Foley Retail Consulting

Why is Lidl going to enter the USA market?

The answer to this question lies in two separate circumstances.

Firstly, the ideal discount markets are running out for Lidl in Europe, therefore USA is the next best option. Ideal discount markets are characterised by several conditions:

1. Consumers who have enough money to choose their quality levels (but don’t want to pay more than they have to).

2. High-wage economy where the labour-saving efficiency of discounters capitalises on their super-productive business processes (this is a discounter’s biggest differentiator to supermarkets and hypermarkets).

3. Discount penetration is well below the threshold of 20% market share (the natural barrier discounters find difficult to break, if all other retail concepts are healthy and available).

4. Most of the competitors are publicly traded on a stock exchange (which normally incentivises those listed companies’ management to prefer short term profit gains over long term profit sustainability).

There just aren’t any markets left with these conditions in Europe.

The second reason surprisingly is Walmart, whose history has been to apply a profit stranglehold on grocery retailing in the USA and has definitely loosened that grip over the past 5 years to achieve better profits and returns for their shareholders. Sam Walton (Walmart founder) and following management understood what made the Walmart business strong: operate at the lowest levels of price and margin your scale gives you the ability to do, and make it difficult for anyone else to build similar scale to be able to compete.

During the 80ies and 90ies, getting a price position underneath Walmart was possible, but not profitable. So by and large it was not attempted. In recent years that has not been so difficult. The dollar stores and more importantly Aldi have managed to get enough of a wedge in between their pricing and Walmart’s that they can make a decent return and therefore expand as fast as possible.

Lidl is betting on exactly this point. The American benchmark for price in food retail is now at a stage that, when they get enough scale, they can beat these prices by 20% for similar quality and make a decent return with their significantly lower costs.

The problem for Lidl and Walmart shareholders is that this is not a secret! If Walmart return to “old Sam’s” thinking, then Lidl and all America’s grocery industry will have a tough time. So too will Walmart’s shareholders. A 20% price gap actively introduced by Walmart is possible right now, even with supplier “pain-share programmes” and management working hard on lowering Walmart’s operating costs. It would mean that profits and respectively shareholders’ dividends are squeezed down.

Commentary by Paul Foley, partner at FRC, Foley Retail Consulting. If you want more information on what FRC can do for your business, contact us here.

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