Discount supermarket Lidl hit by skyrocketing interest bill
- Lidl depends on external loans from banks for ‘at least half’ of its financing
- This will act as a drag on future expansion plans.
- Lidl has almost £3 billion in debt to pay over the next five years
Lidl’s British subsidiary has been hit by a rise in its borrowing costs, threatening its previously relentless rise.
The German discount supermarket’s UK operation fell into the red after interest on its debts almost tripled to £108m.
It marks the first serious setback for Lidl in its foray into the UK market.
Along with rival Aldi, it has revolutionized food retailing over the past two decades.
The pair represents £1 in every £5.50 spent in supermarkets.
Hard blow: Lidl’s UK operation fell into the red after interest on its debts almost tripled to £108m
Millions of cash-strapped shoppers have abandoned more expensive traditional grocery stores during the cost of living crisis.
Both are privately owned. Lidl is controlled by the Schwarz family and Aldi by the Albrechts.
This allows them to take a long-term view and absorb any losses, experts say.
But unlike Aldi, which is financed entirely by its family owners, Lidl relies on external loans from banks for “at least half” of its financing, according to Marc Houppermans of Dusseldorf-based Discount Retail Consulting. This will act as a drag on Lidl’s future expansion plans, he added.
‘Theo Albrecht [co-founder of Aldi] “I have always said that when interest rates rise, Lidl would have problems,” Houppermans said.
Lidl, which is still growing at almost 20 per cent, has almost £3 billion of debt to pay over the next five years. It recently slowed its store opening program and laid off staff in its property buying division.
Lidl, which has expanded to 960 stores and recently opened its largest ever store in Luton, is not the only major supermarket facing rising debt servicing costs.
Asda and Morrisons were saddled with huge loans when they were bought by private equity groups just before the grocery market was hit by soaring food and energy prices.
The couple paid a total of £900m in interest last year, wiping out profits, accounts show. The fact that Morrisons and Asda have more debt with private equity owners “certainly” impacts their ability to compete, retail consultant Richard Hyman said.
“The change in ownership and a different financial structure has tied their hands to some extent,” he said. “That was seen with petrol, where Asda was always the price leader, but that’s no longer the case.”
Morrisons, which last week hired former Carrefour France boss Rami Baitieh to succeed David Potts as chief executive, saw its debts soar to £8bn after its takeover by buyout group Clayton, Dubilier & Rice (C&DR).
Borrowings have since fallen to £5.4 billion, Morrisons told investors last week.
Asda, the UK’s third largest grocer, is owned by the Issa brothers and private equity firm TDR and has debts worth £7.4bn. These are expected to rise following the recent debt-driven acquisition of EG’s gas station business from the Issas.
Analysts say market leaders Tesco and Sainsbury’s are better placed to cope with rising borrowing costs because they also have access to equity capital as another source of funding. Houppermans, who used to run Aldi in the Netherlands, also questioned Morrisons’ appointment of Baitieh, claiming he had “no experience” in competing with discounters.
Baitieh has promised a five-point recovery plan, although details are unlikely to emerge before he starts his new job in November. Morrisons, which last year was overtaken by Aldi as the fourth largest supermarket, declined to comment.
Lidl’s UK chief executive Ryan McDonnell recently said there was “no limit” to its expansion plans. And a spokesperson added: “Keeping prices low is a commitment we will always maintain to our customers.”
Asda said it remained the UK’s lowest-priced traditional supermarket and had to cut prices on hundreds of popular products by an average of 11 per cent.
Its “sustainable capital structure, strong cash generation and clear strategy to grow profits” would allow it to reduce its debt “over time,” a spokesperson added.
Lidl’s debt problems come amid signs that the seemingly unstoppable rise of discounters in the UK could be starting to lose momentum. Data last month from Kantar showed Aldi’s market share fell from 10.2 per cent to 10.1 per cent in the 12 weeks to September 3, while Lidl’s share fell from 7.7 per cent. cent to 7.6 percent.
It was Aldi’s first fall this year and the first in seven months for Lidl. Over the same period, Tesco saw its market share rise from 27 per cent to 27.2 per cent.