After the U.K., the U.S.? Why Aldi and Lidl Will Be Successful in America

The entry of Lidl into the U.S. and Aldi’s response

On May 17, the German hard discounter Lidl (global sales: $80 billion) announced its first U.S. stores will open on June 15, 2017 - one year ahead of schedule. By the summer of 2018, it plans to have up to 100 stores across the East Coast, with more to come thereafter in the East, Midwest, and elsewhere.

Aldi (global sales: $90 billion) follows this all very, very carefully. Indeed, there is only one retailer Aldi is afraid of. It is not Kroger or Walmart but Lidl. In the German home market, Lidl is giving Aldi a run for its money. However, Aldi had the U.S. all to itself, and it has been remarkably successful. The growth rate has increased from a “low” of 5.8 percent in 2012 to 10.8 percent in 2016.

But now that Lidl has entered the world's largest grocery market, the game is changing. In response, Aldi is accelerating its expansion strategy with 400 new store openings planned by the end of 2018, and more afterwards. It has also unveiled an aggressive $1.6 billion remodeling effort to expand its assortment of perishables, modernize its stores and improve product presentation. And truth be told, Aldi needs it as these pictures below show, made by me in a local Aldi store.

Assortment presentation in a local Aldi Store

Three forces that will drive Aldi and Lidl's success in the U.S.

Yet, despite Aldi’s success, hard discount has been less of a factor in U.S. grocery retailing than in other developed countries. This is going to change soon. Why? Three forces stand out.

1.     Stagnating incomes

Stagnating household incomes in the first decade of this century were the engine of hard discounter growth in Germany. The same happened somewhat later in the U.K. U.S. consumers are in a similar situation. The median household income adjusted for the cost of living in the area has declined in more than 80 percent of U.S. urban areas since the turn of the century. And even in the present recovery, hourly wages since 2010 corrected for inflation have risen at barely 0.5% a year. This makes consumers more receptive to the value-based offer of Aldi and Lidl. This is what Vanessa Zimmerman said when she heard that Lidl was coming to America, “Come to San Diego, please! I shopped your store for two months while I was in Ireland and became addicted.”

2.     Low satisfaction with many full-service retailers

You might think that consumers go to Aldi because they have to, not because they want to. That people love Kroger, Food Lion, or Walmart, but need Aldi. Actually, that is no longer true. In the most recent (2016) American Customer Satisfaction Index involving 18 supermarket chains, Aldi ranked #3, ahead of Kroger (#9), Meijer (#11), Target (#12), Ahold Delhaize supermarket chains (Food Lion, Stop&Shop, Hannaford; #14), and Walmart (dead last, #18).

3.     Large price advantage

In a survey Consumer Reports conducted among its readers in 2016, 28% said they had fired a nearby grocery store. Forty-five percent did so in search of lower prices. Hard discounters benefit from this. They significantly underprice mainstream retailers. Aldi’s internal studies show its prices are about 20% lower than Walmart. The difference with other retailers is even higher. In March 2017, I conducted an in-store price check in Aldi and Food Lion, a large regional supermarket chain ($11 billion), which is part of Ahold Delhaize. I compared prices for foods, beverages, household products of the Aldi private label versus the Food Lion private label. The results were shocking. On average, Food Lion was 48% more expensive than Aldi. And as Food Lion's low score in the ACSI study shows, they cannot make up for the price difference by a superior in-store experience, something I can confirm first hand. 

Prices of Aldi and Food Lion Private Label products

What will this mean for shareholder value?

The lesson is clear. There are three fundamental forces why Aldi and Lidl will shake up the U.S. supermarket industry. Aldi and Lidl roughly doubled their market share in the U.K. to around 13% in the last five years or so, with only factors 1 (stagnating incomes) and 3 (price advantage) being present. Aldi has already shown remarkable growth over the years and with Lidl entering, this trend will accelerate, especially because I believe that Lidl’s slightly more upscale format and stronger focus of national brands is more in line with the needs of U.S. consumers.

Like the U.K. retailers, American players can - and will - respond by cutting their prices. This is what the Big Four (Tesco, Asda, J. Sainsbury, and Morrison) did in the U.K. – with dire consequences for their shareholders - something privately-held Aldi and Lidl do not have to worry about. Between April 2013 and the end of 2015, the stock price of Sainsbury declined by 37%, Morrison by 47%, and mighty Tesco's share price by a whopping 63% (Asda is not included as it is owned by Walmart). Will the same happen to U.S. retailers?