For 40-plus years German discount grocery chain Lidl has battled archrival Aldi for control of their home market. Now the conflict is rolling into the U.S., where Aldi already operates 600 stores and continues to expand, and where Lidl is planning to launch its own rollout in 2018. If the competition plays out in the States as it has in Europe, the contestants’ high-value, no-nonsense style could be great news for consumers — though perhaps not-so-great news for already embattled U.S. grocery chains.
Lidl was established as a grocery wholesale business in 1930, in Neckarsulm, Germany. Founder Joseph Schwarz initially named the business after himself but later decided to substitute the surname of a former business partner, because the name Schwarz Markt, which means “black market,” has the same negative connotations in German as it does in English. Schwarz’s son, Dieter, launched the first retail Lidl in 1973. He copied the formula that Aldi, which was founded first, had already perfected: low overhead plus a limited number of stock-keeping units sold under private label at high volume, which leveraged low prices from suppliers. Today Lidl has about 10,000 stores (400 more than Aldi) across 28 countries, and market research firm Planet Retail is predicting that it will become Europe’s largest retailer by 2018.
Lidl intends to begin by opening an undisclosed number of stores in eight mid-
Atlantic and Southern states, from New Jersey southward to Georgia. The company is looking for 3,600-square-meter (about 38,700 square feet) properties in established retail locations within three miles of a densely populated area, according to the company. But will Lidl play as well in Pittsburgh as it does in Potsdam? Lidl offers a more prosaic shopping experience than do the vast, shiny supermarkets Americans have known for generations. Lidl’s stores are small by suburban U.S. standards — smaller than the U.S. supermarket median of approximately 50,000 square feet, according to the U.S.-based Food Marketing Institute. Lidl maintains fewer than 2,000 SKUs in every store, a far cry from the 42,000 SKUs at the typical U.S. supermarket. If you need a special spice or want more than two choices of mustard, you may be out of luck; the same applies if you crave a papaya: Produce at Lidl is of high quality, but if something is out of season, it is also out of stock.
The one whimsical note at Lidl, as at Aldi stores, is a constantly changing and widely random assortment of nonfood bargains: power tools, mattresses, sweaters and flip-flops — all at deep discounts and in limited supplies. Service tends to be Spartan, too: At Aldi and Lidl stores in Germany, the checkout lines can be long, and shoppers must bag their own groceries, often at high speed, to get out of the way of the people behind them. “When you think about the Aldi or the Lidl experience — that you frantically have to grab your groceries and shove them into the bag quickly — it’s irritating,” said David Bowles, a customer-service and employee morale consultant who divides his time between California and Bavaria. “It’s something you don’t look forward to.” This is in sharp contrast to most U.S. supermarkets, even the likes of a Trader Joe’s, which, though a discounter, typically has four or five cashiers open at once. “I think Americans are going to be very sensitive about this,” said Bowles.
Neil Saunders, managing director of Conlumino, a U.K. retail research and consulting firm, concurs. “Both Aldi and Lidl provide very Germanic shopping experiences which are at odds with American expectations,” Saunders said. If service is limited in scope and sometimes even grumpy, this could be merely a consequence of skeletal staffing, which does help keep overhead low but also keeps employees frantically on the move, observers say. Such service-related problems did slow expansion for both Aldi and Lidl during their first years in the U.K., recalls Saunders, and could keep putting people off even now, he says. Others foresee similar problems, if nothing is done. “I don’t think the bare-bones experience is really going to go down well [in the U.S.],” said Bowles. “They will have to modify.”
Additional aspects of Lidl’s offering could fit easily into current trends. The average U.S. grocery purchase is getting smaller, making smaller stores more attractive, notes Denise Dahlhoff, research director of the Wharton School’s Baker Retailing Center. Shoppers are spreading their purchases between stores, and the growing number of single-person households means that people are buying in smaller quantities. Then, too, discount channels are doing well. “Lidl’s concept of low price, a curated assortment with a lot of private labels and smaller store sizes aligns well with these trends,” said Dahlhoff. The overall proposition should also resonate with the Millennials’ preference for convenience and value, she says.
In the U.K., at least, value has been the magic word. “I think Lidl really started to gain traction when it combined its low-price message with more of an emphasis on quality and experience,” said Saunders. “This gave it a very solid value-for-money proposition that chimed with many consumers. Before that, the blunt message of low price without much else failed to capture the imagination of British shoppers.” This lure of high value in Britain has won Aldi and Lidl a combined 10 percent share of the food-retail market, double their share of three years ago. Saunders says their growth is contributing to grocery price deflation. “Their very sharp focus on price has adjusted both consumer expectations and retailers’ pricing strategies,” he said.
The past four decades of Lidl-Aldi competition helped give German shoppers some of the cheapest groceries in the world. In fact, consumers in 66 countries, including the U.S., pay more for their groceries than Germans do, sources say. Germans spend about the same amount per person on groceries as the Chinese or the Argentineans — nearly a third less than the French, and a third less than the Americans, according to Numbeo, an online cost-of-living database. Whether low prices will be enough is an open question. Bowles points to the flop of Tesco’s Fresh & Easy concept in the U.S. as a caveat to any company entering a foreign market. “It’s not, as we say, a slam dunk,” he cautioned.
Others are much more optimistic, however. “I think Lidl is going to come in here and be a powerhouse,” said Howard Davidowitz, chairman of Davidowitz & Associates, a retail consulting and investment banking firm based in New York City. Two high-value chains already do well in the U.S., and they both focus on upscale bargain hunters: Trader Joe’s and Costco. Trader Joe’s, owned by Aldi since 1979, began with a focus on college-town consumers, while Costco’s typical shopper reports household income of $85,000 yearly, Davidowitz says. Now Aldi’s success is proving that there is an even bigger market for food bargains further down the income ladder. “People who are watching every penny — and that’s more and more of America — love Aldi’s,” Davidowitz said.
While the typical supermarket runs on 25 percent margins, Costco runs at 14 percent, and Aldi can undercut Costco by about a quarter, Davidowitz notes. “Here’s what’s driving Aldi, and here’s what’s driving the whole United States: Seven years ago America had one out of 12 people in poverty,” he said. “We now have one out of six people in poverty. We’ve doubled food-stamp usage in the United States — doubled! — in seven years.”
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