German chain has Wal-Mart ready to battle

Discount grocer opening U.S. stores on East Coast

A Germany-based grocery chain is weeks away from opening its first stores in the United States and its reputation for being a disruptive force across retail must be taken seriously by Wal-Mart Stores Inc. and others, according to retail experts.

Mike Paglia and Laura Kennedy, analysts with Kantar Retail, addressed Wal-Mart suppliers during a Doing Business and Bentonville event Thursday, offering an in-depth look at the Lidl grocery chain and the threat it presents in the U.S. market. The privately held company will begin opening 20 stores across North Carolina, South Carolina and Virginia next month, but said it plans to expand rapidly to open about 100 stores -- predominantly on the East Coast -- within a year.

"Our position in Kantar Retail is that Lidl's entry in the U.S. will be the single biggest event in brick and mortar retail over the next several years as they enter the market and expand their footprint," Paglia said. "They're going to disrupt a lot of folks. Everyone is going to feel it in some way, shape or form."

Lidl was founded in the 1970s and, in about 40 years of operation, has strategically expanded to 28 markets. The discount grocery chain has made an impact in nearly every market it has entered, according to Paglia, turning into a European "powerhouse" with about 10,000 stores that produced roughly $95 billion in revenue last year.

Paglia said there are plenty of misconceptions about the company, which is often considered a no-frills, discount chain that primarily attracts low income shoppers like fellow German grocer Aldi. But Paglia said Lidl's stores -- which will be about 36,000 square feet in the United States, according to estimates -- attract a wide range of income brackets by excelling at what he described as the four P's: product, price, promotion and place.

Private label products make up about 75 percent to 80 percent of Lidl's assortment, but Paglia expects the chain to initially carry brand names in the United States to build trust with consumers. The company also has a knack for keeping much of its assortment in stores for only a short period of time, rotating products out regularly and replacing them with new ones.

Lidl's main targets are larger-format supermarkets and supercenters, which is why Paglia believes Wal-Mart is at "high risk" among U.S. retailers.

"They offer a wide array of products for a wide array of people," Paglia said of stores that have typically been affected by Lidl in other markets. "That's who they're going after and that's what they're going to do here."

All Wal-Mart has to do for proof is look at the United Kingdom, where its grocery chain -- Asda -- has felt the impact.

Same-store sales in Wal-Mart's U.K. operations fell 2.9 percent in the fourth quarter of fiscal 2017, but was an improvement from previous quarters where the metric declined 5.8 percent, 7.5 percent and 5.7 percent. Paglia said Lidl was able to pull away about $128 million in volume from Asda last year.

Low prices have played a big role. In March, Kantar Retail conducted a pricing comparison on a basket of brand-name items at Lidl and Asda. The basket -- which contained the same exact selections -- was 15 percent cheaper at Lidl.

"You should be shocked by that 15 percent difference," Kennedy said. "When we do pricing studies, the one thing that I can depend on is that Wal-Mart is always going to win against its top competitors in a pricing study. But in the U.K. this retailer beat them by 15 percent on a branded basket of items. That's just mind-boggling."

Kennedy said simply going head to head with Lidl in a price war has not been a successful strategy. So companies like Wal-Mart must combat Lidl with a "multifaceted approach" that goes beyond just price, emphasizing strengths such as its constant assortment and pharmacy services. Collaboration with suppliers also will be key.

"This is a multifaceted disrupter, which means you have to have a nuanced approach to them," Kennedy said. "I really like to think [Wal-Mart Chief Executive Officer] Doug McMillon, [U.S. stores CEO] Greg Foran and company are keeping that in mind here."

Wal-Mart has been paying attention, which is evident in its actions and messaging. McMillon said during an event last month the competition in the United Kingdom "certainly focuses you."

To combat competitors like Lidl, McMillon said the retailer must focus on price along with the quality of its assortment in supercenters and neighborhood markets. He also said Wal-Mart can't have too much friction in its stores, finding innovative ways to improve the convenience for shoppers.

"We're going to try to take away advantages that discounters have and then play to our strengths," McMillon said.

Price, assortment and convenience also were familiar themes when chief financial officer Brett Biggs addressed investors in Orlando, Fla., last month. Biggs said Lidl and others are "very good competitors" with unique business models, but believes Wal-Mart's emphasis on those three areas along with its growing e-commerce offerings will make a difference.

"Bringing this all together is where we think we'll win in long term," Biggs said.

Lidl's first wave of stores will fine-tune the U.S. strategy. But Kantar expects a rapid expansion of more than 600 Lidl stores in the United States by 2023 that could produce $9 billion in sales.

While much of the operations will be concentrated on the East Coast for now -- from New Jersey to Georgia -- Paglia said Lidl has also shown interest in the Texas market as business in the United States is set to begin.

"Everybody is going to feel an impact," Paglia said. "Not everybody is going to feel it equally. ... But if history is an indicator, if the U.K. is an indicator, Wal-Mart is going to feel some pressure."

SundayMonday Business on 04/23/2017

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