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A Lidl late? German deep discounters go big in America

2017-06-26 07:53:23

Lidl promises over 100 stores, Aldi will soon have 2,500

AMERICA S economy is enjoying its third-longest period of uninterrupted

expansion since the 1850s. So it is at first glance puzzling that Lidl, a

German deep-discount chain whose sales soar when times are hard, is entering

the market now. On June 15th Lidl opened nine stores in Virginia, North

Carolina and South Carolina. Up to 90 more stores across the country are to

follow within a year.

The move may be far-sighted, however. Lidl s arch-rival, fellow-German

discounter, Aldi, has been in America for four decades and has 1,600 stores

across 35 states. It has had success not just among poor Americans but,

increasingly, among the middle class, according to Bain, a consultancy. Aldi is

preparing for an expansion: on June 12th it said it would add 900 more in the

next five years, putting it third in the country by store count, behind Kroger

and Walmart, America s biggest retailer.

Unlike conventional supermarkets, which usually carry between 20,000 and 30,000

mostly branded products, a typical Aldi or Lidl store sells perhaps only a

tenth as many items, some 90% of which are private-label. This no-frills

approach both permits ultra-low prices and earns cash quickly, which is then

reinvested in new stores and offerings, luring more customers. Both

privately-owned discounters have carved out sizeable niches in practically

every country in which they operate. Lidl started in 1973; it rakes in a tenth

of all grocery spending in Germany and 5% in Britain (where it launched in

1994). Aldi began in 1961 and has enjoyed similar success at home and abroad.

Lidl promises that prices at its new American stores will be up to 50% lower

than those of comparable products at other grocers (Aldi excluded). It will

certainly require steep discounts for it to make a mark. The American groceries

market has not been kind to foreign interlopers. Other world-class European

chains, such as Carrefour from France and Tesco from Britain, have tried and

failed to get a foothold. Aldi s record is unusual.

Nor have private-label goods taken up much space on the shelves of conventional

American grocers. They account for only 18% of grocery sales, less than half

the average penetration at a western European grocer. This is partly because

the stigma that private-label products are only for poor people is more

firmly entrenched in America than in Europe, notes Simon Johnstone of Kantar

Retail, a consultancy.

Lidl has long eyed expansion into America, but plans are said to have been

repeatedly shelved, perhaps owing to past internal disputes. Its bungled

attempt to launch in Norway a few years back also left management cautious. It

must now reckon with Aldi. Liz Ruggles, head of marketing at Aldi s American

division, says that new retailers can t match our relationships with hundreds

of America-based suppliers.

Nevertheless, most onlookers expect Lidl s entrance to roil the American

grocery industry, posing yet another danger to companies already threatened by

investments from Walmart, online startups and Amazon. Market share is often on

offer at the low and premium ends of grocery. In Britain three of the

fastest-growing grocers by market share in 2016 were Lidl, Aldi and Waitrose,

an upmarket chain. In America, too, sales at conventional grocers such as

Kroger are stagnant. Bain expects deep discounters to grow by 8-10% each year

between now and 2020, five times as fast as traditional grocers.

As incumbents mull their response, some hope the European interlopers ambition

will be their undoing. Lidl s American stores will offer posh Italian and

French cheeses and wines, for example. Aldi is already adding more organic

products to its American stores. For conventional grocers, such as Wayne

Denningham, chief operating officer of Albertsons, another big grocery chain,

who is watching Lidl s entry (he is concerned, but not unduly worried ), the

ideal scenario would be for the Germans to nudge each other upmarket.