A German supermarket chain has succeeded in pushing grocery prices down by half in areas of the US where it opened last year, becoming even more influential in setting prices than giant Walmart Stores. But the good news for consumers has not translated into success for the company.
According to a study by the University of North Carolina Kenan-Flagler Business School, key staples were up to 55 percent cheaper at grocery retailers located near new stores operated by the German supermarket group Lidl than in areas where Lidl is not present.
The study by Katrin Gielens, associate professor of marketing at UNC, looked at supermarket prices in six markets where Lidl opened stores last year and a control group of markets in Virginia, North Carolina and South Carolina where the chain was not present.
“The level of competitive pressure Lidl is exerting on leading retailers to drop their prices in these markets is unprecedented,” said Ms. Gielens. “In fact, the competitive price-cutting effect of Lidl’s entry in a market is more than three times stronger than the effect of Walmart’s entry.”
“It’s not easy to explain to customers what Lidl is.”
Lidl has become a huge success in Europe by offering incredibly inexpensive private label goods but with far less variety than most rival supermarkets. Another German chain, Aldi, has opened 1,600 stores in the US and a third owns the popular Trader Joe’s supermarkets.
But Lidl, which has opened 49 US stores, is learning a painful lesson about America: Competitors can be ruthlessly quick to match cheap prices to ensure their customers don’t abandon them.
While a Lidl spokesman called the US launch “all in all successful,” he admitted that the chain’s strategy “needs adjustment at one point or another.” Last year, the company had predicted that it would open 100 stores in its first year, but the spokesman gave no forecasts about future store openings.
“Lidl’s management underestimated the challenge in the US,” said Michael Rogosa, global research director at Retailnet Group, a leading market researcher in the retail industry. They failed to understand how complex and diverse the US market is and their expectations were too high, he said.
Last September, Lidl realized that things were not going smoothly with the rollout of new stores. Michael Aranda, who was in charge of Lidl’s operations in Spain, was brought back to the Neckarsulm, German headquarters of Lidl parent Schwarz Group, to oversee the US operation.
A change in the company’s strategy is apparent on a couple of fronts.
Initially, Lidl tried to woo shoppers with soaring all-glass stores, which at 3,300 square meters (3,946 square yards) were about twice as large as the typical Lidl store back in Germany. But recently, Lidl has been advertising in the US for stores that are much smaller, about 1,400 square meters.
Another big change is where they are siting the stores. The old cliché is the three most important factors in retail are location, location and location. While previous stores were sited on arterial roads on the outskirts of towns, the company is now looking to put its smaller stores in town centers, where a “high population density” is within a radius of two miles.
The company is also seeking co-tenants, apparently hoping other companies could attract more shoppers to their retail locations. That suggests that Lidl is having a more difficult time than expected getting Americans excited about its mostly private label products and hopes more well-known brands will bring shoppers to their stores.
“That’s a good strategy,” said Mr. Rogosa. “It’s not easy to explain to customers what Lidl is.”
Florian Kolf leads Handelsblatt’s team covering the retail sector and Charles Wallace is an editor with Handelsblatt Global in New York. To contact the authors: email@example.com and C.Wallace@extern.handelsblatt.com.