How much will Lidl disrupt the US grocery market?
Thursday’s opening is the first step in an offensive that analysts say will push traditional grocers — perhaps to their breaking point
A retailer with the slogan “Rethink Grocery” certainly isn’t short on ambition. But Lidl has a history of disruption that backs up its lofty claim.
In just over 40 years, the discounter has evolved from a single store in tiny Ludwigshafen, Germany to more than 10,000 stores across Europe. In that time, the discounter has marched like a conquering army through Europe, successfully entering 26 markets while only pulling out of one — Norway in 2008.
As Lidl opens its first U.S. stores today along the East Coast, with plans to build over 600 more during the next few years, the question is not whether it will disrupt the American grocery industry, but to what degree.
“It’s going to be an interesting wake-up call for a lot of retailers,” George Faigen, a partner in the retail and consumer goods division of management consulting firm Oliver Wyman, told Food Dive.
Retailers have prepared for the discounter’s arrival, some more comprehensively than others. So who will prove most vulnerable to Lidl’s incursion, and who might give the retailer a run for its money?
Bracing for impact
Lidl’s secret weapon is a supply and operations system honed over the years that allows it to deliver high-quality products at very low prices.
Efficiency is the discounter’s watchword. It measures everything, from the time it takes to move products to shelves to the exact care, temperature and timing required so that a dozen roses bloom right as they get to the store.
Automation has taken the place of human labor in key areas. Lidl’s scale drives high-velocity sales on a limited assortment of goods, further driving down prices. It’s private label heavy mix and deep involvement with suppliers, meanwhile, ensures quality and even further cost reductions.
It all adds up to a steady drip of savings that Lidl passes along to the consumer.
Beyond its low-price, high-quality positioning, Lidl is also a very nimble operator, according to analysts interviewed by Food Dive. It's able to quickly change its operations in response to competitors’ moves and market demand.
“Once a competitor has matched Lidl on a certain point of value, Lidl’s already adapted to become something else,” said Mike Paglia, director of retail insights at Kantar Retail. “They’re a moving target that way.”
“Once a competitor has matched Lidl on a certain point of value, Lidl’s already adapted to become something else. They’re a moving target that way.”
Director of retail insights at Kantar Retail
This makes it difficult for competitors to counter Lidl. Nevertheless, retailers in the markets where the company is set to open have lowered prices, enhanced their fresh offerings, and played up the value they offer through ads, store circulars and other media.
“You’re seeing a lot of retailers trying to remind their shoppers of their core value proposition,” said Paglia.
Paglia said Food Lion is advertising around raising its values without raising its prices, while Publix is playing up its community connections. Kroger is assertively marketing its stores as fresh and affordable in the East Coast markets where Lidl is opening.
Walmart, whose Asda banner in England has taken a beating from Lidl stores during the past few years, has arguably done more than any other store to prepare. In recent months, the world’s largest retailer has pushed its suppliers to lower their prices, saying it wants to be at least 15% cheaper than its closest competitor in most instances. Walmart has also remodeled many stores along the East Coast, and has rapidly expanded its online ordering and curbside pickup services.
“Walmart is watching Lidl very closely and nervously,” said Paglia.
Targeting conventional grocers
Industry observers often note that the U.S. grocery market is overcrowded and over-stored. According to the Food Marketing Institute, there are 38,000 supermarkets nationwide with sales of more than $2 million. But where many see a dense forest, Lidl sees row after row of low-hanging fruit.
At a recent media event in New York, Lidl U.S.’s CEO Brendan Proctor spoke of the “compromises” that American shoppers have to make when they go into a typical American supermarket. They have to pay too much. The trip takes too long. The product quality isn’t very good. The produce isn’t fresh. And so on.
Lidl, as Proctor tells it, won’t require customers to compromise.
“Anybody in the U.S. who grocery shops, we believe we have the market for them,” he said.
Bill Bishop, chief architect of consulting firm Brick Meets Click, says this is effective showmanship, if not exactly true. Lidl, he pointed out, won’t have the prepared foods that an increasing number of shoppers demand nowadays. It also won’t have the staff and services that many consumers look for, or the large fresh selection that often defines a pleasurable shopping experience. At just 21,000 square feet, its stores are also no doubt going to feel small to many shoppers.
“What Lidl is really doing is redefining the trade-offs we make when we shop,” said Bishop. “You may have to bag your own groceries, but you’re getting really low prices and really good quality.”
“What Lidl is really doing is redefining the trade-offs we make when we shop. You may have to bag your own groceries, but you’re getting really low prices and really good quality.”
Chief architect of consulting firm Brick Meets Click
Retailers that are able to differentiate from Lidl with prepared foods, service and a vibrant fresh selection, he noted, stand a pretty good chance of defending their turf. Bishop pointed to Harris Teeter, a chain well-known for its execution and fresh capabilities.
“Lidl is a lot better positioned in that area than they used to be, but they’re not going head to head with Harris Teeter on fresh and prepared foods,” he said.
So which retailers are most likely to lose customers to Lidl? Analysts pointed to conventional grocers like Ingles, Giant and Food Lion that have a relatively low sales velocity and aren’t compelling enough to overcome Lidl’s steep price advantages.
Many of these conventional players have spent millions in recent years to shore up their market positioning. Southeastern Grocers — which operates Winn-Dixie, Bi-Lo and Harveys Supermarket stores — updated its private label selection earlier this year to incorporate everyday, regular and premium-tier offerings. Food Lion has also remodeled hundreds of stores around freshness and lower prices.
Even so, said Doug Koontz, head of content at research and consulting firm Planet Retail RNG, these moves may not hold much appeal against the dual promise of savings and high quality that Lidl makes.
“The mainstream players are going to have a hard time competing with price on the lower end, and they’ll have a harder time being differentiated on the higher end,” Koontz told Food Dive.
Execution, execution, execution
Lidl’s U.S. entry comes at a time when shoppers are more willing than ever to try new retail experiences. According to a survey from Oliver Wyman, 39% of consumers say they would like to shop at Lidl once a week or more, while 67% said they would shop the retailer at least once.
Faigen said this enthusiasm is a credit to Lidl’s marketing. But it also reflects a willingness to try new brands, and in particular private label brands. Trader Joe’s success, he said, paved the way here.
“To me, that’s proof that Americans are ready to accept brands they don’t know across a wide selection of categories in a way that would have been unheard of 20 years ago,” said Faigen.
Because of its low prices, many assume that Lidl will only appeal to low- and middle-income shoppers. But the Wyman results show near even interest in shopping the discounter between consumers who make more than $75,000 annually and those who make less than $25,000.
If Lidl follows the formula that has worked in countries like England, it will begin by focusing on those lower- and middle-income consumers, then work its way upmarket.
“They started with a customer on the lower end but gained comfort and acceptance with middle-income shoppers and certainly became a household name,” said Koontz.
“They [Lidl] started with a customer on the lower end but gained comfort and acceptance with middle-income shoppers and certainly became a household name.”
Head of content at Planet Retail RNG
Widespread success isn’t a given for Lidl in the U.S. To realize its vision of more than 600 stores over the next five years, the discounter will need to properly execute its strategy. Bishop, who has studied Lidl and fellow discounter Aldi extensively, said the company is under pressure to deliver a positive first impression for millions of customers. That means it needs to keep shelves stocked, aisles clean, and attractive merchandising of fresh items, including bakery and produce.
“They need to be sure that they have all the products they should have in each store in sufficient quantity,” Bishop said. “It’s very possible, particularly in the early days, to not get that right.”
If it can get customers into stores and get them to enjoy the products, Lidl stands a good chance of benefiting from what Faigen calls the “savvy shopper effect.” This happens when consumers feel so smart for saving money on quality products, they can’t help but spread the word.
“That level of enthusiasm and connectivity becomes a marketing engine,” he said.
Koontz, for one, isn’t convinced Lidl will be a runaway success. The U.S. he noted, is a larger market than any it’s ever entered, with regional pockets that require savvy as well as speed to serve properly.
“Those regional distinctions are still going to play quite a role,” said Koontz. “The stores they open in South Carolina aren’t going to teach them much about the stores they open in San Francisco.”
The Walmart question
Several of the stores Lidl is opening this week sit adjacent to or across the street from a Walmart. These moves reflect a feistiness on the part of Lidl, and a willingness to challenge incumbent players in the U.S. grocery market.
But Walmart, analysts note, could be the toughest challenge of all for Lidl. That’s because, in addition to all its large-scale initiatives aimed at lowering prices and expanding services, the world’s largest retailer has the resources to counter Lidl in the coming months and years. It’s one of the few retailers capable of competing with the discounter on price, and it has the technical know-how to offer targeted promotions on a store-by-store basis.
“Walmart isn’t being taken off guard by any means,” said Koontz. “They remain a pretty significant risk to Lidl’s success.”
With its large stores stuffed full of national brands, Walmart offers a compelling yin to Lidl’s pared-down yang. Indeed, Paglia sees Walmart continuing to play up its strengths in the months ahead.
“I think you’re going to see Walmart play up all these elements Lidl doesn’t have like pharmacy and curbside pickup to try and neutralize the threat,” he said.
Will Lidl be able to convert Walmart customers? Will it be able to fend off advances from fellow discounter Aldi, which just announced a $3.4 billion expansion plan that would make it the third-largest retailer in the U.S.? Much will be revealed in the weeks ahead as Lidl continues its store rollout along the East Coast.
Follow Jeff Wells on Twitter