Does the U.S. need another major grocery store chain? Germany's Lidl (pronounced Lee-dle) certainly thinks so. It's planning to open 10 stores in the U.S. later this month to establish a foothold in a market that's already covered with grocers. Yet, industry observers say it will prove to be a formidable competitor to the incumbent chains.
Lidl is a unit of Schwarz Gruppe, which operates 10,000 stores in 27 countries and is Europe's second-largest retailer behind Walmart (WMT). Schwarz is a closely held family business with 335,000 employees and annual revenue near $90 billion. The first Lidl U.S. stores are due to open in Virginia, North Carolina, and South Carolina. It expects to be operating 100 supermarkets on the East Coast by the summer of 2018.
Walmart, the biggest U.S. seller of groceries, along with rivals Target (TGT) and Kroger (KR), the largest traditional supermarket operator, will face competitive pressure from Lidl over the long run in an already cutthroat market, according to Howard Davidowitz, CEO of Davidowitz & Associates, a retail consultant and investment banking firm.
Walmart's Asda grocery business in the U.K. has lost market share in recent years to Lidl and rival Aldi, which is also based in Germany. The world's largest retailer exited the German market in 2006 in part because Aldi's and Lidl's dominance couldn't be overcome.
"Lidl is different than Aldi," Davidowitz said. "Its stores are bigger. They have a broader mix of merchandise, which makes them an even bigger threat."
Rivals, however, won't be pushovers. Telsey Group analyst Joe Feldman argues that the U.S. market is more competitive than others around the world.
"I think [Lidl] can be disruptive and will be disruptive," said Feldman. "The incumbent grocers are ready for them."
Walmart, which gets more than half its revenue from groceries, overhauled the business last year after it came under fire for poor customer service among other things. According to Davidowitz, one of the reasons for the revamping was the retailer's concern over the potential U.S. arrival of Lidl, a claim Walmart denies.
"Our leadership launched an intense focus on improving our stores several years ago -- and the plan is working," said Walmart spokesman Phillip Keene. "Comparable sales [sales at stores open a year or more] have been positive for over two years, customer satisfaction has improved. … The bottom line is we're focused on being the best Walmart we can be, and our customers are telling us we are headed in the right direction."
Aldi has a multidecade head start on Lidl in the U.S., which it entered in 1976, with 1,600 locations currently. Earlier this year, Aldi US announced a $1.6 billion remodeling plan for 1,300 of its supermarkets. Aldi plans to have 2,000 stores by the end of 2018.
Moreover, Amazon (AMZN) is keen on the grocery market as well. Last year it unveiled a concept physical store that operates without checkout counters. It's also eager to expand its online grocery delivery business.
Lidl claims its prices are as much as 50 percent lower than those of other grocery stores. If that holds up, rivals will find it hard to match.
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