In an interview with a German business publication in January, Klaus Gehrig, the chief executive officer of the Schwarz Gruppe, Lidl’s parent company, cited several problems with the retail chain’s U.S. launch, including poor store site selection and a lack of understanding of U.S. consumer food preferences. In May, Lidl US underwent a management change when Johannes Fieber was appointed president and c.e.o. He succeeded Brendan Proctor, who had led the retailer’s U.S. expansion since June 2015.
Research conducted by the market researcher Catalina found that while Lidl had a significantly disruptive effect on competing supermarkets during the first two months after its store openings, the impact dissipated by the third month as many trial shoppers returned to their past shopping patterns. For nearby retailers, average sales fell 7 per cent during the first month of a Lidl outlet’s opening. By the fourth month sales were down less than 2 per cent compared to what they were prior to a Lidl store opening.
Competing retailers were able to blunt the impact of Lidl by selectively offering products at the same price or lower. Lidl’s focus on its private label lines also allowed competing retailers to ally with branded food manufacturers to offer targeted promotions on select items.
Lidl’s struggles are reminiscent of Tesco’s failed attempt to enter the United States with the Fresh & Easy concept. Fresh & Easy made its debut in 2007, and by 2013 Tesco exited the business after incurring a cumulative loss of approximately $1.8 billion.
The Fresh & Easy model was based on convenience and the belief American consumers would flock to the company’s small-footprint stores for fresh, prepared meals. The strategy did not succeed because Tesco misread U.S. consumer demand, and the business struggled to establish a cost-effective supply chain. The onset of the Great Recession added to the company’s woes. Interestingly, Tesco said one reason for its withdrawal from the United States in 2013 was the rapid growth of online retailing in other markets outside the United States and its desire to invest more resources to the needs of that business.
Competition is driving significant change throughout food retailing. As competition intensifies, retailers are adopting strategies to compete, whether by focusing on price, offering private brands with distinct points of differentiation, adding more fresh options to the perimeter or enhancing e-commerce capabilities.
Such strategies not only have an impact on upstart competitors but also suppliers. The hyper-competitiveness among retailers invariably results in pressures on suppliers to “sharpen their pencils,” pressuring food company margins and making price increases in the face of higher costs more challenging to execute. It is a reminder of how difficult the marketplace is for new entrants in retailing as well as for those whose business it is to stock stores nationwide.