Download - PDF Lidl US Update: Answers to Four Key Questions · Lidl will open its first US stores in the summer of 2017 ... Lidl US Update: Answers to Four Key Questions ... , Aldi’s average

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DeborahWeinswig,ManagingDirector,FungGlobalRetail&[email protected]:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

LidlwillopenitsfirstUSstoresinthesummerof2017acrossthreeeasternstates:NorthCarolina,SouthCarolinaandVirginia.Thecompanyishiringforstore-basedrolesinatotalof38townsineighteasternstates.Thisreportprovidesanupdateonwhatweknowsofar,andprovidessomeanswerstofourquestions:

1) WhatdoweestimateLidl’sUSsaleswillbe?Weseeanapproximate1-2-4step-upinLidl’sUSsales:roughly$1billionin2018,$2billionin2019and$4billionin2020.ThesefigurespresumethatLidlwillopenjustunder100storesperyearintheUS.

2) WhatheadwindsandtailwindscouldLidlface?Lidlcouldfaceheadwindsintermsofcompromisingthequalityofstorelocationsinaraceforspaceanddivergingfromitstraditionalsmall-storeformat.Tailwindscouldincludeincreasedconsumerdemandforfreshandnaturalfoodsandmillennials’frugalitywhenitcomestoshoppingforgroceries.

3) Whichincumbentretailerslooktobemostatrisk?WeisMarketsandInglesMarketshavethegreatestexposureintheeightstatesinwhichLidlishiring.

4) WhatwillLidl’sUSofferinglooklike?WeexpectLidltooffermorefreshfoodsandasubstantialgeneralmerchandiseselectioninitsUSstores,andtopushtheUSprovenanceofmanyoftheproductsitoffers.

Lidl US Update: Answers to Four

Key Questions

Deborah Weinswig

Managing Director,

Fung Global Retail & Technology

[email protected]

US: 917.655.6790

HK: 852.6119.1779

CN: 86.186.1420.3016

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May5,2017


Source:Lidl

ThisreportprovidesanupdateonwhatweknowsofaraboutLidl’sentryintotheUSmarket.Itprovidessomeanswerstomajorquestionsaboutthediscountgrocer’sprospectsandimpact.WebeginbyprovidingsomekeyfactsonLidl’sUSandworldwideoperations.

LidlUS:KeyFacts• Lidlwillopenitsfirst20USstoresinthesummerof2017across

threeeasternstates:NorthCarolina,SouthCarolinaandVirginia.

• WhenwecheckedLidl’swebsiteonMarch22,thecompanywashiringforstore-basedrolesinatotalof38townsineighteasternstates:Delaware,Georgia,Maryland,NewJerseyandPennsylvania,aswellasNorthCarolina,SouthCarolinaandVirginia.

• Lidlisaimingforstoresofabout36,000grosssquarefeet,peritspropertyadvertisements.Storeswilltypicallyhave21,000squarefeetofnetsellingspace,accordingtoaFebruary2017WashingtonPostinterviewwithBrendanProctor,Lidl’sUSCEO.

• ThatmeansLidlisseekingUSstoresthatareapproximately40%biggerthanitslargestEuropeanstores(whichare15,000squarefeet)androughlydoublethesizeofitstypicalstoreworldwide.Bycomparison,Aldi’saverageUSstoreis10,000squarefeet.

• Lidl’sUSheadquartersisinArlington,Virginia,andithasestablishedthreedistributioncenters:SpotsylvaniaCounty,Virginia;AlamanceCounty,NorthCarolina;andCecilCounty,Maryland.

LidlWorldwide:KeyFacts• LidlispartoftheprivatelyownedSchwarzGroup,whichalsoowns

theKauflanddiscounthypermarketchain.Lidl’sworldwidenetsaleswere€64.4billion(US$71billion)intheyearendedFebruary2016,up9%yearoveryear.SchwarzGroupreportedtotalnetrevenuesof€85.7billion(US$94.4billion)intheyearendedFebruary2016,up8%yearoveryear.

• AccordingtoaDecember2016interviewinGermany’sManagerMagazin,SchwarzGroupCEOKlausGehrigexpectsLidltoreportrevenueofmorethan€70billion(US$77.1billion)fortheyearendedFebruary2017.

• Lidloperatedapproximately10,000storesworldwideasofFebruary2016.Theaveragestoresizewasapproximately9,208squarefeetin2016,accordingtoouranalysisofEuromonitorInternationaldata.

• Lidlisalimited-linediscounterthatfocusesheavilyonitsown-brandproductsingroceryandoffersano-frillsexperience.However,thenumberofproductsofferedhascreptupinrecentyears.InitsstoresinItaly,Lidlreportedlynowoffers1,700products.IntheUK,itslaststatedSKUcount(in2013)was1,600,andthecompanysaidthatitaimedtoincreasethatnumberto1,700in2014.

• Bynumberofstores,Lidl’sbiggestmarketsare,indescendingorder,Germany,France,Poland,theUK,Italy,Spain,theNetherlands,theCzechRepublic,Belgium,Portugal,GreeceandAustria.

Lidl’sworldwidenetsaleswere€64.4billion(US$71billion)intheyearendedFebruary2016,up9%yearoveryear.

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FourKeyQuestions

1. WhatDoWeEstimateLidl’sUSSalesWillBe?Weseeanapproximate1-2-4structuretoLidl’sUSsales:weestimatethatthecompanywillgenerateroughly$1billioninUSsalesin2018,$2billionin2019and$4billionin2020.Toputthisincontext,Krogergeneratedrevenuesof$115billionintheyearendedJanuary2017.However,revenuesinthelowsinglebillionswouldplaceLidlinthesameballparkasInglesMarket,whichhad$3.2billioninsalesin2016;SproutsFarmersMarket,whichhad$4.3billioninsalesin2016;andSuperValu,whichhad$4.8billioninsalesin2016(allfiguresarefromEuromonitor).

OurestimatesassumethatLidlwillopenjustunder100newstoresperyear.AccordingtoTheWashingtonPost,Lidlisplanningtoopen100USstoresbymid-2018.Estimatespublishedbyvariousresearchfirmsbetweenautumn2016andspring2017placedthenumberofsitesunderdevelopmentbetween80and225.

Figure1.LidlUS:EstimatedSales(LeftAxis;USDBil.)andEstimatedYear-EndStoreNumbers(RightAxis)

Source:FungGlobalRetail&Technology

Oursalesestimatesarebasedonanumberofmetrics,includingsalesdensitiesatAldiUS,othercompetingUSretailersandLidl(bothgloballyandinselectedmaturemarkets).Ourestimatesassumeagradualincreaseinaveragesalesdensitiesandarebasedonaverageannualstorenumbers.

2. WhatHeadwindsandTailwindsCouldLidlFace?

PotentialHeadwindsLidlisnotsomuchdippingitstoesinthewaterasdivingstraightin—anditisdoingsowithastoreformatthatdiffersfromwhatituseselsewhereintheworld.Weseethefollowingrisksassociatedwiththesedecisions:

• Araceforspace:Giventheproposedpaceofstoreopenings,thereisariskthatLidlwillpursuequantityofphysicalspaceoverqualityoflocationintermsofshopperaccessandvisibility.

1.0

2.3

3.9120

210

300

0

50

100

150

200

250

300

0.00.51.01.52.02.53.03.54.04.5

2018 2019 2020

Sales Stores

Weseeanapproximate1-2-4structuretoLidl’sUSsales:$1billionin2018,$2billionin2019and$4billionin2020.

IntheUS,Lidlisnotsomuchdippingitstoesinthewaterasdivingstraightin.

2019E 2020E2018E

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• Limitedtimetoadjust:Similarly,bybuildingoutanetworkofstoresbeforethefirststorehasevenopened,LidlislimitingitsabilitytoadjustitsstoreformatsandoverallofferingasitexpandsintheUS.

• Movingintounfamiliarformats:TheUSstoresareadeparturefromLidl’soperatingmodelintermsofsize.WhilethesizeofnewstoreshasbeencreepingupindiscountretailinEurope,Lidl’saimofopeningstoresof36,000grosssquarefeetintheUSisaleapintoadifferentformatfortheretailer.

Inaggregate,therisksLidlfacesappearsimilartothosethataffectedFresh&Easy,Tesco’sfailedUSchainofsmaller-format,fresh-focusedgrocerystores.Fresh&Easyadoptedaformatthatwasdistinctfromitsparentcompany’s,andthechainwassaidtohavebeenhinderedbysomepoor-qualitysites—althoughunluckytimingalsoplayedarole,asthechainlaunchedonlyshortlybeforetheGlobalFinancialCrisishit.

Wewonderif,intime,Lidlwilladoptaslightlyslowerpaceofexpansion,enablingittofocusonqualitylocationsandadjustitsofferingasitgrows.IttookAldi40yearstoreach1,600storesintheUS.Forthesereasons,ourestimatesaboveassumefewerthan100storeopeningsperyear.

PotentialTailwindsMeanwhile,weseethreepossibletailwindsthatcoulddriveLidl’sgrowth:

Consumerinterestinhealthyliving:Groceryretailersandanalystswidelyrecognizethatthereisatrendtowardhealthierliving,includingincreaseddemandformorenaturalproductsandfreshproduce.Butthisdoesnotmeanshoppershavelimitlessbudgetstospendonthesekindsofproducts.Reflectingthis,WholeFoodsMarkethasunderperformed,whileWalmarthasbolstereditsorganicranges.IfLidlusesitsadditionalstorespacetooffersubstantialfreshfoodranges,asweexpectitwill,theretailercouldbewellplacedtopickupshopperslookingforfreshandnaturalfoodsonabudget.

Source:Walmart.com

Thefrugalityofmillennialshoppers:Millennials—typicallycharacterizedasthosebornbetween1980and2000—areenteringtheirpeakearningandspendingyears.Andthisgenerationshowssignificantpricesensitivityingrocery,whichwenotedinapreviousreport,HowMillennialsDisruptIndustries:MillennialsandGrocery.IfLidlgetsitsmarketingright,itmaybeabletomopupsomeoftheseshoppers.

Lidl’sUSstoresareadeparturefromitsoperatingmodelintermsofsize.

IfLidlgetsitsmarketingright,itmaybeabletomopupsomemillennialshoppers.

https://fungglobalretailtech.com/research/millennials-and-grocery-2/

https://fungglobalretailtech.com/research/millennials-and-grocery-2/

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Incrementalshiftsawayfromsuperstoreshopping:Asmoreandmorenongrocerypurchasesshiftonline,andasconsumers’expectationsofconvenienceandimmediacyinfoodshoppingincrease,thereappeartobefewerreasonsforshopperstovisitlargesuperstoresforgrocerypurchases.Lidlcouldbenefitfromanyongoingshifttosmallerstoreformatsthatallowconsumerstoshopmorequickly.

3. WhichIncumbentRetailersLooktoBeMostatRisk?Toanswerthisquestion,welookedattwosetsofdata:

• First,weanalyzedourowndataonLidl’slikelyregionaloverlapwithincumbentretailers.

• Second,welookedatconsumersurveydatafromProsperInsights&AnalyticsonwhoshopsatAldiintheUS,asunderstandingwhoshopsatAldiisonewaytounderstandwhoislikelytoshopatLidl,giventhesimilarityofformats.

RegionalOverlapBelow,wepresenttwotablesthatlookatselectedgroceryretailers’overlapwithintheeightstatesinwhichLidlapparentlyplanstoopenstores.Thefirsttableshowsthepercentageofselectedretailers’storesthatfallwithintheeightstates.ThisgivesanindicationoftheexposureeachretailermayhavetonewcompetitionfromLidl,althoughthedegreeofexposurewilldependontheproximityofstoreswithineachstate.Thesecondtableprovidesstorenumbersinabsolutetermsforthesameeightstates.Thisshowstheextentofpotentialoverlapintermsofabsolutescale.

ThedatashowthatWeisMarketsandInglesMarketshave,byfar,thegreatestrelativeexposuretotheeightstatesinwhichLidlishiring.

Figure2.SelectedUSRetailers:ProportionofTotalStoresLocatedintheEightStatesinwhichLidlIsHiring(%)

WeisMarkets

InglesMarkets

TheFreshMarket Walmart Sam’sClub Kroger

Safeway/Albertsons*

Delaware 1.5 0.0 0.6 0.2 0.2 0.1 0.2

Georgia 0.0 35.3 8.5 4.1 3.6 6.2 0.0

Maryland 23.5 0.0 2.3 1.0 1.8 0.5 0.9

NewJersey 2.5 0.0 1.7 1.3 1.5 0.4 0.0

NorthCarolina 0.0 34.8 12.4 4.2 3.6 5.8 0.0

SouthCarolina 0.0 17.9 4.5 2.3 2.0 1.3 0.0

Pennsylvania 60.3 0.0 2.8 3.0 3.6 0.0 0.0

Virginia 6.4 1.0 9.0 2.9 2.6 4.0 0.9

TotalExposure 94.2 89.0 41.8 19.0 18.9 18.3 2.0

DataareasofApril2017,exceptforInglesMarkets,whichareasofSeptember2016;Kroger,whichareasofJanuary2017;andWalmartandSam’sClub,whichareasofFebruary2017.*BasedontotalAlbertsonsstoresSource:Companyreports/FungGlobalRetail&Technology

WeisMarketsandInglesMarketshave,byfar,thegreatestexposuretotheeightstatesinwhichLidlishiring.

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Inabsoluteterms,WalmartandKrogerhavethegreatestnumberofstoresintheseeightstates.

Figure3.SelectedUSRetailers:TotalNumberofStoresLocatedintheEightStatesinwhichLidlIsHiring

InglesMarkets

WeisMarkets

TheFreshMarket Walmart Sam’sClub Kroger

Safeway/Albertsons

Delaware 0 3 1 10 1 2 4

Georgia 71 0 15 191 24 174 0

Maryland 0 48 4 47 12 15 20

NewJersey 0 5 3 62 10 11 0

NorthCarolina 70 0 22 194 24 162 0

SouthCarolina 36 0 8 108 13 36 0

Pennsylvania 0 123 5 138 24 0 0

Virginia 2 13 16 135 17 111 20

TotaloftheAbove 179 192 74 885 125 511 44

TotalUSStores 201 204 177 4,672 660 2,796 2,200

Source:Companyreports/FungGlobalRetail&Technology

Wedonothaverobuststate-leveldataforAholdDelhaizebanners.TheseincludeFoodLion,GiantCarlisle,GiantLandoverandMartin’sFoodMarkets,whicharevariouslypresentintheeightstates,withtheexceptionofNewJersey,andStop&Shop,whichispresentinonlyoneoftheeightlistedstates,NewJersey.

UnderstandingAldiShopperstoUnderstandLidlShoppersWethinkonewaytounderstandwhowillshopatLidlistolookatwhoshopsatAldiintheUS,giventhesimilarityofthecompaniesandtheircomparablefocusoneasternstates.Forthis,weturntoconsumersurveydatafromourresearchpartner,ProsperInsights&Analytics.Prosper’ssurveyaskedconsumerswheretheyhadshoppedinthepast90days,andthedataenableustoisolateatwhichotherstoresthosewhoidentifyasloyalshoppersataparticularretaileralsoshop.OnecaveattothesedataisthatifashopperhasswitchedtoshoppingonlyatAldi,theywillnolongerregisterasashopperoftherivalstoreslistedbelow.

OfthegrocerystorestrackedbyProsper,MeijerseesthegreatestoverlapincustomerbasewithAldi,with30%ofMeijershoppershavingalsoshoppedatAldiinthe90dayspriortobeingsurveyed.However,MeijerispresentinIllinois,Indiana,Kentucky,Michigan,OhioandWisconsin—andLidldoesnotcurrentlyappeartoberecruitingstaffinthosestates.

Afterdollarstores,Krogerseesthenext-biggestcustomeroverlapwithAldi.Aswenotedabove,KrogerseessignificantgeographicaloverlapinthosestateswhereLidllookstobeopeningstores.

Afterdollarstores,Krogerseesthenext-biggestcustomeroverlapwithAldi.

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Figure4.USConsumerSurvey:ProportionofRespondentsWhoHaveShoppedatAldiinthePast90Days,byTypeofShopper,August2016

Aretailer’sshoppersaredefinedasrespondentswhorankedthatretailerastheonetheyshopatmostoftenforanycategorywithinthesurvey.Base:6,915respondentsaged18+Source:ProsperInsights&Analytics

Lowpricesandsmallerstoreformatsmayappeartoresonatewithmillennials,butProsper’ssurveydatashowthatthisagegroupsofarunderindexesintermsofshoppingatAldi:instead,shoppingatAlditendstoincreasewithage.WethinkthisrepresentsanopportunityforLidltomarketitselftomillennialswhoareprice-conscious,butdemandqualityfreshfoods.

Figure5.USConsumerSurvey:ProportionofRespondentsWhoHaveShoppedatAldiinthePast90Days,byAgeGroup,August2016

Base:6,915respondentsaged18+Source:ProsperInsights&Analytics

ThetendencytoshopatAldipeaksnotamongthelowest-incomehouseholds,butamongthosehouseholdsinthemiddlebracket,withincomesof$35,000–$74,999.

3.5%

10.4%

13.9%

16.0%

17.4%

20.0%

23.7%

25.7%

30.4%

18.7%

Safeway

Costco

GiantLandover

GiantCarlisle

Walmart(Groceries)

Sam’sClub

Kroger(Groceries)

DollarStores

Meijer

Overall

18.7%16.4%

19.2%20.6%

AllAdults Millennials GenX BabyBoomers

ThetendencytoshopatAldipeaksamongthoseinthemiddlebracket,withincomesof$35,000–$74,999.

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Figure6.USConsumerSurvey:ProportionofRespondentsWhoHaveShoppedatAldiinthePast90Days,byHouseholdIncome,August2016

Base:6,915respondentsaged18+Source:ProsperInsights&Analytics

Whilewethinkthesedataareagoodballparkguide,Lidl’scustomerbasewilllargelydependonitsfinalUSpropositionandhowitusestheextraspaceinitsstores.

4. WhatWillLidl’sUSOfferingLookLike?OuranalysishasprovidedsomeindicationsofwhatLidl’sUSofferingwilllooklikeandhowtheretailerwillusetheextraspaceinitsUSstores.

Morefreshfoods:WeexpectLidl’sUSstorestoincludeenhancedfreshfoodsections,withfreshbakerydepartmentsandsubstantialfreshproducedepartments.Inthisrespect,Lidl’sstoresmayresembleacombinationofAldiandTraderJoe’s.Wehaveseenagreaterfocusonfreshfoodsinothernontraditionaldiscountmarkets,suchastheUK.Ina2013interviewwithTheGrocer,LidlUK’sthen-ManagingDirectorRonnyGottschlichsaidfreshfoodaccountedfor40%ofthecompany’sUKsalesandthathecouldenvisagethatrisingto50%.

Generalmerchandise:Lidl’sEuropeanstoresincludefast-changingselectionsofnongroceryranges,fromDIYgoodstoapparel.InhisinterviewwithTheWashingtonPost,ProctorconfirmedthatLidl’sUSstoreswouldeachincludea“largesection”dedicatedtotheseranges.

US-producedproducts:WeexpectLidltohighlighttheUSprovenanceoffreshfoodssuchasmeat,fruitandvegetablesinabidtoreassureshoppersaboutquality.FocusingondomesticsourcinghasbeenLidl’sstrategyintheUK.Ina2014interview,Gottschlichsaidthatmorethan95%oftheUKchain’sfreshmeatand60%ofallthechain’sproductsweresourcedwithintheUK.ByMarch2017,thecompany’sUKwebsitewasboastingthat70%ofitsproductsweresourcedwithintheUK.

Big-namebrands:InEurope,Lidlhasledthechargeamongmajordiscounterstostockbig-namebrands,butitsrangeofbrandeditemsisstillhighlylimited.IntheUKin2013,GottschlichnotedthatLidlstocked300“keybrands,”whichrepresented19%ofLidlUK’sestimated1,600SKUs.Wecouldseeagreaternumberofthird-partybrandsinLidl’sUSstores,

18.7% 19.2%21.6%

15.5%

Overall HouseholdIncomeLessthan$35,000

HouseholdIncome$35,000to$74,999

HouseholdIncome$75,000+

WeexpectLidl’sUSstorestoincludeenhancedfreshfoodsections,withfreshbakerydepartmentsandsubstantialfreshproducedepartments.

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althoughwedonotyetknowwhichmajorgrocerybrandswillappearonitsAmericanshelves.

WethinkLidlmaynotusetheextraspaceinitsUSstorestosubstantiallyboostthenumberofSKUsitoffersinpackagedgoods.Lidlisalimited-linediscounterthatreliesoneconomiessuchasnarrowchoiceandastrongprivate-labelfocustoofferlowprices.CoupledwiththefactthatLidlwilllikelynothavebenefitsofscaleintheUSmarketforsometime,theretailerlookstohavelimitedopportunitytooffersubstantiallyhigher-than-averageproductcountsinprivate-labelpackagedgoods.Inotherwords,agreaternumberofpackagedproductssourcedexclusivelyfortheUSmarketwouldhaveadilutiveeffectonLidlUS’salreadyprecariouseconomiesofscale.

Intermsofphysicalstoreformats,ProctornotedintheWashingtonPostinterviewthatthefirststoreswillincludejustsixaislesandsomefreestandingislandsforfreshfoods.Wethinkself-checkoutsarelikelytobeemployedinthecompany’sUSstorestodriveupin-storeproductivityandmitigatethecostinvestmentsinvolvedinoperatingbiggerstores.

KeyTakeawaysThisreporthasfocusedonfourkeyquestionsregardingLidl’sentryintotheUSmarket,andwehaveansweredthemasbestwecan,giventhelimitedinformationonthecompany’sUSoperationsinthepublicdomain.

InEurope,Lidlhasbeenamongthemostflexibleoftheharddiscounters,bringinginbrands,morefreshfoodsandpremiumownlabels,anduppingstoresizesandproductcountsasaresult.ThisflexingofitsformathashelpedLidlgrowrapidlyinnontraditionalmarketssuchastheUK,whichbodeswellforitsentryintotheUSmarket.

However,uncertaintiesremain:HowwillLidlusetheextraspaceinitsAmericanstores?Arethequalityofitslocationsbeingsacrificedinthepursuitofgrowth?AndwillitfacechallengesintakingtheleapfromsmallEuropeanstorestomuchlargerformatsintheUS?Wedonotyethavealltheanswers,butwewillupdateourcoverageaswelearnmore.

OfferingagreaternumberofpackagedproductssourcedexclusivelyfortheUSmarketwouldhaveadilutiveeffectonLidlUS’salreadyprecariouseconomiesofscale.

Lidl’sflexingofitsformathashelpeditgrowrapidlyinnontraditionalmarketssuchastheUK,whichbodeswellforitsentryintotheUSmarket.

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DeborahWeinswig,CPAManagingDirectorFungGlobalRetail&TechnologyNewYork:917.655.6790HongKong:852.6119.1779China:86.186.1420.3016deborahweinswig@fung1937.comJohnMercerSeniorAnalyst

KatieMarshallResearchAssistant

HongKong:8thFloor,LiFungTower888CheungShaWanRoad,KowloonHongKongTel:85223004406London:242-246MaryleboneRoadLondon,NW16JQUnitedKingdomTel:44(0)2076168988NewYork:1359Broadway,9thFloorNewYork,NY10018Tel:6468397017

FungGlobalRetailTech.com

Download - PDF Lidl US Update: Answers to Four Key Questions · Lidl will open its first US stores in the summer of 2017 ... Lidl US Update: Answers to Four Key Questions ... , Aldi’s average

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