Lidl Looms Large
With a format emphasizing quality perishables and award-winning, upscale private label at rock-bottom prices, hard-discount retailer Lidl is preparing to take America by storm.
Lidl has come to America to upset the applecart.
“Look at the grocery stores here in the U.S. with their stacks of apples,” says Boudewijn Tiktak, SVP of purchasing at Lidl US, based in Arlington, Va. “Have you ever thought about how long that apple at the bottom of that pyramid has actually been sitting there? We take freshness very seriously. For us, we use single-layer cases, no bruises, and the apple you’re picking is always the one on top,” he says.
“When apples come into our warehouse, we have a tool kit for our fresh control employees,” explains Brendan Proctor, president and CEO of Lidl US. “They can measure the size of the apple, check the colors and measure the amount of sugar. If the content is not great, we do not want to sell it because it is not right for our customer,” he adds, noting that attention to detail will serve as a key point of its differentiation proposition. “We believe that is essential because that is our promise. Top quality product at the best prices in the market – that is what we do.”
That’s just one of the ways Lidl is planning to take a big bite out of the American market. Company officials also cite Lidl’s hot-and-crusty store-baked artisan breads, Black Angus beef and 100-percent triple-certified sustainable seafood, as well as its extensive selection of award-winning wines, cheeses, chocolates and gourmet grocery products – plus limited-offer general merchandise – all marketed at rock-bottom prices, merchandised in a limited assortment easy-to-shop format.
Up to 90-percent of Lidl’s assortment will be private label, although industry observers expect Lidl will initially offer more national brands to get shoppers in the door.
“It is our commitment to rethink how grocery is done,” Tiktak says. “For us, that means we deliver on the highest quality at the lowest possible price every single day. By preselecting our assortment, we make sure that our customers will only be offered the very best private label and national brands. By doing so we assure that our customers can experience a care- and stress-free shopping experience that allows us to keep our prices low.”
Based in Neckarsulm, Germany, with roots dating back to 1930, Lidl Stiftung & Co. KG, as the company is formally known, is owned by the Schwarz-Gruppe and operates more than 10,000 limited assortment stores across Europe, where competition with arch rival fellow German chain Aldi has wreaked havoc on traditional supermarkets in the U.K. and other countries.
On June 15, Lidl made its stateside debut, opening nine of its first 20 stores in the already-competitive North Carolina, South Carolina and Virginia corridor. But Lidl has far loftier ambitions, planning to open another 80 stores in 2018 along the Eastern Seaboard, from New Jersey to Atlanta. According to reports, Lidl is already scoping out sites for further expansion in Ohio, Pennsylvania and Texas. The stores will initially be serviced from three distribution centers in Fredericksburg, Va., and Graham, Md., and a third in Perryville, Md., that will come online once volume warrants it.
Industry observers say Lidl’s looming expansion can radically alter the U.S. market.
Ready to Battle
“Lidl appears to be applying the lessons from Sun Tzu’s ‘Art of War,’” says Donald J. Stuart, managing director at Cadent Consulting Group, based in Wilton, Conn. “If you read the extensive media commentary over the past two-plus years, the words that appear most often are ‘battle,’ ‘invasion’ and ‘war.’ The truly amazing aspect of this entry is that Lidl is literally telegraphing everything they plan to do. They announce their plans, broadly communicate them and the competition scrambles on the on the defensive. This is either the most blatant, direct onslaught we’ve seen in the retail competitive landscape, or they’ve planned a few flanking maneuvers that have not yet been announced,” he says.
Unlike British operator Tesco, which entered the U.S. with high hopes for its new self-service fresh-oriented format called Fresh & Easy, only to fail miserably and subsequently retreat, market observers believe Lidl is here for the long haul.
“I don’t think Lidl will be at all like Fresh & Easy,” says Henry Ho, co-founder and chief strategy officer at Field Agent, a crowd sourcing company based in Fayetteville, Ark. “I think they will be very successful. Just look at Aldi and what they’ve been doing. In terms of formats, Lidl and Aldi are almost cousins, yet they are arch rivals.”
It is a bitter rivalry indeed. Just four days before Lidl made its U.S. debut, Batavia, Ill.-based Aldi USA revealed a $3.4 billion capital investment that would give it 2,500 outposts across the country by the end of 2022 – a move the company said will vault it to become the third largest U.S. grocery chain by store count. The chain currently operates more than 1,600 stores and expects to have 2,000 in operation by the end of next year. Earlier this year, it announced a separate plan to spend $1.6 billion to renovate 1,300 stores.
“We think the hard discounter sector is going to grow four or five times faster than the overall market,” says Randy Burt, partner in the Consumer and Retail Practice of A.T. Kearney, a global strategy and management consulting firm based in Chicago. In addition to Lidl and Aldi, Burt includes the domestic Save-A-Lot in the hard discounter group. “We think Lidl will take a fair amount of share over the next five years when you look at how aggressively they are entering. Aldi has already shown success with the hard discounter model, and the way Lidl is going about it, makes me think they are a threat that should be taken very seriously for conventional grocers, mass merchandisers and club players that get a lot of their dollar volume from grocery or food.”
According to Stuart, American retailers are indeed taking the Lidl entry seriously; Kroger and other chains have sent teams to Europe to check out the competitor on its home turf. “Whole foods 365 is a partial response to Lidl,” he says.
“Lidl is a big deal,” adds Burt. “They will have staying power and the question is not whether they are going to take share from existing food retailers, but who they are going to take share from?”
Dr. David Rogers, president of DSR Marketing Systems, based in Northbrook, Ill., notes that like Aldi, Lidl has very deep pockets and is privately owned. “That makes them a bigger threat than Tesco was because Tesco had to report and answer to its shareholders. Lidl does not. So, if they want to lose money for several years, they can go ahead and do that,” he says.
“Lidl’s pride will not allow them to withdraw from America if they are losing money,” Rogers continues. “They have private ownership and are at war with Aldi. They have a plan for growth, and even if they are not initially successful, I think a plan for withdrawal is out of the question. Keep in mind, it took Aldi close to 40 years to become successful in America.”
Lidl, Rogers notes, will be positioning itself as being a little more upscale than Aldi.
“Lidl will have the baked-in-store bread to give that aroma, which causes people to get hungry and buy more. It is just good psychology,” he says. “Lidl is about 85-percent private label, which is a little less than Aldi, which is about 90-percent. Lidl has a few more national brands than Aldi, and I think you’ll see them using them initially as they enter the United States because they recognize that people don’t know them or their private label. I wouldn’t be surprised to see them enter with about 20-percent national label and then perhaps scale that back over time,” Rogers says.
Charting a ‘Red Ocean’ Strategy
According to Ho, Lidl is taking a “red ocean” strategy in the U.S.
“Red ocean means that they are going after the same customers. They are going to go into North Carolina and go after the same customers that shop Food Lion, Publix, Walmart and the like. It is a pretty bold market share grab strategy, versus a ‘blue ocean’ strategy where they would go and serve an underserved category of shoppers that no one else is serving today,” affirms Ho.
The blue ocean strategy was undertaken by the dollar store players a decade or so ago, when they set up shop in small, rural towns and eliminated the need of having to drive 15 or 20 miles to go to a Walmart Supercenter for every shopping trip, Ho says.
“Lidl’s strategy is to go head-to-head right away,” he continues, adding that the initial Lidl stores are being built right near Walmart Supercenters. “Walmart is combating them and Aldi by doubling down on prices. It is going to be a great thing for consumers.”
Ho believes most communities can support both an Aldi and a Lidl, much the same way they do a CVS and Walgreens, which tend to open directly across the street from each other.
“The reason Lidl wants to be right there next to Walmart is the same reason Walgreens is there,” Ho says. “The consumer is going to ask herself is she wants to deal with all of that traffic, the parking and the long lines at Walmart. She’ll just pull into the Walgreens to pick up her milk, etc. Today Walgreens is a convenience store in addition to a drugstore. You’re going to find that Lidl is going to get into the traffic patterns of the Walmart shopper too, and really make them question if they really want to go to Walmart.”
A.C. Kearney’s Burt, meanwhile, feels some smaller towns may have trouble supporting both an Aldi and a Lidl. “I think there are a lot of metros that can support both, but when you get into the B and C counties, that’s probably not something that will be viable.”
But because the hard discounter category will be growing faster than the overall grocery category, Burt says traditional retailers will be impacted most of all.
“If they are going to grow faster than the rest of the market, then they are taking share from somebody,” observes Burt. “I think hard discount is going to impact conventional grocery, mass merchandisers like Walmart and Target that do a big business in food, and the club stores like Costco, Sam’s Club and BJ’s.”
Even though they operate limited assortment stores with only a few thousand SKUs, Lidl officials believe they will be a success in the U.S. by selling top-quality products at rock bottom prices, and using German precision engineering to keep the overhead low.
“We have a curated range because we focus on a smaller range of product,” says Lidl’s Proctor. “We’re not carrying multiple SKUs of the same version of the product. That means we don’t have to carry that overhead as well. Within our stores we measure everything. We look at the length of time it takes to get a pallet from the truck to the shelf. We work with the staff to see what is the most efficient way. We measure everything – how we receive, control and distribute product to our stores.”
Lidl’s trucks and distribution centers are carefully climate controlled to help maintain freshness of perishables, like fresh flowers.
“We actually have a specification for roses that we control with our logistics. When a bunch of roses comes into our distribution center, we measure the diameter of the rose. We also check how much foliage there is compared to the length of the stem, and we also check the base of the rose,” Proctor relays. “The flowers are distributed to our distribution center in temperature-controlled trucks, and then held in a temperature-controlled environment.”
Lidl officials tout the freshness of their product, noting that artisan breads will be baked off in-store throughout the day.
“It is important to say, we are actually going to market as an American supermarket,” says Tiktak. “We want to offer the everyday staples. We want to provide our customers with an everyday shop where they can find all the products they are used to finding, but at the highest quality and the lowest prices.
“For example, we have one of the most enhanced beef programs in the U.S.,” Tiktak continues. “All of our beef cuts are going to be 100-percent Black Angus, minimum USDA Choice, 21 days aged. That brings a flavor to it that is simply amazing.”
American retailers can effectively compete against Lidl, asserts Burt. “They really need to be sharper on price, be strategic on it and work with branded suppliers to handle that,” he says. “They also should reinvigorate their private label and emphasize the customer/shopper relationship with things like touting convenience, omni channel and curbside pick-up. Most surveys say what is most important to consumers is price, quality and convenience – in that order.”
Retailers should also reach out and forge alliances with national brand manufacturers, says Burt. “Lidl is also a threat to branded products. As these guys grow faster than the rest of the market, branded manufacturers are also losing their share,” he notes. “Retailers should work together and collaborate with their branded suppliers to figure out which products people really do care about, which brands are strongest, and how to get shoppers to buy those.”
Rogers warns that Lidl should be careful it doesn’t bite off more than it can chew.
“I think they are absolutely crazy to be talking about opening in Texas and Ohio at the same time they are trying to establish a beachhead on the East Coast,” cautions Rogers. “I think they’d be far better advised to focus on successfully planting themselves in the Carolinas, Virginia and Pennsylvania. I think it is very, very poor decision making to begin a war with H-E-B, Walmart and Kroger in Houston at the same time you are trying to sort out your American invasion on the East Coast. It is too much.”
Time, as always, shall tell.