U.S. Showdown

High Noon for Lidl and Aldi

Getty Imago montage
Lidl's coming to town.
  • Why it matters

    Why it matters

    Aldi and Lidl’s new competition in the United States will cost each millions of dollars, and could affect the outcome of their rivalry in Germany.

  • Facts

    Facts

    • Aldi and Lidl are testing new types of discount stores that look more upmarket but still sell a limited range of products at rock-bottom prices.
    • Lidl is preparing to launch in the U.S. in 2018 to challenge Aldi there.
    • Both chains are aggressively expanding abroad, but are avoiding emerging market economies where poor infrastructure doesn’t support high-volume shops.
  • Audio

    Audio

  • Pdf

 

The global rivalry between German discount supermarket chains Lidl and Aldi is going stateside.

Lidl will expand into the United States, taking on Aldi and its chain of Trader Joe’s specialty stores, which it operates there under its Aldi Süd (Aldi South) division.

“It’s a big deal for us; it’s a step into a completely new market that offers sufficient growth potential for the coming years,” Lidl Chief Executive Sven Seidel told Handelsblatt. “Our U.S. project has brought a bit of start-up feeling into the whole company. The team on the ground is interpreting the Lidl concept and adapting it to the local requirements.”

With more than 10,000 stores and revenue of close to €63 billion, Lidl is already Europe’s largest discount retailer. Worldwide, the Schwarz group with its flagship Lidl and its smaller subsidiary warehouse discounter Kaufland is the third-biggest food retailer, behind Wal-Mart and Carrefour of France.

Aldi is determined to make Lidl’s U.S. launch as difficult as possible. When Lidl announced plans to enter America, Aldi quickly responded with a drive to open 650 more U.S. stores, increasing its presence there to 2,000 sites.

In its first foray to America’s West Coast, Aldi will open new stores next year in southern California. “That’s an important market with really great potential for us,” said Jason Hart, Aldi Süd’s U.S. chief.

Mr. Planer, the retail analyst, said the U.S offers huge potential for Lidl despite Aldi’s head start. “The U.S. is a vast market; there’s definitely room there,” he said — especially for German discounters.

The move is part of a wider shake up of German discounters. Its pile ’em high and sell ’em cheap model has worked well in Germany, but overseas shoppers are more choosy.

At two outlets in Verona, Italy, Lidl has built stores with high ceilings, wide aisles, a huge glass facade and walls in warm brown tones to convey a friendly, welcoming atmosphere. The wine and the vegetables are presented in appealing wooden crates and the store smells of fresh bread.

There are customer toilets and diaper-changing facilities, something uncommon in Germany.

True, the range of goods is still far narrower than classic supermarket chains. Rewe or Edeka, for example, offer 20,000 products, compared with Lidl’s maximum of 2,500. But in terms of presentation, the line between discount and conventional grocery chains is becoming blurred.

Lidl will use a similar format in the United States where it’s investing more than €200 million, or $215 million, to open 50 stores by the start of 2018.

Aldi has also gone up market.

It launched “Project frisch,” or “Project Fresh” at four stores on Australia’s East Coast. Here too, wooden designs have replaced the crates and cardboard boxes that used to characterise discount shopping.

There’s a big selection of fruit and vegetables next to the entrance, just as in conventional supermarkets. In addition to the 900 basic goods for sale, there are selected gourmet products on the shelves.

In addition to expanding internationally, Lidl wants to safeguard its existing markets by investing in its existing stores to fend off competitors like Aldi.

Lidl is spending a three-digit million euro sum to modernize and enlarge its stores in France. In Britain, it’s looking for sites for hundreds of new stores. It even wants to open stores in wealthy London neighborhoods such as Westminster, Kensington and Chelsea.

It plans to spend €1 billion by 2020 to expand its presence in Italy – partly because its eternal competitor Aldi announced plans to enter Italy.

In many countries, established retailers made it easy for the German newcomers because they had become jaded and tended to avoid price competition

Brothers Karl and Theo Albrecht, the late founders of the Aldi chain, invented the discount grocery principle: A limited product range of mostly store-brand goods of high quality. The idea was simple and effective: Let the shopper save time and money. Aldi, followed later by Lidl, shook up grocery markets in many countries, and struck fear into the hearts of local competitors.

But now they’ve realized they need to move with the times to continue their success story. Theo Albrecht, the head of Aldi Nord (North), which operates in northern and eastern Germany, was the first to venture abroad in 1973, opening stores in Belgium, the Netherlands, Luxembourg and Denmark, and then conquering France, Spain and Portugal.

In the United States, he bought Trader Joe’s, a U.S. specialty grocer from southern California that sells a large selection of organic products in its more than 400 stores.

Theo’s brother Karl, who founded Aldi Süd, was late to the party. He moved into the U.S. market in 1976, into Britain in 1990 and into Australia in 2001.

Both Aldi brothers were successful, although some credit the late Karl, who was the first to invest in refrigeration and other “luxuries,” with being the more astute businessman.

“When Aldi Süd goes into a foreign market, the company is more successful than its northern counterpart,” said Jörg Funder, a professor of retail management at the University of Applied Sciences in Worms, south-western Germany.

The same is true of Lidl. The retail chain was founded in 1973 in Neckarsulm in southwest Germany and didn’t go abroad until 1989. But it is now the market leader in Europe with stores in 26 countries. Next year, Lidl will add Lithuania to that list, followed in 2018 by Serbia.

In many countries, established retailers made it easy for the German newcomers because they had become jaded and tended to avoid price competition. In many places, there simply were not any discount stores.

Australia was a prime example. Before Aldi came along, the Coles and Woolworth’s chains had the entire national market to themselves. Now Aldi has a market share of 11 percent, and is growing.

 

Duel of the discounters-01

 

In Britain, the German discount giants unleashed a furious price war. While Aldi and Lidl are enjoying double-digit revenue growth, the country’s big four established food retailers – Tesco, Asda, which is owned by Walmart, Sainsbury’s and Morrisons — have all lost ground.

Sainsbury’s in May posted its first loss in a decade while market leader Tesco last year slumped to its biggest loss in its almost 100-year history.

But the discount giants have learned the lesson, especially in foreign markets, that a rough-and-ready, cheap-at-all costs approach no longer works these days.

“Even if people are poor, they want to shop in a store where they don’t feel poor,” said Boris Planer, a retail analyst at market researcher Planet Retail. “That was likely one of the big lessons of the financial crisis, especially in foreign markets in Europe.”

The rise in the standard of discount stores is explained in part by the companies’ exclusive focus on developed economies, where customers’ demands tend to be higher.

The German discount model doesn’t work in emerging economies.

“Discount works especially well in markets where people do their shopping for a week,” said Mr. Planer. “That means they need a functioning infrastructure, a house or a large apartment where they can store a large amount of shopping, fridges, a car with which they can carry shopping.”


Video: Filming the Lidl US catalog.

 

Florian Kolf leads a team of reporters, who cover the trading and consumer sector for Handelsblatt.  Kirsten Ludowig is an editor in Handelsblatt’s ‘companies and markets’ department, specializing in the trade sector.  Annkathrin Frind is a reporter with Handelsblatt. 

To contact the authors: kolf@handelsblatt.com, ludowig@handelsblatt.com, frind@handelsblatt.com

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!