A “threat” to existing players in the U.S. grocery market is set to invade the East Coast, according to Mike Paglia, director of retail insights at Kantar Retail. Lidl, the German discounter, will open its first 20 stores next month in the Carolinas and Virginia.
“Lidl’s entry in the U.S. is the single biggest threat to the grocery market in many years,” Paglia told Wal-Mart suppliers in Bentonville at the Doing Business in Bentonville breakfast on Thursday (April 20). ”Lidl has been massively disruptive in every market they have entered. They have a track record of 28 and 1 over the past 40 years.”
Paglia said while it’s just 20 stores to start, Lidl has a plan to be in 28 markets and he believes they will have up to 100 stores a year from now focused mostly along the Atlantic states and then Texas, where it’s German competitor Aldi is doing well. By 2023, Paglia said Lidl could report $9 billion in U.S. sales, which is basically the size of Family Dollar. Within five years he said LIdl could have 600 stores, which is more than H-E-B.
“They (Lidl) will disrupt lots of folks and everyone is going to feel some pain in some shape or form,” Paglia warned.
He said there are many misconceptions about Lidl and it would be dangerous to not consider them a threat. Lidl will surprise many as a mid-marketer that puts them in closer contact with Target, Wal-Mart and Kroger, more so than the pure Dollar stores. He said Wal-Mart is at high risk and the retailer knows it, he said.
Lidl and Aldi garnered market share in the United Kingdom against Wal Mart’s Asda division. Fourth quarter comparable-store sales fell 2.9% at Asda, which was an improvement from steeper declines in previous quarters. Walmart International CEO David Cheesewright said in February comp sales remained under pressure in the recent quarter. He said the plan to combat competition is to continue to simplify the offer, improve product availability, and make strategic investments in service and price – in other words, reduce prices.
BEWARE OF PRICE WARS
Paglia said the strategy Asda has used against Lidl hasn’t worked because it plays into the hands of the competition. He said an all-out price war on branded items can also be detrimental to suppliers.
A recent basket price comparison between Lidl and Asda conducted in March by Kantar showed that a basket of name brand products was 15% cheaper at Lidl than Asda. That’s how far Lidl will go to grab market share. Laura Kennedy, head of Wal-Mart insights for Kantar, told the suppliers at Thursday’s meeting that this kind of price spread among branded products was “mind boggling.”
Kennedy said Walmart U.S. is already reacting to the Lidl threat by doubling down on price investments and store remodels in key markets like the Carolinas. She said suppliers need to be vocal with Wal-Mart and across their own organization about the dangers of steep price rollbacks on premium brands. She said if the Lidl team gets a low price for a premium product like Tide, then Wal-Mart will want that same price from the supplier. Kennedy urges suppliers to use their own data and share it with Wal-Mart to try and protect their brand equity where they can.
Making it more difficult to compete against Lidl is the retailer’s rotational product strategy. Products are brought into Lidl and sold for a period of time, but they are eventually phased out and new ones take their place. Kantar said there will some exceptions to that rule in the U.S. as the retailer will want to build consistency with recognizable brands for American consumers. Historically, Lidl is about 80% private brands, but the retailer will likely rely on more named brands to help drive traffic when it first opens stores.
Paglia said the Lidl stores in the U.S are larger than the European stores. At roughly 36,000 square feet they are similar to the size of Walmart Neighborhood Market. The stores will have fresh produce and bakery in the front of the store. There are five or six wide aisles which are easy to maneuver. There are 13 checkout stations which is an indication of how busy execs believe the stores will be. Like Aldi, Paglia said, the stores will use drop pallets and moveable fixtures so that the stores can be reconfigured overnight.
He warned suppliers that it will be important to walk the Lidl stores regularly because the product is always rotating as the retailer seeks to keep the experience fresh and new for its customers.
“Lidl is a moving target. You can’t just visit a store once or twice and think you have it. You will miss it,” Paglia said.
Some areas where Wal-Mart has Lidl beat is in services provided and online grocery pickup, where Lidl has no strategy. Kennedy told suppliers to look at ways to emphasize “hero categories and services” for Wal-Mart. She said toys, baby, entertainment, pharmacy and health are wins for Wal-Mart. She urged suppliers to look for ways to link the hero categories to consumables. She said toy suppliers might give away a small toy to children having in-store immunizations, or high-protein snack makers might sample products near the pharmacy area.
Kennedy also urged Wal-Mart suppliers to keep close track of the performance of stores in the new Lidl trading areas and have an intervention plan ready if sales begin to slide.
She said the price gaps found in the recent comparison indicated Lidl was 36% cheaper on dry spaghetti, but higher on some items than Asda. She said Lidl’s strategy is take some prices much lower and then protect margin on others. It will be prudent for Wal-Mart look at rollbacks strategically and not simply try and match a low price elsewhere.
‘MARKET SHARE-GRABBING NIGHTMARE’
Kantar is not the only retail consultant firm to call Lidl a big threat.
“Be afraid, very afraid. Lidl presents a looming threat to any and all U.S. grocery and dollar stores. The combination of Aldi and Lidl is a market share-grabbing nightmare,” Carol Spieckerman, CEO of Spieckerman Retail, told Talk Business & Politics a year ago. “No doubt Walmart has been paying attention, prepping for the incursion and even learning from these hard discounters. Walmart’s relentless focus on in-store efficiency and backroom-to-shelf agility in particular being one example.”
A recent report from Fayetteville-based Field Agent asked consumers in the United Kingdom to compare Asda to its German competitors Aldi and Lidl. In most cases the agents who participated in the survey said they favored Asda over the other two, but hard sales data indicated Asda lost sales to Lidl.
Paglia said last year Lidl drew away the equivalent of $130.743 million in sales volume from Asda and Tesco in the United Kingdom. He said the threat is real, but it doesn’t have to be a crushing blow if suppliers will work with Wal-Mart on smart pricing strategies and cross promotional opportunities to accentuate the areas of services and one-stop shopping offered at Wal-Mart.