Lidl: The era of hypermarkets is over. Retail growth will be driven by private labels

A recent retail study reveals that the most profitable retail chains in Europe no longer occupy massive floor spaces and predominantly sell private label products. These trends have now reached Baltics. “Data from European markets clearly show that future retail growth is driven by chains with a dominant share of private labels and a cost-efficient business model,” says Alexis Latorre, Board member of Lidl Latvija, responsible for Purchasing. 

According to an April State Of Grocery Retail Report by the world-leading consulting firm McKinsey & Company, in tighter economic conditions, most consumers are opting for cheaper products. This puts pressure on large hypermarkets and gives an edge to local stores and smaller-format retailers that can offer cost-efficiency, good prices, and a strong brand.

The study found that a retailer with an above-average share of private label products is 2.8 times more likely to gain market share compared to competitors with a lower share.

According to both NielsenIQ and McKinsey data, the market share of private label products in Europe has risen to almost 40%. In some countries, such as Spain, Switzerland or the UK, they already account for more than half of total grocery sales. Discount stores such as Lidl, Aldi and Mercadona are experiencing the fastest growth in Europe thanks to private labels, which in some cases account for more than 80% of their assortment.

"This shows that consumers are no longer looking for famous brands – they are looking for a trustworthy shop. The retailer itself has become a brand," notes Latorre,  adding that Lidl’s secret lies in simplicity and consistency: we don’t distract the customer but offer exactly what they’re looking for.”

Difficulties for hypermarkets

"The future of hypermarkets can only be predicted on the basis of European trends. For example, Groupe Casino in France has had to close its hypermarkets, while in the UK Tesco and Sainsbury's have started to restructure their large stores to prevent customers from switching to discount stores."

In Latvia, these changes are only just beginning. 

"Lidl's rapid expansion and customer loyalty to private label products confirm that European trends are taking root here too. "We see that local customers increasingly value transparent pricing and high quality. That's why we can't afford to waste square metres. Every corner of our store has to serve a clear purpose - it ensures our cost efficiency," says A. Latorre.

Recent consumer behaviour research also shows that Lidl remains the leader in value for money.

"In a volatile market environment, our private label strategy has proven successful both globally and locally. With a relatively limited assortment of around 90% private label products, we exclude intermediaries who might otherwise increase final prices due to logistics and other factors. This model gives us full control over production and marketing costs. A limited range of products allows us to buy directly from specific manufacturers or to order larger volumes with fewer product variants," explains Alexis Latorre.

Technology as a route to personalisation

Retailers are also increasingly using automated technologies to increase efficiency, reduce their costs and create personalised offers for shoppers. 56% of shoppers return to a retailer where they are offered this personalised approach of shopping, resulting in a 4-6% increase in sales.

Artificial intelligence solutions are also used in Lidl stores for order picking, customer experience analysis and decision-making, helping to reduce costs and improve communication between the retailer and the customer. What does this mean? A transformation also in employee skills in response to the increasing automation of processes and alternatives to replace missing hands and invest on the employer side.

What to expect?

The lessons of the recent pandemic and the global instability suggest that the time for long-term projections is over. However, it is clear that one of the drivers of retail development in Europe over the last 4 years has been mergers and acquisitions. It can therefore be said with certainty that consolidation will continue in the coming years, both within and between countries, in order to take pressure off and find new, additional potential from cross-country synergies.