Two German companies are making inroads to the highly competitive grocery market.
Aldi and Lidl are challenging old guard stores like Giant and Safeway as well as Amazon, discount warehouses, supercenters, other retailers and scattered independent stores that target the right niche in a cut-throat industry.
Legendarily fierce rivals in Europe, Aldi and Lidl have largely flown under the radar in the U.S. While they’re rivals on this side of the pond, they’re still perceived as a double-threat in the domestic market that will drive the razor-thin margins of the industry down even more.
‘Down Market Cache’
Aldi recently reached a long-delayed goal when it opened store number 2,000 in the U.S. Of the 52 stores in Maryland, shoppers in can find an Aldi in Bowie, Columbia, Crofton, Hanover, Glen Burnie and Laurel.
Lidl operates more than 100 stores in the U.S. with 11 in Maryland, including Bowie, Brooklyn Park and just-opened Glen Burnie, with others under construction at The Mall in Columbia and in Annapolis.
Lidl reported 2019 revenues of $1.09 billion, according to the National Retail Federation (NRF)/Kantar 2020 Hot 100 Retailers list.
Aldi, which “Progressive Grocer” estimates generated sales in 2019 of more than $15 billion, has been cited by various sources as a potential number one player in the market.
The fast growing grocer employs “a contrarian strategy of operating many of its stores close to Walmart Supercenters,” said Carol Spieckerman, founder and national retail consultant with Spieckerman Retail of Bentonville, Ark. “That exhibits confidence. Doing so ensures that its nondescript storefronts get noticed and allows Aldi to wick off traffic from Walmart.”
Those shoppers who are headed to Walmart “who would never have noticed Aldi before decide to stop in and from there, they’re hooked,” Spieckerman said. “Aldi shoppers feel smart for ‘discovering’ Aldi, [which] enjoys a down-market cache that keeps shoppers coming back.”
Aldi has a very aggressive branding strategy, as its private brands compete well against name brands, “not just as low-price alternatives to them. Aldi’s loyal customers come to its stores just for these brands,” she said, adding that it “stays on top of food trends by stocking gluten free, organic and plant-based options while offering gourmet and international foods that aren’t readily available elsewhere.”
Still, Aldi is also not against selling direct knock-offs of famous brands. “There’s a real art to that shameless mimicry and Aldi has perfected it in packaging as well as beer and wine,” Spieckerman said.
And there are few personnel running an Aldi store.
“The company pays well and the workers are very skilled and tend to stick around. It’s all part of its highly efficient, non-union operating model,” she said. “Stores also feature ever-changing ‘treasure hunt’ aisles filled with merchandise you wouldn’t expect to see in a grocery store. You never know what you’ll find with its opportunity buys.”
Mark Millman, CEO of Millman Search Group, in Owings Mills, is impressed with the new comers.
“It’s a good concept and their local expansion means that the region’s market share is up for grabs,” he said.
Both companies, said Millman, are siphoning business away from the big U.S. players “by offering solid values and easy parking. Each operates thousands of stores throughout Europe and have also acquired valuable real estate,” he said. “They also have loyal followings similar to that of Trader Joe’s, which is what led to their dramatic expansions overseas. In Europe, it seems like they have a store on every corner.”
With bigger players like Giant, Safeway and Food Lion losing market share, Millman recalled a different time in the industry. “Thirty years ago, Giant owned the Baltimore-Washington market with 30 percent market share,” he said, “but not today.”
Not lost in the market where consumers can buy groceries anywhere from a warehouse operation to the Dollar Store are the independent operators, who often earn a living catering to niche markets.
“I think many more people are trying to eat organically,” said Zack England, store manager for the Gambrills location of David’s Natural Market, which also has a location in Columbia. “I think Aldi and Lidl will take some business away from the larger chains. We all compete but the circumstances are different for each store.”
England said the frequent customers at David’s “often have questions that pertain to our product lines, which are 100 percent organic or all natural. The other stores cater to more traditional products and typically have certain aisles set aside for the types of products that we sell, but not the whole store.”
Walmart No. 1
Even before COVID-19, “retailers like Target and Dollar General were laser-focused on upping their grocery game,” said Spieckerman, “[because grocery buyers] keep the flow of customers coming through the doors.
“The grocery departments help drive traffic to higher-margin discretionary categories and make it easier for shoppers to accomplish more in one trip,” she said. “Particularly of late, shoppers want everything in one place.”
The increasing variety of places to buy groceries is just another angle of the current change in food shopping.
“Aldi and Lidl are likely in the early stages of having a significant impact on the American grocery market, just as they have done in Europe,” said Scott Moses, managing director with grocery investment banking at PJ Solomon.
“Roughly one in seven grocery dollars in the U.K. is spent at an Aldi or Lidl store,” Moses said, “which is extraordinary given the competitive dynamics there.”
There are some equally-eye-opening figures in the U.S. market for alternative grocers. “Roughly 80 percent of sales at Dollar General and Family Dollar are the same food and consumables sold in supermarkets,” he said. “Together, they have a nearly $40 billion U.S. grocery business, as do CVS and Walgreens combined.”
He added that alternative grocers “account for far more U.S. grocery sales than traditional supermarkets,” Moses said. “For example, Walmart is the largest grocer in the U.S. with more than $200 billion in sales – approximately 25 percent market share and growing – particularly given their significant recent investment in online grocery to compete with Amazon, which has a rapidly-growing $40 billion U.S. grocery business.”
Cailey Locklair, CEO of the Maryland Retailers Association in Annapolis, expressed concerns about a shakeout in the industry.
“Grocers only have a 1-3 percent profit margin, so might yet more competition take some grocers out of the market? Absolutely,” she said, noting that Lidl has already moved into some empty Shoppers Food Warehouse spaces in Annapolis.
While some shoppers will move to Aldi or Lidl if they haven’t already, Locklair isn’t so sure that the expansion in Maryland will seriously alter the local landscape “as much as people think it will. The market is already saturated and most people don’t go more than a couple of miles out of their way to buy groceries.”
By Mark R. Smith | Senior Writer | The Business Monthly | January 2020 Issue