LinkedinGoogle Plus

The Lidl Effect: How the German Retailer Is Driving Down Prices and Shaking Up the Grocery Industry

The Lidl Effect: How the German Retailer Is Driving Down Prices and Shaking Up the Grocery Industry

The U.S. discount grocery market is being hit by a tidal wave from across the ocean. Lidl, the top German grocery retailer that is intensely popular in Europe, is already causing traditional grocery stores near the new retailer to drop prices by as much as 55% off of staples such as dairy products and an average of more than 9% off other products. While Lidl claims that shoppers are the ultimate winners through improved pricing overall, retailers are not looking forward to having a Lidl store move into their vicinity. Here’s what you need to know about this new competitor that stands to shake up the grocery industry — starting on the east coast and swarming throughout the country.

Who is Lidl?

The German retailer has committed to opening more than 100 stores throughout the country by the end of 2018. The initial stores are large for a deep discounter at around 36,000 square feet. Smaller stores are also in the works at various sizes between 15,000 to 25,000 square feet. With nearly 50 stores already under construction or open as of June 2018, the retailer stands ready to hit their mark. Lidl’s aggressive growth strategy is what helped them rise to the top throughout Europe, where they boast upwards of 10,000 stores. The discount grocery retailer is expected to have a dramatic and disruptive impact on the U.S. market as it seeks its ideal balance of footprint size, staffing, and pricing. A key factor in Lidl’s strategy is offering a limited assortment of high-quality products branded with their private label — a strategy that provides new opportunities and risks for current U.S. manufacturers and retailers.

The Lidl Effect

With decades of experience in the European grocery market, is Lidl truly equipped to service American consumers who may be accustomed to different offerings? The answer appears to be yes, as shoppers begin to see a ripple effect in downward pricing on key products in markets where Lidl now has a presence. This is one of the many indicators that shoppers are willing to take a chance on a new brand. Lidl is competing in a variety of different arenas including price, store format, quality, and assortment.

Pricing Strategies

One place where retailers will begin to feel the pain is in their overall pricing strategy. Not only are staples seeing deep discounts, but retailers are looking at general rates that are 25% above Lidl in areas where the discounter has entered the market. According to a study by Katrijn Gielens, Associate Professor of Marketing at the University of North Carolina, ‘The Lidl Effect’ is stronger even than the entry of Walmart into a specific area, with discounts at 9.3% greater than in markets where Lidl does not have a presence. Price reactions by retailers where Lidl is present are significant:

  • Aldi’s prices are set 19% lower
  • Kroger discounted their items by an average of 13%
  • Food Lion lowered prices by 15%

These savings to shoppers resulted in an average $20 cheaper basket for a range of 48 products — costing retailers much of their hard-earned profits. Deeper discounts are found on specific categories such as bread and avocados, were reductions were in the order of 30% or greater.

Store Format

The soaring glass walls of the initial 36,000-square foot Lidl stores may not be the format that eventually makes its way to communities throughout the U.S. as the retailer looks to refine their offerings. This larger size is new to Lidl, as their European stores have a smaller footprint more on the level of their German-turned-U.S. rival, Aldi. Leaders at Lidl note that the reduced scale will also drop the number of available parking spots and the expected draw radius from 3 miles to 2 miles while exploring co-tenant situations instead of standalone stores.

Quality

Lidl’s focus is on high-quality private label products, but the limited POS data available to American retailers may be causing some concern in the market. They take a no-frills approach to retailing, but there is a focus on offering low-priced gourmet foods that are found in Europe, as well as locally sourced options.

Assortment

The larger-format 36,000-square foot stores provide an opportunity for Lidl to increase the assortment of their offerings. Their unique array of products includes American and European favorites alike, with food and non-food options equally available. Larger stores include onsite fresh bakeries as well as general merchandise.

Key Takeaways

While retailers may find that Lidl’s pricing is putting a damper on their overall price structure, manufacturers delight in the opportunity to provide their offerings through yet another discount channel. Lidl’s reputation as a deep price discounter in Europe will be supported with their U.S. strategy, with retailers in the area making pricing decisions based on the perceived level of competition offered by the new market entrant. With more than 400 potential real estate deals currently in the works, what is clear is that Lidl is here to stay and will be a force to be reckoned with in the grocery vertical of the future. It remains to be seen whether or not the pricing fallout will be short- or long-term, and will largely depend on the level of acceptance from shoppers throughout the states where Lidl establishes a presence.

Lidl’s deep discount strategy is not new to retailers with an Aldi’s or other discount groceries in their market, but the combination of low prices and unique assortment of gourmet European items may present new challenges. Leverage data from shoppers to stay competitive regardless of the current market volatility.