leaders have, it should have little difficulty responding with similar offers. Additionally, it would take a considerable time for the chain’s popularity to grow and for it to begin earning an adequate profit to start expanding. This tendency is particularly prevalent for foreign companies, which have to adjust to the local market first, though they can also invest additional money to fuel faster growth. Overall, it is highly challenging for a new market entrant to establish itself in Norway.
Power of Suppliers
Suppliers tend to be weak in the retail food industry, as they can generally be easily replaced. There are many food producers, most of whom are small and do not constitute a large portion of any retailer’s supply. Their goods have a low variety, and a similar selection is available at most other businesses. Many are also located in geographically adjacent locations, and as a result, the costs of changing the supplier are negligible.
Moreover, grocery stores tend to be the primary channel of distribution for food, and farms and other producers cannot bypass them. Forward integration is not a viable strategy for any individual producer, and while cooperatives such as Norgesgruppen have been highly successful, current entry barriers make repeating its approach challenging. As such, stores can negotiate low prices and other favorable conditions with their suppliers under the threat of switching to another outlet. Overall, suppliers are weak in the Norwegian food retail market, having the choice of either joining a current cooperative and following its rules or making unfavorable contracts with a grocery chain.
Power of Buyers
Everyone needs food, which means that the food retail market’s customer base is massive and independent. Moreover, individual customers are not particularly significant, theoretically enabling companies to negotiate from a position of advantage. However, by definition, food is a saturated market, as companies will not find any customers who had previously not needed food, except for a relatively small number of newborns and immigrants.
To increase their buyer base, businesses have to either take market share from each other or expand internationally. They can achieve the first goal through competition, offering people better value or novelty products. However, the other companies will respond, driving prices down and giving customers power through increased choice. The second is risky and expensive, and only companies with a strong domestic presence can usually gather the necessary resources. Ultimately, buyers have power over food retailers because they can always switch to a better offering if one exists while the businesses are dependent on them.
The threat of Substitutes
There are generally few alternatives to a large grocery store that will have a substantial enough appeal to threaten sales. Smaller stores and niche businesses such as organic shops will not have the selection of a large location or their low prices that are created by the advanced logistics that large-scale operations enable. Their other advantages will still secure a client base for them, but it constitutes a small enough amount of people and sales to be negligible. Online grocery shopping may present a more significant concern, as it replicates many of supermarket retail’s advantages while reducing the amount of effort expected of the buyer. However, according to Tristano (2019), it is still in its early stages, as customers who prefer to select their groceries personally distrust them, and younger people drive demand slowly. It would be prudent to keep these options in mind, but at present, they are not a significant threat.
Internal Resources Evaluation
Lidl has two primary resources that can be considered valuable: its pricing and its own-brand products. Concerning the former, the company can be regarded as one of the originators and leaders of the discounting approach. Schmid (2018) highlights its and Aldi’s no-frills approach and its effects on various other supermarkets that have led Lidl to become Europe’s top grocery seller in 2014.
Throughout its existence, the company has been able to refine its strategy and stay ahead of many of its competitors, especially in the local area. Discounters use many different methods to reduce their prices, such as building outlets in areas with low rent, saving on design and packaging, and hiring less staff. Other businesses may find it challenging to compete with this approach, though some companies have begun imitating it in the time since Lidl’s creation.
The chain’s other strength is its selection of own-brand products, which are sourced from various areas across Europe. According to Schmid (2018), Lidl is a soft discounter, which means that it presents products that use its brands as well as those of other companies to create a diverse selection.
There are numerous internal Lidl brands, the production of which is typically concentrated in a particular area. As a result of this practice and the established nature of its brands, Lidl can sell many regional European products far away from their point of origin while guaranteeing their authenticity. It likely has also developed various methods for the reduction of costs and improvement of productivity compared to the competition. As such, the introduction of these items at strongly competitive prices can provide significant benefits to Lidl, and this resource is valuable, as well.
With that said, the resources available to Lidl are not necessarily rare, as the majority of its offerings consist of local produce, and the own-brand products can be acquired from competing brands. The company focuses on popular, traditional products that sell well for its lineup, which contributes to weak differentiation from other grocery store chains.
Moreover, most of these goods are produced within the European Union, which means that it would be relatively fast and inexpensive to deliver them if some other brand decided to start selling them. As such, it would not necessarily be costly to duplicate or imitate Lidl’s own-brand products, though the price of the alternatives would likely be somewhat higher as a result. The chain’s goods are neither rare nor inimitable and do not provide it with a significant competitive advantage as a result.
The chain’s discounting-based business model is less common, as many groceries prefer to focus on packaging, design, and customer service at the expense of a higher price. It would be challenging for such a company to reorient itself to adhere to Lidl’s model, as it would have to overhaul its entire image. With that said, REMA, one of Norway’s biggest grocers, uses a no-frills model that is similar to that of the German business.
As such, the rarity of the resource is somewhat compromised, as Lidl will compete directly with at least one other well-established business. However, it will be costly to imitate for companies that do not possess Lidl’s efficiency yet for the reasons mentioned above. Overall, the company’s resources struggle to distinguish themselves from those offered by the competition enough to provide a significant advantage.
With that said, Lidl is well-organized to produce value as a result of its long history of success and international expansion. It is designed to accommodate the discount model by incurring minimal expenses at all stages of operation, and it has well-established and efficient supply chains for the goods that it sells. Moreover, Lidl is open to innovation, as its business model is based on applying new and disruptive methods and continuing to evolve ahead of the competition. As such, the company should be able to capitalize on the advantages that it has and obtain an edge. However, if its lead over the other market participants is not long enough, Lidl’s efforts may not result in a big success. In the case of Norway, this consideration may apply, complicating the expansion proposition further.
Ultimately, it is likely that Lidl can only achieve parity with its competitors, taking up part of the market share but not growing without additional investment from the parent company. Its competitors either use the discount model or are familiar with it after a long period of competing with the first category. As such, they will not struggle to develop countermeasures for Lidl’s efforts and retain their customer base. Lidl’s entry into Norway in 2004, which turned out to be non-feasible after several years and resulted in the sale of the locations to a local firm, demonstrates this fact. Norway is not a market where the company can disrupt the industry and threaten the current leaders. As such, while entry may be possible, the returns will be low, and the chain will struggle to expand.
Modes of Entry Analysis
In 2004, Lidl entered the Norwegian market by rapidly constructing numerous stores in the hopes of quickly securing a portion of the customer base. This approach is standard for the company and was used when it entered many of its other markets. It enables the local venture to become self-sufficient and popular faster at the expense of a substantial initial investment. However, in the case of Norway, it failed because of the market structure, which was prepared to receive Lidl. The current leaders did not want the German business to establish itself and take their customers away. As a result, they developed answers and ensured that Lidl never justified its costs in Norway, eventually forcing the company to sell its local stores. The strategy proved to be ineffective and will likely do so again if Lidl decides to use the same approach.
There have been few noteworthy changes in either Lidl’s business model or the environment of Norway’s grocery retail industry since 2004. The German store still uses its discount approach and offers a wide variety of goods at low prices. In Norway, mostly the same companies are popular now as were back then, which means that they have experience from prior dealings with Lidl. An aggressive approach would likely run into the same obstacles as before, and Lidl would be unlikely to have any new ideas that would make it feasible. The emergence of such a set of proposals is unpredictable and unreliable. As such, the strategy is not adequate and likely to lead to a repeat of the failure from before. A different approach will have to be used if Lidl intends to succeed in its endeavor.
A joint venture is one of the more feasible approaches to expansion into Norway, assuming that Lidl can secure an agreement with one of the market leaders. It would allow the business to have the cooperation of at least one of the companies that would try to hurt its sales otherwise. Additionally, Lidl would have access to that retailer’s customer base and a chance to make its products popular with them. The adjustment of products to suit local needs would also be easier due to the partner’s experience. However, it may be challenging to convince a company to enter in such a partnership, and Lidl may have to offer it significant concessions. Moreover, the overall profits gained from such an endeavor would be lower than in the case of a successful standard entry.
Another option is to purchase another company and use it as the entry point for the market, bypassing the need to build a customer base. Many of the same advantages apply as in the case of the joint venture, and there should be no concerns over the relationship because the two businesses become a single entity. REMA 1000 would be an excellent acquisition due to the similarity of its business model to that of Lidl. However, its shareholders may have no interest in selling the company and refuse to consider the merger offer. Even if they agree, the price is likely to be exorbitant due to the size of the business. Regardless, the option warrants consideration if Lidl can arrange adequate resources to go through with the merger and if the potential profits outweigh the investment.
The last option is for Lidl to export its own-brand products through other outlets without establishing a store presence in Norway. This model has numerous disadvantages, such as lower potential sales and weaker brand loyalty. Moreover, Lidl will not have control over how its products are handled, with a lack of advantageous positioning and an overall retailer approach that contradicts its philosophy is possible.
However, the method is also characterized by low risk and needs a smaller investment. If Lidl’s products are popular with customers and create a demand, it can use this interest to transition into another mode of entry with the knowledge that the investment is likely to pay off. However, ultimately, this method is too far removed from Lidl’s general model to warrant in-depth consideration, as it is primarily a retailer rather than a manufacturer.
Ultimately, a joint venture appears to be the most feasible approach for Lidl’s entry into the Norwegian market. Direct entry through a subsidiary is likely to meet powerful resistance and struggle to grow, ultimately failing due to a lack of unique and powerful advantages. An acquisition would be free of the issues of the joint venture but would also require a massive investment that is not necessarily justified. Exports of its products without the construction of stores conflict with Lidl’s basic model. Licensing is meaningless because there are too few independent stores, which would need a significant reconstruction and drive their prices up because of the licensing fee. Overall, entry into Norway appears to be challenging for Lidl, and if it is to succeed without an excessively significant investment, a partnership is the best option.
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