German discounter Lidl adds double threat to Walmart’s model

It won’t happen this year or the next, or the next, but within 5 years the U.S. grocery sector will see more of deep discounters Lidl and Aldi who have disrupted the retail and grocery store models in the United Kingdom and are now ramping up U.S. expansion plans, according to several retail experts.

Carol Spieckerman, CEO of Spieckerman Retail, warns that U.S. retailers should take notice of the looming threat.

“Be afraid, very afraid. Lidl presents a looming threat to any and all U.S. grocers and dollar stores. The combination of Aldi and Lidl is a market share-grabbing nightmare,” Spieckerman told Talk Business & Politics. “European retailers such as Tesco, Sainsbury’s and others learned this the hard way after initially underestimating the potential impact of Aldi and Lidl’s proliferation. Hopefully U.S. retailers won’t make the same mistake. Lidl should be expected to hit U.S. shores with a big bang.”

She said Aldi and Lidl in the U.K. doubled market share in one year and together now command 10% of the grocery market. She expects Lidl won’t drag its feet once its supply chain and operational infrastructure in the U.S. is up and running.

SOWING SEEDS
In October 2015, Lidl broke ground on its regional headquarters and distribution center in Fredericksburg, Va. The facility will employ 200 and serve a wave of stores expected to open no later than 2018. Lidl said it will invest more than $200 million in Virginia and has pledged to create 700 new jobs in the state by 2018.

In November 2015, Lidl CEO Sven Seidel said he viewed the U.S. as a strategic market. The next month Lidl broke ground on a distribution center in Mebane, N.C., an investment of $125 million, according to the announcement. And the retailer has already purchased land in at least four North Carolina cities – Wake Forest, Sanford, Raleigh and Cary where it has filed site plans to build 36,170 square-foot retail stores. In Wilson, Penn., Lidl has submitted building plans for a store located directly across the street from Aldi and near regional grocery Giant Food.

The company also recently announced Brenden Proctor as the new CEO and president for its U.S. business. Proctor pledges to create “a unique experience for American consumers that will be unlike anything else in the market.”

While the Lidl invasion is now creeping into mid-Atlantic states of states of Georgia, South and North Carolina, Virginia, Delaware, Maryland, Pennsylvania and New Jersey, Spieckerman expects Lidl will ramp up quickly rather than play the waiting game.

LIDL THREAT
“It’s interesting to note that both Aldi and Lidl are based in Germany, a notoriously difficult nut to crack as Walmart found out a few years ago. Both retailers operate fire-tested models that will present a potent challenge to both small and large-format U.S. retailers,” Spieckerman said. “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.”

Lidl, was modeled after the competitor Aldi model, much like Sam Walton copied Sol Price’s Price Club/Costco model with his own version known as Sam’s Club. Lidl is doing much the same, offering more branded products at deep discounted prices while Aldi primarily sells private label products.

Lidl and Aldi are similar in their store operational model in that they are more self-serve, lower overhead costs with focuses on fresh foods, convenience and lowest possible price. There are a couple of differences with the Lidl model planned for the U.S. These stores are considerable larger than Aldi stores and more the size of the typical Walmart Neighborhood Market.

Lidl also has high rated private labels but will carry up to roughly 40% of national brands, a curated selection. What shoppers will not see at Lidl are 10 different varieties of Oreo Cookies or brownie mix. There could be one private label and one national brand from which shoppers can choose.

Lidl corporate communications told Talk Business & Politics that the company is building its supplier network and the requirements are listed on its website. The retailer said it gives extended contracts, and looks for local and regional suppliers as it merchandises its stores with a regional focus.

Milos Ryba, international senior retail analyst at IGD, said Lidl has an efficient business model focusing on everyday low prices and smart promotional campaigns.

“The high quality of its private label products, especially in fresh categories, will be a competitive advantage in its U.S. expansion. Lidl has really expanded its fresh range over the last two years, most notably in its bakery range,” Ryba told Talk Business & Politics.

Ryba said low prices are not the only way Lidl wins against competitors.

“Technology is an important part of Lidl’s strategy, as it helps it operate with the everyday low-cost model. For example, it has been installing self-checkout zones in its UK stores,” he said. “The shopper experience is also a key factor differentiating Lidl from other discounters. Lidl’s new store concept, which is being rolled out across its markets, includes better store navigation and signage, more natural light, wider aisles, self-checkout zones and toilets.”

LIDL EFFICIENCIES
A March 31 report by Deutsche Bank analysts does not see Lidl soon having a huge impact on the U.S. grocery market, noting that Aldi’s recent expansion coupled with the Lidl entry could be most problematic for discounters like Walmart and Dollar General in the few years.

“In Lidl’s case, in line with its U.K. strategy, our view is that the company would likely expand assortment to include clothing and other non-food merchandise, more in-line with mass players like Walmart,” the report states.

The analysts also said Lidl along with Aldi have enormous scale when it comes to private label products which gives them an enormous purchasing power and leverage over manufacturers and suppliers. The Deutsche analysts said the retailers have expertise over how products are packaged, thereby better controlling costs and ensuring quality.

The Deutsche analysts do not think the grocery sector in the U.S. will concede market share as quick as what happened in the United Kingdom over the past three years. That said, there is a threat looming.

WAKE-UP CALL
Dr. Richard George, professor emeritus at Saint Joseph’s University in Philadelphia, said consumers in the U.S. have not yet experienced “frugal fatigue” as they became more price and value conscious during the 2008 recession.

“The combination of value retailers, which will be further lifted by the impending arrival of Lidl, and increased grocery price transparency should be a wake-up call for Walmart as well as for traditional supermarkets,” George told Talk Business & Politics. “I would not limit my concerns that Walmart might have to Aldi and Lidl. While the combination of these two have done a terrific job of communicating their value proposition, the other value retailers, particularly the dollar stores are also real threats to Walmart. Dollar stores now carry over 60% consumable products at prices that are lower than Walmart.”

George said the value proposition of Aldi, Lidl and dollar stores when combined with their small (manageable) store size is a double whammy for Walmart.