In 2016, with the Great Recession well in the rear view, retailers were in various stages of pondering dramatic changes to combat Amazon, which, amid growth in its marketplace, fulfillment network and brick-and-mortar operations, that year staged its second record-breaking Prime Day. Walmart in particular seemed to have had enough. Hampered by neglected stores and lackluster e-commerce, the retail giant made a dramatic summertime play that year, with the acquisition of e-commerce startup and Amazon agitator Jet.com.
But Amazon wasn't the only shark in the water; a fresh challenge would soon cross the Atlantic — Lidl.
The German grocer is part of the Schwarz Group conglomerate (Europe's largest retailer and one of the largest worldwide), which operates some 10,000 stores in 26 countries throughout Europe. Like its German compatriots Aldi and Trader Joe's, Lidl offers a scaled back grocery selection and bottom-barrel prices. However, the chain stands out with its large stores and assortment of home goods and apparel that is immensely popular in Europe — and a headache for rivals.
The retailer staked its U.S. headquarters in Arlington County, VA in 2015 and, after a busy 2016, began opening doors mid-year last year. "We have opened 48 stores since June," Will Harwood, Lidl director of communications, told Retail Dive in an email, adding that the company plans to open more stores and sell products at "prices up to 50% lower than other retailers."
Lidl’s merchandising has elements in common with a few U.S. retailers. Like Target, its apparel is stylish thanks to designer collaborations like with German model Heidi Klum. Her Lidl collection, available as of September in the U.S. and the U.K., last year helped boost U.K. sales of discount apparel overall, according to GlobalData Retail Senior Retail Analyst Molly Johnson-Jones.
Who should be most worried about Lidl's expansion?
"Given Lidl's focus on lower cost, it might be the best example of a direct competitor to Walmart that we have seen in a long time."
Senior vice president of retail at consulting firm Magid
Walmart — dependent on grocery for half its sales and not particularly known for enticing non-grocery offerings — is especially vulnerable to the new competition.
"Given Lidl's focus on lower cost, it might be the best example of a direct competitor to Walmart that we have seen in a long time," Matt Sargent, senior vice president of retail at consulting firm Magid, told Retail Dive in an email.
Nevertheless, Walmart, at first, didn’t seem to notice the incursion, apparently preoccupied with its newfound focus on e-commerce. "If I ran Walmart, I would be much more concerned about [Lidl] than about Amazon," Nick Egelanian, president of retail real estate consulting firm SiteWorks, warned late in 2016 in an email to Retail Dive.
That was destined to change.
The price war is on
Lidl "launched with a bang," according to an October study from mobile marketing platform inMarket, siphoning share of voice from Walmart right out of the gate. But Lidl's early success has lost some steam, according to inMarket. "BI-LO, Walmart and Harris Teeter have all recovered SOV as of September, while Lidl decreased in July and August before a slight recovery in September."
In the U.S., the chain is facing assertive defensive moves from rivals. Walmart, as well as Kroger and others, has, apparently taken notice, and has pulled down prices in the face of Lidl’s competition, according to a new study by the University of North Carolina Kenan- Flagler Business School emailed to Retail Dive.
"Other retailers are dramatically dropping their prices in the vicinity of our stores, and the effect is profound. Shoppers in our markets are the ultimate winners, and those that live elsewhere deserve the same deal."
Lidl director of communications
Grocery stores located near Lidl in the U.S. set their prices for key staple products up to 55% percent lower compared to markets with no Lidl, according to the study, which was done on Lidl’s behalf. "The University of North Carolina study validates what we have seen on the ground in every market since launching our stores," Harwood said. "Other retailers are dramatically dropping their prices in the vicinity of our stores, and the effect is profound. Shoppers in our markets are the ultimate winners, and those that live elsewhere deserve the same deal."
Other research finds Walmart and other rivals actually beating Lidl. Walmart was priced at a 150 basis point discount to Lidl, on average, for example, according to late December number-crunching from Gordon Haskett analysts, who also said the retail giant had "made significant progress versus Lidl."
"To this end, Walmart’s pricing improved 590 basis points sequentially versus Lidl. From a 440 bps premium in October to the aforementioned 150 bps discount in December," according to a note from Gordon Haskett analyst Chuck Grom emailed to Retail Dive.
American grocers have been bold, but the emerging price war is ominous for them in light of how ongoing battles elsewhere, particularly in the U.K., have squeezed margins. Homegrown grocers and Walmart’s banner there, Asda, have been kneecapped by the German companies.
"[Asda] was the greatest division a few years ago," Howard Davidowitz, chairman of New York retail consulting and investment banking firm Davidowitz & Associates, told Retail Dive. "Then Aldi and Lidl went across England, and now Asda is doing very badly."
The battle isn't over
Late last fall, as Walmart, Kroger and Target defended themselves on price, Lidl appeared to falter, which led some observers to wonder if Americans, initially flocking to check out the new stores, were returning in significant-enough numbers.
The retailer in December reportedly scaled back plans for its New Jersey locations, according to multiple news outlets, but Lidl denies the move. "This is not true," Harwood told Retail Dive. "We look forward to opening more stores in New Jersey. In fact, we want to accelerate our site acquisition across all of our operational markets along the east, including in New Jersey."
Though SiteWorks' Egelanian hasn't studied Lidl closely, he, like others, has heard anecdotally of some "early problems."
"They are very independent in their real estate activities and have picked some questionable sites" and have chosen to open up in a fairly wide geography, from South Carolina to Delaware, he noted to Retail Dive in an email. "With little name recognition and a lack of market concentration, this may be hampering them a bit," he said. "The grocery market in the East Coast, particularly in Richmond and Tidewater, VA, is particularly competitive. Between Kroger’s Harris Teeter brand, Walmart, Dollar General, and of course, Aldi, they are facing plenty of competition.”
In fact, Lidl has altered its strategy somewhat, Harwood said. "We have opened up more flexible site criteria for our real estate team," he said. "Our criteria now includes lease options in addition to purchases deals. The site criteria also includes more flexibility on store sizing, which will allow us to reach more deeply into urban areas and places more difficult to reach with our standard 36,000-square-foot, stand-alone store. We will continue to open and construct our 36,000 square foot stores, which reflect all 48 that we have opened to date."
That means that Lidl is re-calibrating to some extent. But it doesn't mean it's all that much less fearsome.
“[Lidl and Aldi] don’t have to report earnings. You realize what an advantage that is — they’re just monster cash machines that take a long term view, and they’re in there to stay and their formula is straightforward."
Chairman of Davidowitz & Associates
"Given the relative newness of Lidl combined with the initial aggressive pricing response of competitors I wouldn't judge Lidl as struggling yet," Magid’s Sargent said. "Lidl will give it time, and as customers become more brand aware of Lidl and as competitors back off their initial competitive actions. I think we will have a better perspective of Lidl's ability to play in the U.S. market."
If time is what Lidl needs, it has plenty, thanks to the luxury it enjoys, like Aldi, of being a private company with deep pockets, Davidowitz said. "They don’t borrow money, they’re rich, which gives them ultimate flexibility," he said. “[Lidl and Aldi] don’t have to report earnings. You realize what an advantage that is — they’re just monster cash machines that take a long term view, and they’re in there to stay and their formula is straightforward. The assortment is narrow and the prices are unbelievable — so the merchandise sells out before they have to pay for the goods, very similar to Costco.”
Don’t expect Walmart to give up the fight, however. The retail giant has already demonstrated that it may have more than Amazon on its mind. "Walmart has made tremendous strides. They’ve gotten back into the price game, which is critical," Davidowitz said. "They’ve improved their produce, their bakery, their food presentation and they’ve gotten much more price competitive."
Still, he warned that it's much too early for Walmart — or anyone — to write Lidl off. "It’s very early days," he said. "If you look at their counterpart Aldi — they started out slowly too. There were missteps. I remember how Aldi started, they started a food company in the Midwest, they had to close it. Just look at the success now of Trader Joe’s and Aldi. I rest my case."