Dive Brief:

• Aldi and Lidl are expected to earn between $50 billion and $65 billion over the next five years, according to Brick Meets Click. In a webinar report, the consulting firm outlined several unique challenges the hard discounters pose to U.S. supermarkets.
• Retailers, the report stated, need to “blunt” Aldi and Lidl’s price advantages, but they need to be careful not to enter into an expensive price war with the discounters. Although both retailers advertise a price advantage of as much as 50% over most grocers, BMC estimates their actual price advantage is between 20% and 30%.
• The firm also noted that Aldi and Lidl have evolved their product mix to better compete with supermarkets that are many times larger. About half their stores’ products change every week, and many are optimized to increase gross margins. 

Dive Insight:

Lidl's U.S. opening and Aldi's recently announced $3.4 billion expansion have a lot of retailers strategizing how they'll compete with the discounters. Considering Aldi and Lidl's low-price advantages, many grocers' first response may be to cut prices throughout their stores. However, according to the report from Brick Meets Click, the hard discounters will always win.

As Bill Bishop, chief architect at Brick Meets Click, told Food Dive, it’s better to study Lidl’s pricing carefully, then discount those products that will have the most impact.

“If someone knew with precision what Lidl prices were resonating most powerfully and went right at those prices, instead of dropping 400 prices they may be able to drop four or 40,” Bishop told Food Dive.

The BMC webinar report also notes that Aldi and Lidl’s assortments have evolved significantly over the years, with more high-impact products that can offset their limited selection. The discounters carry between 1,500 and 2,000 items compared to 30,000 at a typical supermarket. Within each retailer’s mix, too, are products that deliver surprisingly high gross margins, including those under Aldi’s Specialty Selected brand, which make twice the profit per ounce of a standard Aldi product.

Other important facts about the fast-growing discounters include their total-store approach to management rather than a category-focused one, and their high level of service despite having fewer employees than a traditional grocer. Bishop said that Lidl employees, for instance, are trained extensively in customer care as well as how to work jobs throughout the store. This gives them a more complete understanding of storewide operations.

Overall, the report noted, the growth of Aldi and Lidl is ushering in a new era of discount retailing — one that stands to dramatically impact the industry. Many consumers are going to take a close look at their grocers in comparison to these competitors, while retailers will be under pressure to remove costs that don’t add value to their business.