How Lidl accidentally took on the big guns of cloud computing

Selling bread, butter and other staples at cut-throat prices has made Dieter Schwarz one of Europe’s richest men.
Now the 84-year-old founder of discount retailer Lidl, who according to business magazine Manager Magazin has amassed €40 billion in personal wealth, is branching out into a very different staple of the modern world: data services.
Starting with a system built for internal use in 2021, Lidl owner Schwarz Group now offers cloud computing and cyber security services to corporate customers.
Its IT unit, Schwarz Digits – which became a stand-alone operating division in 2023 – has signed up clients including Germany’s biggest software group SAP, the country’s most successful football club Bayern Munich and the port of Hamburg. Last year, the unit generated €1.9 billion in annual sales and it employs 7,500 staff.
“We did not start with a commercial motivation in mind but just wanted to address our own needs,” Christian Müller, co-chief executive of Schwarz Digits told the Financial Times in a rare interview. “We’re on a very steep growth path.”
A main selling point of its service is that all client data is processed and stored exclusively in Germany and Austria, which have stringent privacy and data protection laws.
When Schwarz, a privately held business with €167.2 billion in annual sales, was first exploring new options for storing data, it “did not want to be dependent on third parties,” Müller said.
And if there was no German option, it wanted at least to use a European provider and avoid storing data in other jurisdictions. After concluding that no existing provider could meet its needs, the company decided to set up its own cloud service.
“We have loads of highly sensitive data,” said Müller, such as sales patterns for individual stores, pricing calculations, customer information from Lidl’s loyalty programme and details of the group’s 575,000 employees.
When Lidl had its own cloud up and running, it soon discovered that other German businesses were asking themselves the same questions about whether they wanted to use the biggest cloud services based in the US and China.
“It is extremely important that Europe is on top of state-of-the art information technology and able to provide such services,” said Johannes Helbig, professor for digital sovereignty at Erlangen-Nuremberg University, adding that Schwarz Group’s approach was “important and much welcome” and “a highly encouraging role model”.
A precondition for an interview at Schwarz Group’s IT control centre in its sprawling headquarters was not to disclose its precise location on the estate. The group worries about the security of the nerve centre that is vital to the running of its 14,000 Lidl and Kaufland stores globally, as well as 220 warehouses and a growing number of factories that churn out products including bottled water, pasta and ice cream.
Before entering the premises, visitors must leave their mobile phones and all other electronic devices in a locker outside, and access is controlled by staff on a desk, as well as an automatic door controlled by a palm vein scanner.
The business is notoriously publicity-shy and only a few years ago started to hire media relations staff.
It is based in the outskirts of Neckarsulm, a small town of 27,000 in Germany’s wealthy southwest, and has slowly opened up in recent years. It now sponsors the Lidl-Trek Tour de France cycling team and was a high-profile partner of the Euro 2024 football tournament, with the children who walked the players to the start wearing Lidl-branded kit.
Last year, Schwarz decided to dip its toe in artificial intelligence, acquiring a minority stake in German AI start-up Aleph Alpha.
Dieter Schwarz is taking this opportunity to pursue broader goals in the fast-developing technology: his charitable foundation is working with the company’s home state of Baden-Württemberg to fund an AI campus in the city of Heilbronn. The campus aims to become “the global home” of applied AI and is partnering with Aleph Alpha.
Schwarz Digits’ focus on cloud computing, cyber security and AI was “well thought through”, said Axel Oppermann, owner of German IT consultancy Avispador, because all three areas were “highly relevant for clients”.
The size and financial power of its owner made Schwarz Digits more attractive to external clients who “are looking for an IT partner who won’t be gone within two years,” he added.
While Schwarz Digits had become “a credible regional challenger” to large incumbents such as Amazon Web Services, Google and Microsoft, Oppermann said the firm was at competitive disadvantage because it lacked their wide networks of external service partners, which market cloud products and help with the implementation and management of services. Amazon Web Services, for example, has a network of 130,000 partners in 200 countries.
But for regional companies with a close eye on data privacy and control, Schwarz Digits is an attractive option. “The key reason for us [to use Schwarz] was the offer’s digital sovereignty,” Bayern Munich told the FT, adding that Schwarz Digits’ focus on data protection and privacy stood out. “There is no comparable product available on the market,” the club said.
Its cyber security products have also convinced software juggernaut SAP, which became a client in 2023. The Schwarz cyber security platform “is showing us our IT systems from the perspective of a potential attacker,” SAP told the FT, adding that this was useful for identifying weak spots and analysing potential threats.
Schwarz built up this expertise in 2021 when it bought Israeli cyber security company XM Cyber for $700mn. Initially it had wanted only to become a client of the firm, which was cofounded by a former boss of Israel’s secret service Mossad.
“We evaluated every available cyber security product and concluded that XM Cyber’s was the best by far,” said Rolf Schumann, Schwarz Digits’ other co-chief executive. But the group then discovered XM Cyber was considering a stock market listing and worried that this could lead to the departure of key staff. “Hence we decided to add the whole company to our group.”
Schwarz’s investment in AI was “the next logical step” in broadening its tech expertise, said Müller. When Aleph Alpha raised more than €100mn in fresh equity last year, Schwarz Digits took part in the funding round, which also included research grants and business commitments worth close to €400mn.
But just as caution about security and privacy has shaped Schwarz’s approach to cloud computing, its use of external AI is being guided by similar principles.
While the company views it as a crucial emerging technology, it is wary about internal data being used with AI tools that are outside its control. “We did not want to run into this trap,” said Müller. Hence it decided to block access to ChatGPT for staff “on day one” when the chatbot was launched. – Copyright The Financial Times Limited 2024