A little over a year ago the supermarket sector was roiled by speculation about the impact that the arrival of Lidl would have on established players in the U.S. market. Based in Neckarsulm, Germany, the hard discount grocer has proven a disruptive force and fierce competitor with more than 10,000 stores in the 28 European countries where it operates. Many industry observers thought the company would quickly have a similar impact in this country.
A new report from Catalina shows that Lidl’s U.S. debut was not the game-changing event that some had predicted. The study, titled “Defending Supermarket Share When Lidl Comes to Town,” found that existing grocery stores near one of the German retailer’s new outlets saw a sales decrease 6.8% in the first month after a Lidl opening, but quickly regained most of that business, with volume down by only 1.9% by the fourth month. The results are based a 16-week study of shopper behavior at 83 established supermarkets located within three miles of 30 Lidl locations that opened last year.
Catalina’s research singled out one reason that the no-frills grocer’s stores — there are now 53 of them in this country — failed to shake up the market: Lidl’s intense focus on private label merchandise runs counter to the preference of many Americans for branded products. The study states that sales of name-brand items at supermarkets competing with Lidl declined about 3.4% less than sales of their store brands.
“Retailers need to pay close attention to how new competitors are impacting their shoppers and respond with the right pricing and promotion strategies to protect and grow share,” says Tom Corley, Catalina’s chief global retail officer and president of U.S. Retail. “It is also clear that well-recognized brands can provide a strong competitive advantage against new retail models, including Lidl, that emphasize private labels over name brands. Retailers should work with their manufacturing partners to fully leverage that advantage.”
Recent actions by Lidl constitute a tacit admission that the retailer’s entry into the American market hasn’t lived up to expectations. In May, the company named Johannes Fieber president and chief executive officer of its U.S. operation, succeeding Brandon Procter, who handled those responsibilities for the past three years. The change in leadership followed the decision to significantly scale back store openings. Lidl launched just over half of the 100 outlets it had originally planned for its first year in the U.S. In addition, management has indicated that the retailer is rethinking its approach to such basics as site selection and store size, while at the same time endeavoring to develop a better understanding of what motivates the American consumer.
Another factor that blunted the impact of Lidl in America is the intense competitive nature of food retailing here. As has been previously pointed out in this space, the U.S. doesn’t lack for world-class retailers vying for a piece of the grocery business — Kroger, Albertsons and Ahold Delhaize among traditional supermarket operators; regional grocers, including standouts Publix, Wegmans and H-E-B; discounters like Walmart and Target; and a host of drug, dollar and convenience stores. Throw in Aldi, Lidl’s arch rival in hard discount grocery retailing, which already has more than 1,600 stores in the U.S. and is in the midst of a $5 billion capital investment program here, and it’s no wonder that Lidl’s arrival didn’t do much to alter the balance of power.
Amazon represents a far more serious threat to the status quo in the supermarket business. As it has in one merchandise category after another, the company is leveraging its prowess in technology and logistics to convert shoppers at brick-and-mortar stores to e-commerce. While online grocery sales in this country are still relatively small — less than 5% of all food and beverage volume — they are picking up speed and should account for some 20% of the market by 2025.
Amazon is leading the charge. The company’s grocery business grew 59% last year to reach $2 billion, according to One Click Retail. While that dollar figure pales in comparison to the total food and beverage sales generated by industry leaders Walmart and Kroger, it puts Amazon in a commanding position in the e-commerce grocery space with an 18% market share, double that of Walmart, its nearest competitor. In addition, Amazon is hard at work developing synergies, in terms of both merchandise and services, between its online grocery business and Whole Foods, the brick-and-mortar retailer that specializes in natural and organic food that it acquired a year ago for $13.5 billion.
Other major players are taking similar steps. Walmart and Kroger, to cite just two of many possible examples, are focused on accelerating the development of their omnichannel capabilities, while at the same time enhancing the customer experience in their stores.
If you are a retailer with ambitions to succeed in the food and beverage business, it’s clear that competitive threats are not limited to a single source — whether Lidl, Amazon or Walmart. It’s now necessary to be able to fight simultaneously on multiple fronts to earn the allegiance of food shoppers.
A recent study indicates how far grocers have to go in that regard. It found that 40% of people would not care if the store where they currently buy most of the food and beverages consumed by their families were to close. That should serve as a wake-up call for executives and tell them that they need to find new formats, new products and new services to differentiate their brand in a marketplace crowded with good retailers, and give customers a compelling reason to be loyal to it.