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Despite slow store openings, Lidl finds traction in US

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Despite slow store openings, Lidl finds traction in US

One year after entering the U.S. grocery market, Lidl Dienstleistung GmbH & Co. KG has cut ribbons on fewer stores than first planned, but industry analysts say there are signs the discount chain is finding its place in America.

As of June 11, Lidl had 53 stores in the U.S., according to a map of locations from the company. Ahead of its first store openings on June 15, 2017, Lidl said it planned to have 100 stores in the U.S. by the middle of 2018.

Analysts told S&P Global Market Intelligence that the slower-than-forecast pace of store openings indicate that the grocer, headquartered in Germany, has had to adjust to different dynamics in the U.S. market.

One change came in Lidl's plans for the size and locations of stores, said Bill Bishop, chief architect at Brick Meets Click, a consulting firm. At the end of 2017, the discount chain walked away from potential store sites in some small towns and revised its requirements for future store locations to include store footprints of between 15,000 square feet and 25,000 square feet — smaller than its first U.S. stores but still larger than most locations it operates in Europe.

Some of Lidl's early site selections appeared to weigh on the U.S. division's results as the company tried to save money by taking spaces far away from major shopping centers, Bishop said.

"The Germans arrived with very definite views and until recently haven't been open to adjusting them," he said in an interview.

A spokesman for Lidl did not respond to a request for comment from S&P Global Market Intelligence, including a question about why the grocery chain had missed its own target. Lidl is privately held, meaning the company does not disclose as many details about its performance as its rivals, such as The Kroger Co.

Lidl has expanded into new markets before, and the company operates stores in 28 European countries and China. Entering each of those markets has involved adjusting to local demands, George Faigen, a partner covering retail and consumer goods at Oliver Wyman, said in an interview.

"When you come to a foreign country, there's a lot to learn," Faigen said.

A fresh perspective

Still, the analysts said, there is evidence that Lidl has made progress in the U.S.: In surveys conducted since Lidl opened, customers gave the chain high marks for metrics, including price and selection of fresh groceries.

One survey, conducted by research provider Service Management Group in the six months after the chain opened and analyzed June 11 by Brick Meets Click, found that about 75% of Lidl shoppers were visiting the store because of either a "previous positive experience" or the quality of products after that six-month period. That compared with about 56% who cited either factor as a reason for visiting other grocers in markets where Lidl operates.

Shoppers also reported that they were more likely to recommend Lidl to others six months after the first openings, according to the survey.

A separate study, conducted by management consulting firm Oliver Wyman and published June 7, found that 48% of first-time shoppers now visit a Lidl store more than twice per month, with the grocer's fresh food offerings serving as a top draw for customers.

Lidl's high marks on fresh produce should constitute a warning for U.S. grocers, Faigen said. Fresh products are among the most profitable in many supermarkets, Faigen said, meaning that established grocery chains cannot afford to lose too much of those sales to Lidl.

The study also showed that Lidl is particularly popular with shoppers between the ages of 18 and 34.

Facing the future

Over the next year, Faigen said he expects Lidl to continue expanding its store network in the U.S. Compared to traditional supermarkets, the company's small-format stores are well-suited to small storefronts in densely populated areas, such as near urban college campuses, he said.

The grocer's ability to source products itself and sell them under its private label will also be key to expansion, Faigen said, adding that Lidl can adjust its products to local tastes in different parts of the U.S. just as it has in different parts of Europe. The supermarket relies on its store brands for about 90% of the products it stocks at its U.S. stores.

"I would expect them to try multiple things," he said. "The beauty of their format is that it's flexible."

There is also room for Lidl to bolster its private-label products as it expands within the U.S., Brick Meets Click's Bishop said.

In markets such as the U.K., Lidl has grown market share by keeping prices low. A key part of that strategy, Bishop said, has been limiting marketing costs, labeling its store-brand products in a "plain and straightforward" way.

Not all U.S. consumers may buy into that strategy as Lidl expands, Bishop said, adding that many grocery shoppers are used to being swayed by marketing efforts, both from big food manufacturers and grocers with strong store brands, such as Kroger.

"It's not simply getting the product right," he said. "It's building better mousetraps."