Are they Nuts?

Could it be that that Lidl executives have taken leave of their senses? Maybe so. They’ve announced plans to plant a large number of stores in the US, notwithstanding its overseas industry peers’ wretched record of failure in the States.

Lidl is the mammoth discount food retailer based in Germany. There can be no doubt it’s a formidable force in European food retailing. With annual revenues of roughly $80 billion and about 10,000 stores in more than 20 countries in both Eastern and Western Europe, it’s probably the largest pan-European food retailer of all.

Yet, the failure of other European food retailers in the US surely must give Lidl executives pause. The most recent downfall came when UK-based Tesco threw in the towel and decided to cut short its five-year-old bid to establish its Fresh & Easy format in the western US. Tesco lost in excess of $3 billion in startup and operating losses. Tesco isn’t alone. Other European operators have tried to enter the US without any success. They include Carrefour, Auchan, Leclerc and 3 Guys. All are long gone.

These companies in their lack of success in the US have one thing in common: they all tried to plant a new format in US soil. Tesco had an up-market/convenience hybrid. Carrefour, Auchan and Leclerc tried out hypermarkets. 3 Guys was a bizarre format with leased and individually operated departments.

Conversely, a couple of smarter European companies have had long-running and fairly positive experiences in the US. Ahold of The Netherlands (Stop & Shop, Giant and Peapod) and Delhaize of Belgium (Food Lion and Hannaford Bros.) entered through acquisition and left the acquired companies alone, at least for quite a while. But even acquisition doesn’t ensure success as Sainsbury and Marks & Spencer discovered after short ownership tenures in the US.

The Big Exception

There is one exception to the comparatively safe harbor afforded by acquisition, and that’s Aldi. Aldi, like Lidl, is based in Germany and operates deep-discount stores in about 15 countries in Europe. Aldi’s sales volume and store count are nearly, but not quite, equal to Lidl’s. (Both Aldi and Lidl are privately held and disclose no financials, so estimates must suffice.)

Here are two telling facts about Aldi. First, it’s the model for Lidl stores in Germany, and later elsewhere (Aldi was founded in 1962, Lidl in 1973). Secondly, and more important is that Aldi has been in the US since 1976 pursuing a strategy of rolling out its own stores and its own format. Its growth trajectory has been slow and quiet, but powerful. It now has more than 1,000 stores in some 30 states, many in the Midwest and the East. Aldi is now apparently confident enough that it’s pursuing a far more aggressive growth path with major bursts of openings slated for Texas, Florida and California.

Lidl intends to once again model itself on Aldi’s success — this time in the US. With Aidi’s track record, we can assume that Lidi isn’t too worried about whether or not other European food retailers have thrived in the US. To the degree that Lidl’s intentions for the US can be divined, it appears to be a far more solid plan than Tesco had for its Fresh & Easy format.

Lidl plans to roll out about 100 stores initially, all on the populous East Coast. Lidl, with its deep-discount, limited-assortment, small-store format should find a more hospitable home in the cities of the East than Tesco encountered in the sprawling West. The limited- assortment format is truly limited in terms of product range. Most likely the Lidl stores in the US won’t offer much in the way of perishable product, such as produce, meat or baked goods. That means Lidl shoppers, like Aldi shoppers, will have to do some fill-in buying in a conventional supermarket. That’s more easily done in cities with a wide variety of shopping choices.

Aldi Paves the Way

Lidl also will benefit from Aldi’s strategy in the US. Thanks to Aldi, and a couple of smaller operators, many shoppers are now familiar with the deep-discount format and are comfortable with it.

Lidl is said to have dispatched a small team of executives to the US to do some scouting for store sites. The team is also said to be looking for a place to establish a distribution center and a US headquarters. Lidi plans to invest more than $600 million to support its rollout in the States.

This is not to say the way is entirely clear for Lidl. One trap that Tesco fell into was to build an extensive grocery distribution center and manufacturing plant for fresh-prepared food long before the first store was opened. That made the cost of exiting the US seem so outrageously high that it was obliged to keep trying long after it was clear to everyone else that it was throwing good money after bad. Lidl may also fall into that trap if it’s intent on developing its own distribution apparatus before researching if its store model will work and what product range US shoppers will demand.
A Safer Way
The safer alternative would be to source product from a third-party wholesaler while the store format is being tweaked. The big downside to that approach is it would be difficult to maintain sharply-reduced price points by acquiring product from a wholesaler. (Lidl’s prices are as much as 30% below those of its competitors in many of its operating areas.)

A solution to that would be to subsidize prices for the time it takes to perfect and prove the store format. That would be costly, but probably not as costly as developing a distribution center. And, it would allow Lidl to cut its losses quickly if the format doesn’t work out in the US as expected.

Lidl will also need to take a closer look at its product offer. In most of its operating areas, it offers a high percentage of private-label product. Most discounters that have been successful with selling a lot of private label do so by first offering national brand product at a sharp discount to establish their low-price image. Then, they’re well positioned to increase the proportion of private label products over time. Aldi has done just that, as have Costco, Walmart and others.

All things considered, then, what are Lidl’s prospects for success in the US? Well, it has a known format that is well suited for a sluggish economy, it has picked the right geography, and it certainly has the economic wherewithal to make it happen.

At the current juncture, Lidl’s chance for success looks as strong as Tesco’s looked weak right from the start. Maybe those Lidl executives aren’t nuts after all.