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Lidl bets big to break into the US grocery market

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Lidl bets big to break into the US grocery market

German discount supermarket operator Lidl is preparing an invasion of the U.S. grocery market, with plans to open 100 stores in the mid-Atlantic and southern states through June 2018 in a bid to undercut established players such as Wal-Mart Stores Inc. and Kroger Co.

Lidl is not the first foreign grocer to try to elbow its way into the American market, but the efforts of its predecessors have yielded contrasting results. Some, like discount rival ALDI Group and the Netherlands' Koninklijke Ahold Delhaize NV, have carved out profitable niches, while others, such as France's Carrefour SA and the U.K.'s Marks and Spencer Group plc, have floundered.

Lidl, which is expected to open its first U.S. store on June 15, has made successful incursions into overseas markets where shoppers have reacted with enthusiasm to its business model. It sells fresh produce and a narrow range of food products under its own private label at prices often comfortably below those of the market-leading supermarket chains. In addition to groceries, Lidl offers a range of low-inventory non-food merchandise intended for quick sale, which has helped boost profit margins in Europe.

Lidl, controlled by Germany's unlisted Schwarz Group, traces its roots in retail to 1930 but opened its first discount store in Germany in 1973 and expanded into other European markets in the 1990s. It now has more than 10,000 stores and employs more than 120,000 workers.

As a privately owned company, it is not required to publicly disclose its finances. However, one analyst estimates its revenue in 2016 was more than $85 billion. In contrast, Walmart's revenue in the year ended Jan. 31, 2017, was $485.9 billion.

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An artist's impression of one of Lidl's proposed stores.

Source: Planning documents filed to Albemarle County Department of Community Development

The timing of Lidl's entry into the U.S. could be spot on: America's appetite for stores that emphasize low prices and generic or private-label brands is growing, according to Barclays analyst Karen Short.

But some analysts question its approach to opening in the U.S. They worry it is trying to accomplish too much too soon, and it could be in danger of repeating the mistakes that foiled other overseas grocers.

While European retailers like Carrefour and Marks & Spencer folded or sold their American operations when it became clear that they would not achieve the scale required to be profitable, Lidl is making a splash in the U.S. with plans to open 100 stores in 12 months in Pennsylvania, New Jersey, Delaware, Maryland, Virginia, North Carolina, South Carolina and Georgia.

The company's American arm did not respond to telephone calls, emails or a reporter's visit to its Arlington, Va., headquarters seeking comment for this article.

Lidl's big entrance could present problems. It means it will be more difficult to adjust store layouts and other aspects of its business on the fly, Wisconsin-based supermarket research consultant David Livingston told S&P Global Market Intelligence in a telephone interview.

Others have made mistakes

Opening so many stores also means the company has to outsource other decisions, such as securing spaces for stores in high-visibility locations. "There's no way you can plan on opening a hundred stores without using outside sources" to find properties, said Livingston, who runs his own consulting business. "They're just not taking the best locations."

It is one of the obstacles that tripped up U.K. supermarket giant Tesco Plc, which in 2007 launched a network of about 200 Fresh & Easy stores in California, Nevada and Arizona. Tesco called a halt to its experiment in 2012 after racking up £1 billion in losses.

Some analysts have attributed Fresh & Easy's problems in part to poor choices about store locations.

In addition, Fresh & Easy's branches were about 10,000 square feet, much smaller than the smallest U.S. grocery stores at about 40,000 square feet. They were disparaged by retail analysts for not looking like typical American grocery stores, and they relied heavily on self-checkout technology that was then in its infancy at most other American retailers, according to a report from the New York office of research firm Fung Global Retail & Technology.

"You couldn't tell from a distance whether it was a food store or a drug store or a convenience store," said Bill Bishop, chief architect at Barrington, Ill.-based consulting firm Brick Meets Click, in a phone interview with S&P Global Market Intelligence.

Lidl's U.S. stores will be about 20,000 square feet, still small by U.S. standards but twice as large as its average European store. The layout will more closely resemble U.S. grocery stores, Bishop said, and will be familiar to consumers who shop at Aldi, which operates more than 1,600 stores in 35 states.

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"It's not brand new in the way Fresh & Easy was," said Bishop, whose firm advises grocery chains and industry groups. "The format itself and the business model is proven."

Analysts caution that cracking America will be tough, but Lidl's management could take heart from Aldi, its German rival. The two operating companies that form Aldi both have a presence in the U.S. Aldi (Süd) GmbH & Co. has operated stores under the Aldi name in the U.S. since 1976, and ALDI Nord GmbH & Co. oHG owns Trader Joe's Company Inc.

Lidl also has a track record of successfully infiltrating foreign markets. For instance, it ramped up store numbers in the U.K. a decade ago when the global financial crisis began to squeeze household budgets and cash-strapped consumers scoured the shelves for cheaper groceries.

In Lidl — and Aldi — they found what they were looking for. The discounters steadily captured market share from the country's leading supermarket operators — Tesco, Wm Morrison Supermarkets plc, J Sainsbury Plc and Walmart's Asda Stores Ltd.

Tesco has suffered the most at the hands of the discounters: Its share of total U.K. grocery spending fell to 27.5% in early 2017 from 31.7% in late 2007, according to data from Kantar Worldpanel, a Barcelona-based firm that researches consumer trends. Lidl's U.K. market share has reached about 5% and Aldi's 6.9%. Lidl now operates more than 650 stores in the U.K. and Aldi has more than 700.

Quality helps discounters retain customers

Mike Watkins, the London-based U.K. head of retail and business insight for Nielsen, a firm that tracks consumer buying habits, said the discounters had been able to retain customers — and attract new ones — because of the quality of their products. At Christmas, for instance, Lidl offered a whole lobster for £5.99 and jars of "salmon caviar" for £2.99.

"Aldi and Lidl's momentum continues due to new stores opening and the average shopper spending more," Watkins said in an emailed statement. "The difference today is that Aldi and Lidl aren't solely associated with low-priced brands, having been very astute at promoting the quality and price of their private-label range to a wider array of shoppers."

Success in the U.S. could prove tougher because incumbent retailers are already responding to customer demands for lower prices and better shopping experiences.

Walmart is reviewing its prices on thousands of items. Grocery chains with a strong presence in the states where Lidl is opening first, including Koninklijke Ahold Delhaize's Food Lion LLC, have announced renovations aimed at making their stores easier for customers to navigate. And Aldi has said it will spend $1.6 billion on remodeling and expanding its U.S. outlets.

Lidl seems ready for the challenge. "Lidl culture and organization is getting more confident," said Bishop of Brick Meets Click.