Monday, June 9, 2008

Breaking News and Analysis: German Small-Format Discount Grocery Chain Lidl is 'Coming to America' By 2012 Says Chief Executive Klaus Gehrig

German small-format discount grocery chain Lidl plans on joining its fellow "fighting tiger," price-focused German food retailing cousin Aldi by expanding into the United States, Fresh & Easy Buzz has learned.

In an interview published today in the German newsweekly Focus Magazine ("Trade: Lidl boss Klaus Gehrig will, despite the setbacks by scandals continue to grow--soon in the USA and Switzerland"), Klaus Gehrig, chief executive of Lidl's parent company Schwarz Gruppe, tells the publication: "We are now preparing to enter the U.S. market."

Gehrig tells Focus Magazine Lidl plans to enter the United States food and grocery retailing market by 2012, likely having its first stores in the states before that date.

The small-format grocery retailer's strategy is to significantly build-up its European business, including opening numerous new Lidl discount grocery stores in the region, and then move into the U.S. by 2012, Gehrig says in the interview.

Gehrig also says Lidl plans to have a significant grocery retailing presence in Switzerland with its small-format, price-impact grocery stores. He says the retailer is planning to open about 80 small-format Lidl stores in that nation.

In addition to its plans to grow significantly throughout Europe, including in Tesco's home turf of the United Kingdom where Lidl is becoming a major grocery retailing player, CEO Gehrig says Lidl plans to open 1,000 new stores in Germany, which would put it near German rival Aldi's store count of about 4,000 in the homeland.

Aldi and Lidl are strong competitors in Germany and in other parts of the world, like the UK, where both grocery chains have stores in the same markets. Therefore, it doesn't come as a surprise to Fresh & Easy Buzz that Lidl is going after Aldi at home in Germany and in Europe, where Aldi has become a major food and grocery discount retailing force, as is Lidl.

Aldi currently has about 900 of its small-format, limited assortment discount grocery stores in the U.S. and is growing its store count by 75 -to- 100 new stores a year for the next five years, according to an announcement Aldi USA, its American division, made late last year.

Lidl and parent company Schwarz Gruppe has been watching Aldi USA for a long time--Aldi first came to the U.S. in about 1975--as it has been watching Tesco since it opened its first small-format Fresh & Easy Neighborhood Market grocery stores in the Western U.S. beginning in November, 2007.

Schwarz Gruppe believes it does small-format, discount food and grocery retailing better than Aldi (and of course Aldi disagrees) in its Lidl stores, and it appears the grocery chain believes it can do well in the United States--which is a potentially lucrative market for international food retailers--so has decided to cast its lot across the Atlantic beginning shortly before or in 2012 when Gehrig says the German "fighting tiger" small-format, price-focused discount grocer plans to enter the U.S. market with its first stores.

There is no information as of yet regarding which regions of the U.S. Lidl plans to target initially. However, Aldi's current 900 stores are located in the Midwestern, Mid-Atlantic and eastern regions of the country.

Lidl could decide to start in one or all of those regions if it wants to go head to head against rival small-format discounter Aldi. Or it could pursue a Western U.S. strategy (or a combination strategy), taking on for example Tesco, which is focusing its Fresh & Easy small-format combination basic grocery and fresh foods grocery markets in the Western U.S. states of California, Arizona and Nevada at present.

Lidl's stores are different than Tesco's Fresh & Easy in that they put more of an emphasis on selling basic grocery items at discounted prices. Although, the Lidl stores in Germany and elsewhere offer some fresh and specialty foods, it isn't as much of a focus as with the Tesco Fresh & Easy stores. Lidl stores average 10,000 -to- 15,000 square feet.

The small-format Lidl discount grocery stores are best described as no frills, warehouse-style stores in design and merchandising philosophy. In fact, in many ways they are like lots of supermarkets from the 1970's and 1980's in the U.S. These stores used a no frills merchandising style which also included the "stack them high (grocery products) and sell them fast" philosophy, which was to fill the store aisles with lots of cut-case product stacks and sell the goods for cheap. High stacks, cheap prices, fast turnover.

Inside a Lidl small-format, no frills discount grocery store.

Lidl stores also employ what we call the "sell everything but the kitchen sink" in-and-out promotional merchandising strategy just like Aldi does. Lidl and Aldi stores sell everything from television sets, furniture, electronics, clothing, garden supplies and more on an in-and-out promotional basis, advertising the various items in their weekly advertising circulars at hot prices and stacking the goods high and selling them fast in the stores.

Take a look here at Lidl's current advertising newsletter which features bathroom goods like towels, along with Budweiser beer, Pepsi Cola, Ty-phoo brand Tea, Knorr brand sauces, calculators, woman's fashion items and other goods. Like we expect with Aldi, we just know a kitchen sink will show up one day in a Lidl newsletter advertisement.

However, at least half of Fresh & Easy's focus--a focus that's central to the chain's success--is on selling everyday grocery items at discount or affordable prices. Both Lidl, Aldi and Fresh & Easy also focus on store brands over national brands.

Although they are infants in terms of store count in the UK compared to the nation's major food retailing players, both Lidl and Aldi have recently been taking a small amount of market share away from Tesco there, where it's the leading food and grocery retailer with about a 31% share of the market. The two German discount grocery chains also have been taking share away from the UK's number two supermarket chain, Wal-mart-owned Asda, and number three, Sainsbury's.

Schwarz Gruppe, Lidl's parent company, which also owns the Kaufland retail chain based in Germany, is the sixth-largest food and grocery chain in the world, according to the research firm Planet Retail, which annually ranks the top global food and grocery retailing chains by annual sales and other criteria.

Annual sales for Schwarz Gruppe in 2007 was $70 billion dollars (~50 billion Euros), an increase of 5.8% over 2006. Lidl accounts for about $67.869 billion of that total (the rest being Kaufland), according to Planet Retail's latest estimates.

By contrast, Aldi is ranked by Planet Retail as the ninth-largest global retailer, with sales of $57,522 in 2007.

Wal-Mart is the world's largest retailer, followed by France's Carrfour, Tesco, Germany's Metro Group, U.S-based Kroger Co., and then Schwarz Gruppe, parent company of Lidl, at number six.

Schwarz Gruppe currently has its small-format Lidl discount grocery stores, about 8,580 in total to date, in the following nations: Austria, Belgium, Bulgaria, Croatia, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom.

Like Aldi, which essentially operates the same small-format discount grocery store format throughout the world, with some customization depending on the national market, Fresh & Easy Buzz expects Lidl to do the same; to bring its basic Lidl format to the states and only to tweak and customize the merchandising mix based on U.S. consumer tastes and preferences like Aldi USA does.

In contrast, Tesco created what essentially was a special format for the U.S. with its Fresh & Easy grocery stores, in that Fresh & Easy is modeled after Tesco's popular European Tesco Express small-format stores, but parts company with those stores in the areas of design and overall merchandising mix, especially the emphasis on fresh, prepared foods. As such, Fresh & Easy qualifies as being a separate format from Tesco Express in our analysis.

Although 2012 is four years away, Lidl will inject much excitement and competition into what already is a small-format food and grocery retailing revolution happening in the United States.

For example, U.S-based SuperValu, Inc. now operates about 1,600 of its small-format Sav-A-Lot discount grocery stores in the U.S., and Aldi USA, as we mentioned, plans to grow its current 900 store base by up to an additional five hundred stores, for a potential total of 1,400 discount grocery markets, over the next five years.

Tesco hopes to have 150 of its small-format Fresh & Easy Neighborhood Market combination basic grocery and fresh foods stores open in California, Nevada and Arizona by the end of this year, with double that amount opened by the end of 2009, including its entering the new markets of Northern California (Bay Area and Sacramento Metro) and California's Central Valley.

Tesco's long terms plans with Fresh & Easy have included moving into Oregon and Washington State from Northern California and into additional states in the Western USA.

As Fresh & Easy Buzz has reported in the past, Tesco executives also have looked at opening Fresh & Easy stores in the Chicago, Illinois Metropolitan region and in parts of New York and Florida as part of its long term strategy.

Wal-Mart and Safeway stores also are now in the small-format food and grocery retailing business in the U.S. with their "The Market" and "Marketside" 15,000 square foot formats respectively. Safeway opened its first small-format store, "the Market by Vons," in Long Beach, California on May 15, and plans to open more in California and likely elsewhere in the numerous U.S. markets where it does business with its current 1,750 supermarkets.

Wal-Mart's Marketside, which are a combination basic grocery and fresh foods grocery store format similar to Tesco's Fresh & Easy, but with a difference in that the Marketside stores will prepare food right in-store and even have in-store seating for customers to eat-in, will start opening--the first of four initial stores--in the Phoenix, Arizona Metropolitan region this summer, perhaps as soon as July.

Numerous other retailer's are opening small-format grocery stores in the U.S., as we've reported here on Fresh & Easy Buzz.

Lidl is a seasoned, major global player though in small-format discount food and grocery retailing. Therefore, its announcement that it's coming to America is a very big deal, both for small-format grocery retailing (and all format retailers) in the U.S. in general, and for all of the retailers currently participating in the small-format food and grocery retailing arena in the U.S.

Lidl, which is currently embroiled in a bit of a scandal in Germany over using cameras to spy on its employees in locations like employee rest rooms, will need to avoid that behavior in the U.S. however. Such behavior not only is considered taboo in American business but can cause a company hundreds of millions of dollars in legal fees and employee settlements and enough bad press to sink it before it even starts.

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