Southeast, Mid-Atlantic ripe for Lidl share growth: Report
Lidl appears to have ample opportunity to gain market share in the Southeastern and Mid-Atlantic markets when it makes its U.S. debut this year, according to a report from Barclays.
The German-owned discounter, which established a U.S. headquarters in Arlington, Va., is expected to open its first 20 U.S. locations this summer in Virginia, North Carolina and South Carolina, followed by additional stores in Georgia, Delaware, Maryland, Pennsylvania and New Jersey.
“We think these markets are ripe for competitive intrusion, given their combination of ample spending power, good population density, and generally weak or vulnerable retailers,” Barclays said in the report, which was compiled by analyst Karen Short in the U.S. and analysts James Anstead and Nicolas Champ in Europe.
Delhaize, Ingles Markets and The Fresh Market. Photo: FoxysGraphic/iStock/Thinkstock; Illustration: SN/Anna Kang
The report cited Ahold Delhaize, Ingles Markets and The Fresh Market as having the highest exposure to Lidl’s anticipated rollout in terms of the percentage of their total store base in Virginia, North Carolina and South Carolina. Ahold Delhaize has about 52.7% of its stores in those three states — predominantly the Food Lion banner — while Ingles has 49.3% of its stores in those states and The Fresh Market has 24%.
Other supermarket operators that have “meaningful overlap” include Southeastern Grocers — parent of the Bi-Lo and Winn-Dixie banners — with 16% of its store base and Kroger with 10.1%. Dollar-store chains Dollar General and Family Dollar also both have more than 11% of their store base in the three states where Lidl is expected to debut.
Many of the supermarket chains in the markets where Lidl plans to grow have relatively unproductive stores in terms of sales per square foot, which Barclays argues could leave them vulnerable to the aggressive pricing anticipated from Lidl. The report cites Ingles, Weis Markets — which operates at the Northern end of Lidl’s anticipated geographic reach — and Southeastern Grocers as among the large chains that have relatively low sales per square foot in the Southeast and Mid-Atlantic.
As previously reported, Lidl is expected to operate larger stores in the U.S. than it typically operates in Europe. Its U.S. locations are expected to have about 21,000 square feet of selling space to accommodate a broader product mix. Private label is expected to account for about 70% of sales, Barclays said.
The companies with the top-three market shares in each area where Lidl expands will likely be better able to withstand the threat, as will those companies that have experience competing against Lidl overseas, according to the Barclays report.
Walmart, Ahold Delhaize and Aldi all have been competing against Lidl in other countries for several years, which may give them some ideas about strategies to best compete against Lidl. Ahold Delhaize, for example, competes against discounters in the Netherlands and Belgium by offering high-quality, entry-level SKUs, differentiating with innovative products and concepts, investing in price in overlapping product areas and investing in service departments.
Citing data from financial reports filed in the U.K., Barclays argues that Lidl’s relatively low labor costs and merchandise margins could make it a formidable competitor.
Lidl’s wages as a percent of sales in 2015 were 7.4%, compared with 9% at nonunion food retailers in the Southeast and Mid-Atlantic and 10% to 12% at union retailers, according to Barclays’ estimates. Unionized operators in particular could face difficulties competing against Lidl “if competitive intensity increases,” Barclays said.
“This gives Lidl flexibility to invest in price or to operate at a higher operating margin and use the resulting cash flow to open new stores,” Barclays said in the report.
Barclays projected that Lidl will open about 100 stores per year. The retailer is planning distribution centers in Fredericksburg, Va., Mebane, N.C., and Cecil County, Md.
The report anticipates that Lidl will likely see the most opportunity to gain market share in areas where the top three food retailers hold the lowest percentage of total share. Of the 28 TV markets in the eight states where Lidl has been seeking store locations, the markets most ripe for Lidl to take share are Philadelphia, Baltimore and Washington, D.C., with 59%, 58% and 52% of their market share “up for grabs,” respectively, according to Barclays’ analysis of Metro Market Studies market-share data.
However, one real estate expert, who asked not to be identified, said that Lidl can still be expected to face tough competition in those markets from operators such as Ahold Delhaize, Safeway and Wakefern Food Corp.’s ShopRite banner. In addition, he noted, it remains to be seen how much pushback from unions Lidl will receive in those more heavily unionized markets.
While Lidl previously had been seeking to buy and own real estate sites for its initial locations in the U.S., it has over the past several months become open to long-term leasing opportunities, the real estate expert said. That shift should make it easier for the company to find sites in more heavily developed urban areas.
However, at the same time, the company has not been flexible in terms of the size and layout of its stores, which could limit its opportunities going forward.
One potential danger for Lidl is spreading itself too thin to capture distribution efficiencies, the real estate expert pointed out.
“Anyone can have low prices in the short term,” he said. “In the long term, it depends on how long you are willing to subsidize those prices and your efficiencies. As they look to spread themselves very thin, there is a question in my mind about the efficiencies they will have relative to the entrenched competition that they face.”