The price war between Aldi and Lidl in Germany is escalating quickly, with the two discounters pushing prices down further. Most retailers are focusing their advertising and communication on low prices, following the VAT rate cut implemented by the government.
VAT cut to help population and consumption
Following the COVID-19 pandemic, the German government has implemented a temporary VAT rate cut, which will run from 1 July until the end of 2020. The cut is aimed at supporting the population, as well as trying to maintain consumption levels. The VAT rates have been cut from 19% to 16% and from 7% to 5% on various services and products, including groceries.
However, the evidence of the efficiency of a VAT reduction on boosting the economy and consumption are mixed and difficult to measure. In this case, it has already had a direct impact on the retail industry with major retailers lowering their prices and entering a fierce price war.
The fight for value
Following the government’s announcement, retailers were quick to react and reduce their prices. Lidl was first to reduce its prices in line with the new VAT rates, transferring the “savings” directly to shoppers.
Aldi, known for being the cheapest discounter in Germany, was also quick to react. Aldi Süd and Nord added an extra percent off on products taxed at the new rate of 5% and communicated the 3% price reduction on their entire range.
Nearly all retailers, including Edeka, Rewe, Kaufland and Penny also reduced the price of most or all their assortment according to the new VAT rates. Netto Marken-Discount is going further by rounding off prices to the whole cent, providing even more value to shoppers.
|Source: Kaufland, Edeka, Netto, Penny (top to bottom, left to right)
Initially retailers communicated with consumers the VAT rates were being cut and prices decreased, however Aldi and Lidl are now entering a more direct price war.
Escalation of the price war
Aldi (Nord and Süd) and Lidl have taken the fight for value and entered direct competition. The retailers are now comparing their prices against their competitors, claiming they are the cheapest. However, the way prices have been compared might not be completely relevant, according to German retail specialist Lebensmittel Zeitung.
The other retailers and discounters have so far seemed to stay away from this type of direct competition. Rewe and Edeka are expected to continue communicating their low prices and potentially introduce strong promotional offers on brands. This might only be the beginning of this price war and it could intensify further in H2 2020 and into 2021 due to the expected economic recession.
|Source: Lidl (left), Aldi Süd (right)
Considerations and potential implications
- Germany has always been a market where the focus on low prices was strong, due to the large share of the discount channel. The COVID-19 pandemic and the government’s new measures on VAT rates have accelerated this further
- The strategy from major discounters Aldi and Lidl focuses on everyday low prices. As other retailers will struggle to compete in this area, it could mean more space for promotional offers, especially on branded products
- The fight for value is growing everywhere. Germany might be one of the earliest examples of what could come in the retail industry in other countries
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