Lidl's International Expansion into Mexico

Introduction

Lidl is a German global discount supermarket chain operating across some 30 countries globally. The company is seeking to further expand its operations internationally. The supermarket has established itself by providing high quality of services and products at relatively low costs. The organization ensures to provide the best at low costs using processes which are less complicated and this ultimately results in the most outstanding shopping experiences by customers. Lidl envisions to revolutionize grocery shopping through its principles and values and adopting different kinds of good practices. This report presents an assessment of Mexico as the chosen suitable and most potentially attractive target market for Lidl’s future international expansion strategy. A rational shall be provided to justify, using a detailed discussion, the PESTEL analysis of Mexico’s macroenvironmental factors. This shall be followed by the application of Porter’s Five Forces model to provide a critical analysis of the competitive intensity of Lidl’s industrial environment in Mexico. Using a value chain analysis, an analysis of Lidl’s internal environment shall be discussed. To finalize, a critical evaluation of the various modes of entry available to Lidl in Mexico shall be discussed to determine the most suitable option.

Rationale

Following the comparative PESTEL analysis carried out, Mexico has been identified as the most suitable market which Lidl ought to venture into. The following is a detailed discussion of the macro-environmental factors of Mexico as the chosen market.

Political Factors

Government Policies

In reference to Appendix 1.0., there exist key government policies which majorly focus on the control of competition in the retail market in Mexico. The competition policies focus on regulating the abuse of dominance and the abuse of power in the grocery retail sector. The grocery retail market in Market consists of large supermarkets, hypermarkets, convenience, small, convenience supermarkets, bars and kiosks among others . In Mexico, the grocery retail sector grew as a result of trade liberalizations which came after the signing of the North Atlantic Free Trade Agreement. These liberalizations led to an increase in foreign investors in Mexico which boosted the sector. Therefore, Lidl will be greatly welcomed in Mexico following the positive trend brought about by the trade liberalizations

Armed Conflicts

Mexico has incurred a significant amount of emotional and human expenses due to violence in the nation. Approximately 13% of the nation’s GDP is used to curb the outcomes of violence. For instance, in 2015, nearly $134 billion was spent by the government to rein in homicides and other kinds of violent crimes. Despite the rates of homicides being at 6.3% in 2015, they dropped by 9.5% from the previous year and this could be reflected in a tangible financial benefit through the reduction of government spending on the matter by 96 billion pesos (Schippa, 2016). A violent environment may not be attractive to Lidl, although, with knowledge that its effects are decreasing year after year, Lidl can remain confident that in entering the Mexican market will be increasingly safe after every year.

Economic Factors

The Mexican economy is considered to have a black hole in the informal sector and retail market. In 2016, 55% of the nation’s total employment was in the informal sector while, in precision, 16% are employed in the retail sector (Maldonado, 2017) . This represents a decrease by 5% from 2015. In addition, the International Labour Organization confirms that the minimum wage in Mexico is part of the lowest in North and South America. The minimum wage in Mexico is $3.9 per day and 35% of the Mexican population are low income earners. Therefore, as many people rely on the minimum wage, retail markets take advantage of this factor to ensure low income earners can access their products. Similar to the motivation seen by other retail organizations in Mexico, Lidl can opt to invest in the market and capitalize on the availability of employees and being able to incur relatively lower costs on labour.

National Retail Market

In the course of 2016, the retail market in Mexico grew by 9.7%. 49.1% of the total sales in retail market (mainly groceries) were from supermarkets. In 2015, there were over 2600 store openings; 10% consisted supermarkets. This means that Lidl will have to outcompete other organizations present in the retail market and this will result in a variety of goods being provided to the customers. Some of the competitors that Lidl will have in the market include internationally recognized retailers such as Walmart de Mexico and Organización Soriana. Lidl would have to adopt different formats in order to meet the needs of different target customers from different segments (Maldonado, 2017).

Literacy Levels

In 2016 alone, less than half (46.7%) of Mexicans aged between 25 and 34 years old had attained secondary education. Also, in the same year, 21.8% had acquired tertiary educations. In 2016, the number of people who graduated for the first time from secondary education increased from 40% in the year 2000, to 56% in 2015 (OECD, 2019). In addition, Mexico’s constitutional reform in 2012 made education compulsory so that students can acquire skills which are important in the 21st century. There is a Programme for Inclusion and Educational Equity whose goal is to empower the capacity of educational services and schools which serve students, migrants and children with special needs for education. Therefore, Lidl can benefit from Mexico’s goals towards enhancing its literacy levels and this will provide skilled personnel who shall occupy key positions in the organization.

Population Trends

The population in Mexico keeps growing at a rate of 1.3% every year over the previous 20 years. 53% of the total population in Mexico is 30 years old. The population of children and babies between ages 9 and 12 is projected to decline significantly during the next 20 years because Mexicans are postponing starting families until they have reached above the age 30 (International Markets Bureau, 2013). Also, Mexico’s population is largely composed of youths and this results in continuous urbanization of the nation with many people residing in urban centers. Therefore, Lidl will benefit from the large young population present in urban centers. Its supermarkets in Mexico will benefit from high income shoppers who have a preference of buying food from such stores (OECD, 2019).

Environmental factors

Climate Change

Mexico has adopted a mid-century climate change strategy which has central lines of action based on the building of a resilient society with developments that result in low emissions to the environment. The strategy focuses on reducing the average global temperature below 2 degrees Celsius. Mexico has faced hot days and added heat waves. Temperature can grow to the extent of 33 to 35°C. Since the 1960s, Mexico’s temperature has risen across the nation by 0.85°C. These high temperatures tend to affect the elderly cohort whose population has grown from 5.1% in 1995 to 6.8% in 2006. This factor represents one of the challenging factors which Lidl will face in the event of unfavourable outcomes from climate changes. Lidl would have to collaborate with reliable sources of meteorological information in order to acquire information earlier and to anticipate and counter unfavourable effects of climate (Anon., 2016).

Expected Future developments in the Environment

Since 2003, Mexico has been working towards improving its environmental policies and institutions which has resulted in positive influences in its economic integration policies. The nation faced different environmental challenges following the years of drastic industrialization which include deforestation, desertification and contamination of water sources (Gilbreath, 2003). Another key challenge that the government is working on is fostering urban development in a manner which is socially-inclusive and environmental-friendly. Border 2020 is one of the bi-national environmental programs which Mexico is engaged in whereby it collaborates with the US in solving environmental problems and associated health problems in the border region (Almodovar, 2019). Lidl will benefit from such future developments by operating in an environment with reduced air pollution, access to safe and cleans water, proper waster and material management and joint preparedness with society in responding to the environment.

Technological Factors

Potential For innovation

There are optimistic reports concerning Mexico. It is regarded as having potential for vast technology innovation due to demographic and infrastructure development. For instance, the number of start-ups based on technology has grown threefold since 2010. Close to 2000 contracts for venture capital were finalized that were to result in $22 billion worth of investment in technology activities (Agencia EFE, 2019). This potential for innovation is beneficial for Lidl because the economy is increasingly dependent on technology. With a positive trend in adopting technology, Lidl can easily reach its customers using online marketing activities and campaigns.

Technology transfer and Access

There is a digital divide in Mexico and this is due to inequality in society (Manuels, 2016). The division is according to high- and low-income earners. By 2014, the Mexican government had to approve essential constitutional amendments as well as miscellaneous legal reforms with a goal of reducing the divide using fibre optic network. As a result of this technology divide, Lidl will initially attract high-end customers who are more accustomed to a variety of technology. Technology innovation will eventually result in a close in the gap in the technology divide.

Legal Factors

Human Rights

Laws in Mexico do not, by every sufficient means, protect the rights of girls and women against sexual violence. Every state in Mexico upholds the constitutional right to life, but in 2010, the Supreme Court ruled that all states ought to provide emergency contraceptive pills accessible to victims of rape. Women are discriminated in their places of work and the UN Committee on the Elimination of Discrimination against Women pushes the state to combat this problem.

Regulation and regulatory Bodies

A Mexican agency, COFEMER is present which oversees regulatory policies and ensures there is quality in regulations made affecting the economy. Also, with goals of ensuring regulatory improvement, the Regulatory Improvement Council exists which liaises with the private, public, and social sectors, as well as coordinating with the Mexican government (United Nations Development Programme, 2014). Lidl can have an impact on the making of regulations which affect its operations by collaborating with the Regulatory Improvement Council.

Porter’s Five Forces Model

Lidl can apply the Porter’s Five Forces Model to determine the competitive intensity it is likely to face while positioning itself in the Mexican market.

Threats of New Entrants

New players in the market pose threats to Lidl in the Mexican market. The retail industry in Mexico has had a history of steady development and this reflects that there exist few barriers to enter the industry. More players will come in to compete with Lidl. However, Lidl is large enough and has vast experience working in 30 nations (Maldonado, 2017). Therefore, it can acquire a large amount of capital which can be used in promoting itself through advertisements and offering enough discounts after opening up in order to capture more clients. In addition, since there are many stores available, the psychological switching costs which will be involved by the customers will be significantly lower.

Threat of substitutes

The presence of substitutes for services and products can be a great challenge to Lidl in the Mexican market. Potential substitutes for Lidl’s retail market services can come from kiosks, convenience stores and shops which are easily accessible by the low-income earners (OECD, 2019). However, when Lidl positions itself in the Mexican market as being able to provide high quality services and products at incredibly low costs, the switching costs which includes economic and psychological costs that will be incurred by consumers will be low. Therefore, Lidl can substantially over come the threat of substitutes.

Competitive Rivalry

Lidl will be operating in an environment which has already been explored by other key players who make up the competitors. These competitors include Walmart and Organización Soriana (Anon., 2016). Another factor which will further minimize the threat of competitive rivalry for Lidl is that the industry has been growing over the previous years. Also, the retail industry is attractive to employees as it is seen that 55% of the total employment population are working in retail-based businesses (OECD, 2019).

Bargaining Power of Suppliers

The bargaining power of suppliers is low when there are many suppliers in the market. Considering that the retail market is still growing in Mexico, there is a large number of suppliers who are able to sustain the operation of competing companies like Walmart. With many suppliers in the market, the switching costs involved are primarily lower and this adds to Lidl having an upper hand while making negotiations with suppliers. This favours the operation of the supermarket as it can negotiate lower costs from suppliers to sustain its mission of providing lower costs services at high quality.

Bargaining Power of Buyers

It is identified that high-income earners are more likely to shop in large supermarkets and hypermarkets. This does not mean that low income earners do not acquire their products from Supermarkets as well. Since the low-income earners make up a larger population of the people living in Mexican urban centres, they can negotiate for lower prices for products and services from Lidl. This means that the buyer power in the retail market is strong (Maldonado, 2017). On the good side, Lidl promises to deliver quality at low costs therefore prices would not be determined greatly by the impact of buyer power.

Value Chain Analysis

In this section, a value chain model shall be used to evaluate the resources and capabilities of Lidl’s internal environment.

Primary Activities

The primary activities in Lidl’s value chain includes the resources and capabilities which have a direct impact in providing products and services to its customers. The primary activities include the following

Inbound Logistics

While operating in other nations, Lidl has exhibited good and strong working relationships with its stakeholders. Good relationship with suppliers helps Lidl negotiate long-term beneficial contracts which are necessary in ensuring the continuous flow of goods and services in time (LIDL, 2019).

Operations

These operations, on the part of Lidl, involve the activities done when the required raw materials arrive at the supermarket’s warehouse and they are processed to become the end products which are presented on the shelves in supermarkets (LIDL, 2019). Lidl has activities such as packing, machining, assembling and inspection to ensure the products meet the quality needs and comply with the standards of requirements by both the organization and the law.

Outbound logistics

These activities include the delivery of products and services to customers by the use of different intermediaries. Lidl has invested in the proper material handling, scheduling, warehousing, transporting, order processing, and order delivery processes. Order delivery is advanced, especially with the use of technology and the internet. Customers can make online purchases from the organization’s website and the company can arrange for the means of delivery at the customer’s destination. In addition, after-sale services are available for large products such as televisions and fridges. In the case where Lidl does not have outbound logistics, it opts to outsource. For instance, it works together with Dublin service called Buymie, which is a third-party provider of home delivery services for Lidl’s customers (The Irish Times, 2019).

Marketing and Sales

In this stage, Lidl highlights the benefits as well as the points of differentiation offered to convince customers what they are being offered is the best service or product at the best quality. Lidl understands that providing products at high quality and at relatively cheaper costs with features that are distinct do not add value along. Therefore, the organization invests in sales and marketing activities. In the Mexican market, Lidl will have to hire marketers and sales agents who will play a crucial role in popularizing its stores, products and services.

Services

Lidl has experience in retaining customers by offering post-sale and pre-sale services. In Mexico, there is a large number of young people who will be frequenting Lidl’s stores and website (LIDL, 2019). Therefore, in order to keep them returning, Lidl can employ its post-sale services which will cause the customers to market and promote the organization by sharing with their friends and making recommendations.

Secondary Activities

Procurement

These are the processes involved in the buying of inputs and procurement is linked to a variety of activities which add value to the company’s supply chain. Therefore, having set up shop in Mexico, Lidl will need to consider its procurement activities closely and in order to gain this information, the company can approach professionals and consultants in the market (LIDL, 2019).

Technology Development

Lidl has been in the retail business long enough to witness the changes in technology. Therefore, technology advancement is key, especially when entering the new market of Mexico. Mexico has potential for tech innovation and Lidl needs to comply with this technological trend so as to remain a step ahead and have the opportunity to adapt new techniques of handling material and selling to customers (The Irish Times, 2019). For instance, Lidl can adopt the use of drones in Mexico because it is well understood by the young generation which occupies urban centres in Mexico.

Evaluation of Modes of Entry Available for Lidl

Entering a new market requires investment in key activities to ensure successful penetration into a foreign market. The following means can be used.

Licensing and Franchising

Lidl can establish a mall and have it integrated with its store. This mall can have external space which can be used by business committees and other professional committees in running their errands. Lidl can provide license to such committees in using of such spaces and rooms inside the mall for professional purposes (Marketing Teacher, 2019). Lidl can introduce a new kind of technology that will ease the functioning of retailers in the industry and for external organizations which seek to use it, some fee can be charges as royalty for its temporary possession.

Acquiring Foreign Companies

This would be the most recommended entry strategy for Lidl. By acquiring a Mexican retail company that already exists, Lidl will have a good position to pick up from. This means that it will not only be acquiring the tangible assets of the foreign company, but also the intangible assets. For instance, Lidl can acquire Organizacion Soriana, and this will turn the already existing customers of the company into being the future customers of Lidl (Miley & Donohoe, 2019). However, Lidl would have to ensure that the acquisition is not considered as an anti-competitive practice which violates the existing laws. For instance, if the acquisition is unlawful, Lidl can be charge with abuse of dominance or abuse of power, and this will result in legal costs which will affect the entrance strategy.

References

Gilbreath, J., 2003. Environment and Development in Mexico. Recommendations for Reconciliation.

Manuels, J. M., 2016. The Digital Divide in Mexico: A Mirror of Poverty. Mexican Law Review, 9(1), pp. 93-102.