Greenfield Investment and Its Utilisation by Aldi and Lidl
Greenfield investment is a type of business expansion where investments are made on the facilities in a new market where there were no such a facilities previously (Barclay, 2002). Aldi and Lidl have increasingly relied in greenfield investment as they main new market entry strategy.
The choice of greenfield investment was done by Aldi and Lidl management among other alternative methods of new market entry such as exports, forming joint-ventures, mergers and acquisitions etc. for a range of reasons. All of these new market entry strategies have their advantages and disadvantages some of them have been discussed below.
According to Ando (2006) companies will be in a better position to fully utilize their company-specific advantages if their choose greenfield investment as their new market entry strategy. This statement can be shown as one of the main reasons why Aldi and Lidl have increasingly relied on greenfield investment as their main new market entry strategy. Both companies had their competitive advantages that were their ability to keep business costs down by saving on additional costs such as customer services, ‘art-of-state’ shop designs and additional features. If Aldi and Lidl had chosen any alternative new market entry strategy their current competitive advantages would be put under risk, threatening to the overall success of the business.
Moreover, “reasons for greenfield investment could be that companies frequently make foreign investments where there is little or no competition, so finding a company to buy may be difficult” (Epperlein, 2007, p.22). This argument was true as well due to the fact that discount retailing business concept Aldi and Lidl adhered to was relatively new at the time of their expansion and there were no retailers using the same business concepts in Aldi and Lidl target markets, these companies could form joint-ventures with.
Another possible reason for the choice of greenfield investment done by Aldi and Lidl management may include low transportation costs with investment method is associated with. As we know from the case both Aldi and Lidl offered mainly local products in the markets they have expanded to. For instance, in UK Lidl supplied 90 percent of poultry and meat from UK producers and fruit and vegetable were taken from local producers as well when there was season. There are many similar examples in other countries as well. Moreover, Aldi as well did not sell any German products in US market at all, except the world famous brand ‘Christstollen’ and almond paste and only during the Christmas season.
As a result Aldi and Lidl were in a position to save significant amount of financial resources on transportation costs and this saving was passed to customers in the forms of reduced prices of the products, thus maintaining competitive edge of Aldi and Lidl.
It has to be taken into account that much of the international expansions Aldi and Lidl were engaged in, have been conducted during the period before Euro had been introduced as a common currency for all country members of European Union to implement apart from the UK. Therefore, when choosing greenfield investment as their market expansion starategy within Europe Aldi and Lidl management were partially guided by foreign exchange rate benefits.
Specifically, choosing any alternative method apart from the greenfield investment for market expansion would have made the profitability of Aldi and Lidl vulnerable to any foreign exchange rate fluctuations where German currency and the currency of expansion market country were involved in. Therefore, choosing greenfield investment new market expansion strategy made a good business sense for Aldi and Lidl at that point of time in terms of avoiding from being disadvantaged by fluctuations in a foreign exchange rate.
Advantages and disadvantages of greenfield investment entry strategy
There are range of advantages and disadvantages associated with greenfield new market entry strategy. Aldi and Lidl management were guided by some of these advantages when they were making new market entry strategy decisions, and at the same time some of the advantages of this strategy discussed below did not apply to the case of Aldi and Lidl due to the various reasons.
The advantages of greenfield investment market expansion strategy include support from the host countries, low transportation costs, avoidance of trade restrictions, tax incentive advantages, and avoidance of being negatively affected by fluctuations in the foreign exchange rate, while the main disadvantages of greenfield investment are being more expensive to set up and the higher level of risks involved.
It has been stated that “greenfield investments are uniformly welcomed by host countries as they create new production capacity” (Sauvant, 2009, p.9). As a result host companies offer incentives and encouragement for multinational companies in forms of tax advantages, legal supports and decreasing the level of bureaucracy.
This advantage played a significant role on the new market entry strategy choice of Aldi and Lidl, and accordingly these companies have gained support from many of the host governments of the markets they were expanding in.
However, it has also needs to be stated that this specific advantage of greenfield investment strategy is more related to undeveloped and developing countries than highly developed countries. This is because in highly developed countries local governments would not be very keen to offer advantages to multinational companies entering their markets because they would prefer to protect their local companies, whereas in undeveloped and developing countries multinational companies entering their markets get increased support because the number of jobs they create in these countries is very important for host countries.
Another considerable advantage greenfield investment offers as a market expansion strategy is related to the avoidance of trade restrictions in new market countries (Braunerhjelm and Ekholm, 1998). There are trade restriction in place for imports in many countries or blocks set up in order to support local companies. Moreover, the majority of trade restrictions relate to the food products entering the country for health and safety reasons, as well as in order to support local producers.
A good example for the trade restriction would be European Union, where any European Union member country is not allowed to import the products from non EU-member countries, when these products are available from EU member countries. However, when companies enter new markets through greenfield investment strategy any trade restrictions in force within the country would not apply to their products.
The advantage of avoidance of trade restriction did apply to Aldi and Lidl, because during their expansion time European Union had not been formed or was not in its current state in terms of enforcing trade restriction rules and regulations for member-countries.
Moreover other advantages associated with greenfield investment strategy include low transportation costs and avoidance of being disadvantaged by fluctuations in foreign exchange rate and these advantages played a major role in cases of Aldi and Lidl, as it has been shown above.
However, greenfield investment strategy has a range of disadvantages as well and the high amount of risk associated can be shown as one of the main disadvantages of this investment strategy (Kotler, 2002). Due to the lack of knowledge about the characteristics of the new market, and the absence of strategic partners there, companies that enter new markets through greenfield investment strategy do take more risks than companies who choose two form joint-ventures in new markets. A good example would be Lidl’s market expansion to Norway. Due to the fact that Lidl management was not closely familiar with specifications of Norwegian market the whole expansion project had failed.
Another disadvantage of greenfield investment strategy relates to this form of strategy being more expensive compared to alternative market expansion methods, at least at the initial periods of operations. Where in cases of joint-ventures set-up expenses are shared among the partners, in case of greenfield investment expanding company has to pay all business set-up bills, which tend to be huge in amount.
- Ando, K, 2006, Japanese Multinationals in Europe: A Comparison of the Automobile and Pharmaceutical Industries, Edward Elgar Publishing
- Barclay, LA, 2002, Foreign Direct Investment in Emerging Economies: Corporate Strategy and Investment Behavior in Caribbean, Routledge
- Braunerhjelm, P & Ekholm, 1998, The Geography of Multinational Firms, Volume 12, Springer
- Kotler, PH, 2002, Marketing Asian Places: attracting investment, industry and tourism to cities, states, and nations, Prentice Hall
- Epperlein, A, 2007, Foreign Direct Investment in Ireland Under Consideration of the Financial Services Sector in Particular, Green Verlag
- Sauvant, KP, 2009, Investing in the United States: Is the US Ready for FDI from China? Edward Elgar