Within months of Lidl opening ten stores in Virginia, North Carolina and South Carolina in June with the promise of a new shopping experience and prices up to 50% lower than those at other grocers, nearby conventional retailers slashed prices on key items compared to what they sold for in markets where Lidl was not yet present, according to a new study released Jan. 10 from the University of North Carolina Kenan-Flagler Business School.
The study, commissioned by Lidl US and led by Katrijn Gielens, associate professor of marketing at the university, found competing retailers set the price of a half gallon of milk about 55% lower in Lidl markets compared to markets where the newcomer is not present.
It also found price reductions of more than 30% on avocados and bread, and more than 15% on popular staples such as ice cream, bananas and cheese at competitors in markets with Lidl versus those in markets without the discounter.
These cuts resulted in an average $22 drop in the average trip to Kroger in markets where there was a Lidl versus those without the store. Similarly, Food Lion saw an average reduction of $17 and Aldi saw a drop of up to $14 for a basket of 48 products in regions with Lidl versus those without, according to the study.
Overall this translates to an average 9.3% reduction in competitive pricing at retailers due to Lidl’s entry into their markets, according to the paper.
These findings are based on price analysis for a broad basket of 48 grocery products, including dairy, meat, produce and shelf stable and frozen packaged goods, at six markets where Lidl operates and six control markets in which Lidl is not present in Virginia, North Carolina and South Carolina.
The impact of Lidl’s entrance on competitors’ pricing also is notable because it is three times stronger than the effect of Walmart’s entry into new markets reported in previous research, Gielens said in the paper.
Price cuts are not competitors only option
While price cuts were employed by many retailers in Lidl markets, it is not the only strategy that Gielens noticed nor were price cuts instigated the same across retailers.
She explained that retailers that lowered prices either did so by lowering costs through efficiencies, service reductions or reducing the quality of products sold, or they did so by taking a hit on their margins.
Other higher-end retailers that offer a wider suite of services reacted to Lidl’s entrance into the market by shifting their focus away from price-sensitive consumers “whose ‘defection’ to Lidl can be assumed to be a lost cause,” and focused instead on “less price-elastic consumers” who appreciate services beyond the basics.
The secret behind Lidl’s influence
Lidl’s streamlined product offering, focus on private label and smaller store footprints than typical US supermarkets all contribute to the chain’s ability to offer low prices that place pressure on competitors, Gielens explains.
For example, she writes, most Lidl stores have only six aisles and 2,000 SKUs, compared to the average supermarkets’ 40,000 SKUs and WalMart supercenter stores’ 100,000. These factors allow staff to restock, rearrange and track products more easily as they are sold than competitors, which means only 13-14% is added to procurement prices compared to 28-30% at traditional supermarkets.
Ultimately, Gielens says, the research shows that big-box stores and other retailers in the markets where Lidl plans to open up to 90 more stores before the end of next summer should be “on high alert,” and expect similar “fierce price competition.”