USA: Lidl and Aldi secure market share with discounter strategy

DRC interview for Handelsblatt

The German discount retail chains Aldi and Lidl are reacting quickly and benefiting especially one of the two. After a dramatic price increase, US consumers are abandoning previous habits.

On the Lower East Side, a lively neighborhood in the middle of New York, the retailer Lidl is currently tempting with particularly large discounts. Just a few weeks ago, the company opened a new store here and advertises with the "Lidl-est prices", a play on words from the brand name and the English word for "small".

This is because American consumers are increasingly paying attention to prices in the supermarket. Since the corona pandemic, the cost of food has continued to rise, and the US government's tariff policy is now causing additional uncertainty.

The two German discounters, Lidl and Aldi, could benefit significantly from this. While the tense situation catches many US supermarkets unprepared, the two German chains are well positioned with a suitable business model. Analysts see great growth potential for Aldi in particular. Lidl is also expanding, but still faces some challenges.

Number of customers on the rise

Already at the opening of a Lidl store in Manhattan in July, the rush was great, long queues regularly formed in front of the checkouts. Customers in other branches in the city have also had to wait longer for several months before they can pay for their purchases.

The perceived waiting time of visitors can be substantiated with concrete figures: Discounters in the USA experienced a significant increase in customer numbers in the first half of this year. According to a recent analysis by PlacerAI, the number of visitors to the American Lidl stores has increased by almost five percent compared to the same period last year. The software consultancy evaluates location data for this purpose.

'Food customers in the USA are currently experiencing a price shock,' Marc Houppermans

Discount Retail Consulting

At German competitor Aldi, the increase is even more than seven percent. By comparison, classic grocery stores recorded an increase in visitors of only 1.8 percent in the same period. With an increase of around twelve percent, German retailers were only surpassed by the US supermarket chain Trader Joe's, which, however, is a subsidiary of Aldi Nord.

"Food customers in the USA are currently experiencing a price shock," explains Marc Houppermans, Executive Partner of the industry consultancy Discount Retail Consulting. During the coronavirus pandemic, many families still received food stamps, but the new government has scaled back this support.

"At the same time, prices are rising dramatically," the former top manager of Aldi Nord told Handelsblatt. Finally, there are the tariffs on imported food, Houppermans emphasizes. This is because the Trump administration also levies special levies on imported products, which are often found in American supermarkets.

From India, which has so far been subject to a tariff rate of 50 percent, the USA mainly purchases spices, nuts and rice. Brazil, in turn, is an important supplier of meat and coffee as well as fruit and vegetables. Imports from the South American country are also currently subject to 50 percent.

Yale University's Budget Lab has calculated the cost increases for certain foods. According to the report, all currently applicable US tariffs will increase the price of fruit and vegetables by six percent in the short term, while processed rice will increase in price by 6.4 percent. Consumers even have to pay about ten percent more for fishery products.

Discounter with unusual concept for US consumers

"In the past, Americans bought in large quantities and did not pay attention to prices. Today, they are extremely price-sensitive," says Houppermans. The US supermarkets are not prepared for this. Discounters such as Aldi, on the other hand, already offer small pack sizes at low prices.

The decisive advantage of German discounters lies in their efficient, streamlined structures with fewer staff and lower rental costs. As a result, they already offer comparatively low prices and were able to absorb the cost increases more easily than the competition – which protects their returns.

Aldi store in the USA: "This hits the nerve of consumers." Photo: Reuters

In fact, the principle of discounters seems to fit perfectly into the new era of cautious consumers. Unlike in many US supermarkets, customers have to put their purchased products in the shopping bags themselves. Employees often place the goods in wholesale boxes on the shelves instead of draping them individually.

In addition, the discounters mainly have their own brands in their range. This strategy, which is new to many Americans, saves significant costs and thus reduces the supermarket bill.

The US supermarket chains have to raise prices much more than the discounters. As a result, they have managed to keep their sales slightly above the previous year's level for the time being, as figures from market researcher Bloomberg Second Measures, which Handelsblatt has evaluated, show.

These figures also show Aldi's success: The chain is achieving growth compared to the previous year without raising prices. Aldi, for example, even increased sales by double digits at the beginning of the year. In the summer, they kept sales stable – although they lowered prices for 400 products from June. This covers almost a quarter of the entire range.

Aldi benefits from the takeover of a competitor

"Aldi owes much of its success to its impressive operational performance," explains PlacerAI analyst Bracha Arnold. The chain is focused on maximizing efficiency and streamlining operations to keep fixed costs low. "The efforts seem to be paying off," says Arnold. After all, Aldi is one of the fastest growing food chains in the country.

Aldi, or Aldi Süd to be precise, now operates more than 2500 stores in the U.S. and plans to open more than 225 more this year alone, the company announced in the spring. The acquisition of Southeastern Grocers should also help. Some of the retailer's stores, former Winn-Dixies and Harveys supermarkets, are to be converted into Aldi stores.

Aldi has thus almost doubled the pace of expansion this year: Last year, the retailer grew by 120 stores in the United States. According to expert Houppermans, Aldi is still able to increase the number of customers per store despite its rapid expansion.

Lidl has also been able to grow recently. However, Houppermans still sees the German competitor confronted with some challenges. With almost 200 stores in the USA, the supermarket chain of the Schwarz Group is by far the smaller player, and recently there have been some new openings, including in the US states of New York, Maryland and New Jersey.

"Lidl has so far invested five to ten billion euros in its store network and warehouse infrastructure. Nevertheless, the retailer Aldi is far behind," says Houppermans. This is also reflected in the profit: While the USA is now one of the most profitable markets for Aldi, Lidl is said to continue to be in the red in the country due to the high start-up costs, according to industry circles.

This is also due to the fact that Lidl has not yet found the right business model for the USA. "The retailer is conceptually between discounter and supermarket," says Houppermans. Lidl has therefore temporarily sent top manager Marco Giudici from headquarters to the management of the US subsidiary to further sharpen the positioning of the brand.

The discounters rely heavily on local goods

In recent years, Lidl has tried to win over the suburban audience in particular - i.e. mainly wealthy and older people. Among the recently price-sensitive singles and career starters, the chain has lost market share over the past five years, as the figures from PlacerAI show.

'The pressure is now very high internally at Lidl to finally deliver results,' Marc Houppermans

Discount Retail Consulting

Recently, however, the retailer has also expanded in city centres. "This push beyond its well-known roots in affluent suburbs suggests that Lidl may be trying to increase its appeal to a more diverse urban clientele," explains PlacerAI analyst Arnold.

Expert Houppermans emphasizes: "The pressure is now very high internally at Lidl to finally deliver results. Because they have hardly any growth left in Europe, they are doomed to success in the USA."

At least in terms of price, Lidl can keep up. In the new branch on the Lower East Side, consumers pay less than in comparable US supermarkets. How much the discounters are affected by the tariff policy of the Trump administration itself, Aldi and Lidl left unanswered when asked.

Most recently, however, Lidl emphasized that the retailer sources its goods locally wherever possible. Around 85 percent of the products came from the USA, a Lidl spokeswoman told Handelsblatt. And Aldi also relies more on local suppliers than on "made in Germany".

Read more: USA: Lidl und Aldi sichern sich Markanteile mit der Discounter-Strategie

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