German deep-discount grocers Aldi and Lidl are pushing U.S. grocery retailers to up their game but don’t present an insurmountable challenge, according to management consultancy Bain & Co.
The impact of the two chains’ U.S. expansion so far has been “largely underwhelming,” Bain said this week in announcing a new study titled “How U.S. Grocers Are Standing Up to Europe’s Hard Discounters.” Yet the report noted that Aldi and Lidl remain a disruptive force and a mounting competitive threat for traditional supermarkets here.
An Aldi store interior.
"Lidl and Aldi are just beginning to flex their competitive muscles," co-author Mikey Vu, a partner in Bain’s retail practice, said in a statement. "What we're seeing is that U.S. grocers can effectively stand up to these hard discounters but that they need to remain vigilant and innovate in strategic areas to keep their edge."
Conducted with research firm ROIRocket, Bain’s study of over 17,400 consumers found that up to 30% of shoppers at traditional and mass grocery stores also regularly shop at Aldi and Lidl. The German retailers’ abilities to sway U.S. shoppers to include their stores in grocery trips and drive strong customer advocacy have enabled them to boost their presence and popularity in the United States, the report said.
For regular grocery shopping trips, the hard discounters tallied a Net Promoter Score of more than 40, compared with 30 to 35 for warehouse clubs and supermarkets and 20 for mass merchants. The hard discounters’ Net Promoter Score edged over 60 for stock-up shopping trips versus about 45 for warehouse clubs, just under 40 for supermarkets and nearly 30 for mass merchants. “Promoter” consumers are fans of a particular brand and make purchases more often, spend more and show a higher degree of loyalty.
Hard discounters, however, didn’t fare as well in prepared foods. The Net Promoter Scores of warehouse clubs (over 50) and supermarkets (about 35) easily eclipsed the hard discounters (about 25) in prepared-food shopping trips. Mass merchants scored only in the single digits. Still, the hard discounters proved strong in convenience, leading in quick-trip purchases with a score of 10, a couple of points over supermarkets. Warehouse clubs and mass merchants had negative scores for quick shopping trips.
“Like their European counterparts, U.S. shoppers who try the format typically like it,” Bain said of Aldi and Lidl in the report. “Also, wherever those stores are available, U.S. shoppers are often willing to add Lidl or Aldi to their shopping repertoire.”
A Lidl store interior.
Aldi, which has operated U.S. stores for decades, continues to win over American shoppers, the study noted. Aldi’s consumer advocacy rose to a Net Promoter Score of 55 last year from 46 in 2017. Bain said the chain outperformed in the two areas customers care about the most: best everyday low prices and best value for the money. Lidl, which opened its first U.S. stores in 2017, had a solid Net Promoter Score of 30 in 2018.
Market share gains
The high marks from shoppers have translated into market share gains for both Aldi and Lidl, Bain reported. In a summer 2018 study, Aldi had more than 3% share of grocery spending in six of eight markets studied and has seen share rise in most of those areas over the last two years. The analysis also showed Lidl snaring 3% or more share in five of seven markets studied, with the sales coming from traditional grocers.
More share gains by the hard discounters are likely, according to the report. Aldi is amid a five-year, $5 billion-plus expansion program that will remodel most of its locations by 2020 and grow the chain (now with about 1,800 stores) to 2,200 by 2022. Aldi also has launched a major product expansion in which 20% of items in every store will be new versus a year ago, and the selection of fresh food will expand by 40%.
Meanwhile, Lidl is back on the expansion path after stumbling out of the gate with its June 2017 U.S. store launch, in which the company initially planned to have 100 locations within a year but then scaled that back to about 50. Lidl has since reset its real estate strategy and grown to 65 U.S. locations. The chain continues to be held in high regard by American shoppers and, in late 2018, raised eyebrows with the acquisition of Best Markets, giving it 27 stores in the lucrative metro New York area.
"While hard discounters' expansion into the U.S. turned out to be less overwhelming than expected, it still will prove tumultuous for traditional grocers who are slow to differentiate," explained study co-author Kent Knudson, a partner in Bain’s retail practice. "As we've seen over the past year, the hard discounters know how to pivot their strategies in real time as they get a feel for the U.S. market. They are still a force to be reckoned with."
Although Aldi and Lidl haven’t picked up huge swaths of market share thus far, traditional U.S. grocers must fine-tune their strategies to address the hard discounters’ expansion, Bain said. Competitive pricing remains paramount, the report noted, but two other factors become more important: investing in convenience and using advanced analytics or other technologies to hone operational efficiencies.
For instance, in the area of convenience, Walmart has greatly ramped up its online grocery delivery and pickup capabilities and reach, while Amazon has done the same via Prime Now (including Whole Foods Markets) and innovated with its cashierless Amazon Go stores, Bain said. And Kroger has leveraged its 84.51° data analytics unit to improve shopper personalization and service plus find areas to pare costs and sharpen operations. Traditional grocers also can play to their strengths in fresh and bolster the availability and quality of private brands to better compete with Aldi and Lidl, the study added.
“Learning to live with — and outperform — hard discounters means competing on price, rethinking private labels, investing in fresh food and rigorously attacking costs,” Bain concluded in its report. “Above all, though, the biggest opportunities to get out ahead of hard discounters now lie in finding new ways to define convenience and relying more heavily on advanced analytics to give shoppers what they want.”