BRIEF

Report: Lidl is dramatically scaling back its growth this year

AUTHOR

Jeff Wells@JeffWellsWH

PUBLISHED

Jan. 19, 2018

Dive Brief:

• In an interview with the German business publication Manager Magazin, Klaus Gehrig, CEO of the Schwarz Group, which owns Lidl, estimates the discounter will open 20 stores in 2018 — less than half of the 49 openings over the past seven months, and well shy of the company’s stated goal to open 100 stores by June of this year. A Lidl U.S. spokesman did not return Food Dive's request for comment and confirmation of these numbers.
• Gehrig said in the interview that Lidl’s U.S. stores are too big and expensive, that the division often did a poor job selecting locations, and that the discounter failed to account for American's unique product preferences, including prepared foods. 
• "If you recognize a mistake, you have to correct it," Gehrig told the publication.

Dive Insight:

Gehrig is known for being an exacting but ultimately hands-off chief executive. He appoints leaders within his company, sets lofty goals and then trusts them to carry out Lidl's mission.

Just seven months after Lidl opened its first stores on the East Coast, Gehrig seems to have run out of patience with company’s American foray.

Signs of Lidl’s poor U.S. performance have been building for months, from store traffic declines to canceled developments, and strategy shifts ranging from increased fresh promotions to a focus on smaller stores. Last fall, Lidl fired its German head of U.S. operations, Daniel Marasch, replacing him with the head of Lidl Spain, Michael Aranda, a 17-year veteran of the company. Since then, the company has canceled projects in markets up and down the East Coast, including Staunton, Virginia, where a real estate developer reported the company saying they were no longer focusing on small markets, according to a local report. Lidl has denied this is the case.

Analysts have pointed to a few key problems, most notably Lidl's overemphasis on nonfood products, questionable real estate decisions, and stores that are too big and too costly to operate. Lidl had actually planned to open smaller stores in the U.S., but went back to the drawing board after its research found Americans preferred a larger box. At 36,000 square feet, its U.S. stores are roughly 35% larger than its European stores.

Gehrig confirmed most of these pain points in his interview with Manager Magazin, and there have been signs recently that Lidl is focused on implementing tried-and-true company strategies. Last month, Lidl began searching for smaller stores between 15,000 and 25,000 square feet, which are more in line with its European format.

Smaller stores will likely mean changes in product assortment. Lidl might scale back on its sprinklers, bed sheets and other nonfood selections. According to Manager Magazin, Heidi Klum's fashion collection designed exclusively for Lidl's U.S. stores has been a flop.

Lidl has made a big deal out of its price advantages, which are undeniable. A recent study commissioned by the company and carried out independently by researchers at the University of North Carolina found that retailers drop prices 9.3% on average in markets where Lidl operates, and as much as 55% on staples like milk.

Lidl views these results as proof of its disruptive power, but it actually seems to have made its competitors more attractive to their customers, as opposed to driving traffic to Lidl stores.   

"Lidl has probably underestimated the highly competitive U.S. market, which is in an intense price war at the moment," read a recent story from Retail Detail Europe, a trade journal based in Belgium. "Amazon's Whole Foods acquisition has only made the market even fiercer."

Lidl has 400 U.S. real estate sites in its portfolio at this point, and it's unclear how, or if, the company will eventually hit that number. The discounter has deep pockets, a wealth of management expertise to draw on, and a reputation for learning and adjusting to markets. Results will likely improve as it enforces more discipline in its operations, but the road ahead will continue to be difficult. The retailer that promised to "Rethink Grocery" is going to have to rethink its approach.