10 Reasons Why Lidl Will Be the Single Most Disruptive Force in US Retail This Decade
When I say Lidl will be the single-most disruptive force in US retail in the next decade, there is no caveat. No, I didn’t forget that Amazon.com exits. No, I don’t mean just “Brick & Mortar” retail. I mean what I said. I believe that Europe’s largest grocer, Aldi’s fiercest international rival, and one of the largest merchants in the world will be the most disruptive force on US retail this decade. In June, when the German grocer opens its doors, it will leave an indelible mark on US retail. Whether it exits like Tesco or assimilates like Aldi, Lidl’s US entry will be a defining force in the course of US retail.
These are big claims. I write them without hyperbole. Having done intensive research on Lidl USA, there are 10 factors that I believe give the German grocer the potential to be unprecedentedly game-changing in the US.
1. Lidl Has Experience Competing With Walmart:
Lidl is no stranger to competing with the USA’s (and the world’s) largest retailer. In 1998, Walmart unsuccessfully entered Germany. In addition to cultural and operational issues, Walmart faced aggressive competition from “hard” discounters like Aldi and Lidl. Less than a decade later, Walmart chose to exit Germany.
Similarly, Lidl’s entry into the UK has been problematic for Walmart’s ASDA banner. Former ASDA CEO, Andy Clarke, described Lidl and Aldi’s combined impact on the UK market as, “The worst storm in retail history.” That was in 2015. Today, in 2017, Aldi and Lidl are both at their highest market shares ever in the UK. They don’t appear to be slowing down either.
In June, that “storm” will cross the Atlantic as Lidl opens it’s doors along the Eastern Seaboard. Walmart is aware. The Wall Street Journal has reported that Walmart is conducting pricing comparison tests v. Aldi in 11 states. Not surprisingly, 4 of those 11 are states where Lidl will be opening stores over the course of the next year. The others are geographically significant to Aldi, Meijer, and Kroger.
When Lidl opens its doors in the US, Walmart will be waiting. Walmart US cannot and will not allow Lidl to experience the same competitive success it has enjoyed in Europe. When the largest retailer in the world goes to war, the rest of the US retail ecosystem will feel it.
2. Concern Over Lidl’s US Entry Is Already Changing the US Retail Landscape:
At first glance, Lidl’s decision to enter the US along the Eastern Seaboard appears a bold choice. If nothing else, it is a “Red Ocean” strategy since grocery heavy-weights Kroger and Walmart, as well as fellow German discounter, Aldi, are all heavily-penetrated there. However, the Eastern Seaboard is also home to two other familiar European rivals: Ahold & Delhaize.
Many believe Lidl’s history competing with these two grocers is one of the primary reasons Lidl chose the Eastern Seaboard to begin with — gain a foothold in the US by competing against a rival they have had success against. Further, Lidl’s results against Ahold & Delhaize in Europe has been speculated to be a contributing factor to the strategic merger leading to the Ahold/Delhaize Group. The combined Ahold/Delhaize Group is now the among the largest grocers in the US and is the #1 or #2 grocer by share in 80% of the US markets where it competes. This is already one way that Lidl’s growth and expansion has changed the ecosystem in the US.
Of course, the newly-formed Ahold/Delhaize Group, like Walmart, is not going to take Lidl’s US entry lying down. Ahold/Delhaize Group CEO Dirk Boer has already stated:
“As a European retailer in the U.S…we are sharing a lot of our information about the work Lidl and Aldi are doing (in the Dutch market) to help our American colleagues to be well prepared.”
The good news for the consumer is that the obvious move on the chessboard for both Walmart and Ahold/Delhaize is pricing. Right or wrong, this is likely an angle those retailers will pursue. If those two retailers can remove price perception as an advantage from Lidl USA, it will be harder for Lidl to gain a foot-hold.
3. The Combined Result of Competitive Reactions to Lidl is a Deflationary Trend in the Grocery Market That is Already Impacting US Retail
One retailer that is already feeling the pinch of aggressive pricing moves (even prior to Lidl’s US entry) is Kroger. In March Kroger suffered the disappointment of seeing its 13-year streak of comp store sales growth come to an end. Kroger CEO, Rodney McMullen minced no words in describing the cause for this miss:
We’re obviously disappointed with our identical supermarket sales number in the fourth quarter and our performance on several other KPIs, including FIFO operating margin and return on invested capital, which were driven by the deflationary environment. Kroger Analyst Call.
When asked about Walmart’s role specifically, Mr. McMullen respondend, “There is no doubt that several competitors are improving and running better stores.”
Now, with Walmart running aggressive pricing tests AND the entry of Lidl into Kroger-owned Harris Teeter’s backyard, the deflationary environment in US grocery is expected to continue. If the current environment is already enough to stop Kroger’s historic run, what will happen when Europe’s largest grocer and hard-discounter, Lidl, enters the fray?
4. Lidl Appears Intent on “Messing With Texas”
After Albertson’s unsuccessful attempt to gain a foot-hold in the South Texas grocery market, many retailers are rightly wary of expanding south of the Red River. In the jungle of South Texas grocery, HEB is the dominant predator. HEB is a beloved by its fellow Texans, and its flagship HEB banner still does not have a presence in the DFW Metroplex.
However, DFW’s long wait for HEB could be coming to an end. Over the last two years, reports have surfaced that HEB is purchasing land in North Texas with the intent to build new stores there. Interestingly, the same has been said of Lidl.
It remains to be seen when Lidl will actually open doors in Texas — if at all. Their announced intent to purchase land in North Texas could be as brilliant a distraction-tactic against its competitors, as it is a risky move against HEB. Now that the message exists, national retailers like Walmart and Kroger have to keep one eye on Texas to see if Lidl moves. However, if Lidl moves quickly and actually enters Texas, it might just force HEB’s hand into opening their own stores sooner than planned. If HEB reacts to Lidl’s encroachment on Texas, expect that reaction to be stiff and relentless.
5. It Will Open Up a “New Front” in the Rivalry With Aldi
Lidl is not the only German discounter operating in the US today. Aldi has been here since the 1970’s with little serious, national competition in the hard discount space. That is about to change. Aldi is already well-positioned to absorb Lidl’s entry being both well-developed on the Eastern Seaboard AND being on-pace to complete its 650-store expansion in the West.
Although Aldi’s westward migration began before Lidl’s plans to enter the US by 2018 were announced, that decision certainly seems serendipitous today. As sales, margins, and incrementality decline in Lidl’s foot-print, Aldi’s “Blue Ocean” out west could look more and more appealing. This could mean heightened competition in the California and Texas markets as Aldi looks to double-down in those large states.
Further, on the Eastern Seaboard, Aldi will likely use the same lever as Walmart and their other rivals to combat their German rival — price. The pricing game will be even more critical for Aldi since they will compete like-for-like with Lidl’s private-label-heavy assortment model. Between those two, price will be an essential differentiator for the shopper.
Outside the US, Aldi is also taking advantage of their rival’s US entry. One way Aldi appears to be taking advantage of Lidl’s US-focus is by expanding into Italy. It will be interesting to watch and see the “Great Game” of geographic expansions these two German discounters play against one another as their footprints evolve and shift. What role will the US theater play in that larger game?
6. Lidl Will Up-Scale the Down-Market
If you are a US citizen reading this post, I assume you have never been in a Lidl store. If not, take a moment to look at the “Lidl of the Future” store in Rushden, UK. You can find still images here. And you can find a video walk-through here. These are not ugly stores.
Lidl’s hard discount model is expected to be most appealing to low-income consumers. Low prices on branded and private label items is appealing to everyone, but especially to families struggling to make ends meet. Lidl has often been compared to Trader Joe’s — Aldi’s up-market banner in the US. The clear signage, premium-looking shelving, and ultra-local feel of the “Lidl of the Future” stores in the UK don’t look like discounters. They appear like a traditional US grocer — and a nice traditional US grocer at that. It’s little wonder that Aldi recently announced a massive refurbishment campaign of its US stores beginning in 2017.
Lidl will allow shoppers of all incomes to spend less and feel fancy while doing it. That is a powerful emotional advantage.
7. Lidl Has the Potential to Make Private Label More Mainstream
Compared to Europe, the US is much less developed in private label. Lidl’s business model is flexible enough to accommodate that. Lidl offers a mix of branded and private label products (with a heavy bias toward private label). However, the time might be right for Lidl to help the private label trend to explode in the US.
Consider the following:
- Aldi has been successfully operating in the US for 50 years — selling almost exclusively private label products.
- 26% of Kroger’s sales now come from its own-label products.
- Costco’s Kirkland’s brand is arguably the largest premium mega-brand in the world.
Now, enter Lidl. A German grocer who relentlessly expands by giving its stores a local feel and offering tremendous value and quality and rock-bottom prices through their private label offerings. The time feels right.
Additionally, Lidl’s support for its private label products isn’t the same “no-frills” approach used by Aldi. For example, in the UK, Lidl hosted a massive Twitter campaign around the #lidllobster. Lobster typically retails for £40in the UK. Over Christmas 2016, Lidl encouraged shoppers to tweet about the “Lidl Lobsters” in order to reduce their price. Even celebrities got in on the act. By the time the promotion finished, Lidl was selling lobster in the UK for as low as £2.99. Promotions of this kind are not only innovative, but could dramatically disrupt US retail — especially as Lidl attempts to use them to establish their private label products in the US.
8. All of This Means Lidl Also Poses a Significant Challenge for the Dollar Channel
Mainstream media likes to focus on the potential of a Walmart/Lidl or Kroger/Lidl or Aldi/Lidl rivalry in the US. However, in my opinion, the channel that has the biggest risk from Lidl, and its collateral impact on the US retail ecosystem, is the Dollar Channel.
Between Lidl and the Dollar Channe, shopper demographics will likely overlap. The Dollar Channel is also expanding West and will now have fiercer competition from Aldi’s needing to expand there in the wake of Lidl’s US entry. As Walmart and traditional grocers lower prices to stymie Lidl, they will also close the price gap v. stores like Dollar General and Family Dollar.
Lastly, although Lidl will have a predominant assortment of private label items, Lidl also carries national brands. Their strategy in Europe has been to carry leading branded performers in key categories. This is often more pronounced when their stores are nearby an Aldi as a way to differentiate their stores’ proposition v. their private-label-heavy rival. Previously, stores like Dollar General and Aldi could co-exist in the US because Dollar General carries national brands at great prices v. Aldi who eschews national brands in favor of their own labels. Now, the environment will be different, and Lidl will be pushing the Dollar Channel on the value of national brands as well.
9. Lidl Has “Not Yet Begun to Fight” in E-Commerce
As I said above, I believe that Lidl will be even more disruptive to US retail than even Amazon.com. Most of what is published about Lidl in the US focuses on its brick & mortar operations. However, Lidl has been quietly expanding its e-commerce savvy. First, if you visit any of Lidl’s country portals, you will notice they are tailored CRM experiences. If you did not know Lidl was a German grocer, you would assume that it is a company native to the country’s website you are visiting.
Secondly, it appears that Lidl is attempting to take-on Amazon Fresh in Europe with its acquisition of grocery delivery service, Kochzauber. This, combined with Online Grocery Pick-Up tests in Berlin, and the expansion of e-commerce capabilities in the Low Countries and China, Lidl is quietly building its E-Commerce portfolio. This has led some to question whether Lidl’s existing (and massive) distribution network throughout Europe doesn’t already give them a leg-up on Amazon in Europe if they only had the will to seriously get into the online game.
Imagine what this could mean for the US. Kroger, Meijer, and Walmart are all experimenting with grocery pick-up and delivery programs. Lidl is testing and learning the same thing overseas. It is therefore wrong to think of Lidl as “just” a brick & mortar operation. They are, in fact, an omni-channel “diamond-in-the-rough.”
10. Fear of the Unknown
The most terrifying thing about Lidl is that no one knows what to expect. Lidl has historically been successful by adapting to whatever market environment it enters. Lidl finds a way to feel local. But what does that mean for the US? What levers will they pull to make their proposition work in the United States? One thing is for certain. Whatever Lidl looks like in the US, it will include the best of what they do so well in Europe, but it will also have a uniquely American-flair. They have a tremendous arsenal of tactics and the ability to “hold their breath and wait” as a privately-held company. Until June 15, anything we know about Lidl is either speculation or based on the past. However, the future is unknown, and that, among other things, makes Lidl an unpredictable and disconcerting proposition to US retailers.
Lidl did not grow to be Europe’s largest grocer on accident. They did it by being tremendously innovative and knowing their customer. Just the threat of their entering the US has already wrought significant change on the US retail landscape. When the first doors open on June 15th, clever Field Agents will make a killing by taking gigs to photograph the inside of the new stores because every retailer and vendor in America will want to know what they are like. Until then, all we can do is speculate. If you are going to speculate on what the entry of this hard-discount German grocer means for US retail, think big.