Lidl US, 1 Year In: What Happened and What's to Come?

Lidl brings other strengths to its U.S. business that will be important going forward:

• Lidl knows how to take the business to scale and tap into the product assortment in its global network, based on its successful operations in so many countries.
• Its hard-discount business model has the profitability that will attract the needed investment to support rapid store growth.
• It now has the ecommerce capability to make its products available to more shoppers – beyond those living close to its stores.

Even with all this going for it, Lidl won’t be successful overnight.  It will take more time for it to learn the market, probably a couple of years – just like it did in the United Kingdom – but it will figure it out.

It needs to Americanize its decision-making processes, and the only way to speed this up is to bring in leaders with solid U.S. experience.  If this happens, watch out.

Beyond Lidl’s core message of value for money, it's beating incumbent grocers on fresh and ease of shopping. Fresh is quite a surprise, and very much against the food retail industry’s current zeitgeist, as they think of hard discounters mostly as competing only on center store commodity products.

Lidl has done many things right as measured by American consumers’ shopping behavior. It’s winning on multi-dimensions, having demonstrated a capability to connect with shoppers across the store. Its private brands are causing shoppers to return to the store, building loyalty in a differentiated way.

However, weaknesses in real estate selection blunted Lidl’s market penetration, and some shoppers are disappointed with the product selection and missing services, according to our survey. These misses, if they persist, could significantly dampen Lidl’s growth. But Lidl is quickly correcting course, having put into play a new real estate strategy, adjusting its promotions program and introducing some key national brands.

Lidl is an agile company with stated growth ambitions for the United States and has the latitude to focus on the long term, being a privately held company. Going forward, we expect they will tackle market awareness and driving store trial. Our market data indicate that Lidl’s offer has been resonating, with consumers awarding Lidl industry-attractive net promoter scores. 

Additionally, Lidl is quickly making adjustments to its U.S .model – expect the next set of stores to be smaller, with a new product mix. It will maintain its focus on low-cost, high-quality produce and private label offerings. And it’s rumored that Lidl is evaluating leasing locations, versus buying them, to enable quicker rollouts.

That said, Lidl has faced several challenges since entering the U.S. market that have led it to roughly cut in half its new store growth plans, from 100 to 50.  First, U.S. retailers, notably Walmart and Kroger, aggressively lowered prices in markets Lidl was entering. Lidl expected to have leverage with private label suppliers and took an aggressive stance with them; establishing strong relationships with the right commercials was more challenging than anticipated.

Its approach of buying rather than leasing real estate also delayed the pace of store openings. And while it nearly doubled the size of its U.S. stores versus its typical store footprint in Europe – and roughly doubled the number of SKUs – it’s unclear whether this was the right approach. Finally, Lidl replaced the head of its U.S. business in 2017, due to its not living up to expectations of the U.S. launch.

We outlined Lidl’s strategy in a report earlier this year, in which we noted that we believe the chain sees its challenges in the United States as related predominantly to real estate choices rather than to its discount proposition. The main changes we have seen are a slowing of store openings and an apparent shift away from big, glossy store formats. At Lidl US, we’ve also seen sustained promotions, such as straight discounts and multi-buy offers.

Looking at the pace and number of the retailer’s store openings:

• Lidl opened 48 U.S. stores in 2017 (its first year).
• It announced 20 openings for 2018, we tabulated in a recent report.
• However, as of July 2, it has just 53 stores, implying that it has opened only an additional five stores in the first half of 2018.
• This is far short of the 100-store target that Lidl had for summer 2018. Moreover, estimates published by various research firms between autumn 2016 and spring 2017 placed the number of sites under development at between 80 and 225.

Going forward, we expect to see more modest, smaller stores. As we noted in January, Lidl originally planned to open stand-alone stores of around 36,000 gross square feet, per its U.S. website. This year, it has been seeking sites of 15,000 to 25,000 square feet.

Beyond individual products, Lidl needs to define and amplify its overall brand beyond just price and quality. Trader Joe’s is sometimes held up as an example of a retailer winning with private labels, but really, Trader Joe’s is winning with its overall brand. Its brand stands clearly for fun, newness, exploration, snacks, friendly service, equitable queuing and fun (yes, “fun” twice!). Their shoppers don’t think of their products as “private label.” It took decades for Trader Joe’s to build that brand equity in the United States, and it took decades for Lidl to build that equity in Germany.

Private-brand competition from established food retailers has also become much stronger than it once was. So Lidl isn’t tapping an unoccupied white space, or serving as a clarion call for a new “movement” around private brands. The secret is out that growing private brands is a strategic necessity for food retailers.

What grocers can expect in the future:

• Lidl has been very clear about its plans to refocus and build for the long term. Grocers can expect continued attention-grabbing prices on key value items (e.g., eggs at 32 cents/dozen, milk at $1.32/gallon) to reset shoppers’ price expectations.
• Online could be a major source of growth if Lidl’s threadbare operating model can allow it. Many consumers are passionate about private brands in general, and in theory, Lidl should appeal to them. Brandless is tapping into that passion online in a location-agnostic way, because there’s not a critical mass of these zealous private label lovers in any given store’s shopping radius. But Lidl has to find those private label true believers around every location, and then win them away from Aldi and Costco.
• Private-brand food is a must-win for Amazon. By investing heavily in that space, Amazon will train mainstream consumers to embrace private brands, just as they’ve trained consumers to shop online.
• The more that retailers move to private brands – and they will continue in this direction – the more important their overall brand becomes. For most retailers, the overall brand has been neglected, hoping that location, experience, assortment and price positioning “speak for themselves.” But for private brands to succeed – and for retailers to support their brands efficiently – their overall brands need to do more work, and tell shoppers what to expect in the private brands, beyond “quality at a great price.” Differentiating one’s brand and discipline to execute that promise for shoppers will be critical.