Thursday, August 24, 2017

The Category Killers


Lidl, the German grocery chain which currently operates 10,000 stores in Europe, opened its first stores in the US on June 15th of this year. Plans are to open 20 stores in that region this summer. This chain opened its first stores in the UK in 1994 and now has dominated that country’s grocery retail, sending others into tailspin or oblivion; Lidl now holds 7% of the UK grocery market.

Lidl is what I call a category killer- a retailer with sniper focus on a narrow portion of their category, who aims to be the best at what they do and does not try to be all things to all people-- like a Walmart Supercenter or a traditional grocery/hypermarket. Years ago, it seemed the formula for success was to be bigger, bigger, bigger. One stop shopping. IF it exists, you can buy it there. The same formula was adopted and used by traditional department stores and category retailers such as Dick’s in building new stores, and in their business model.  I believe this formula is not the key to customer’s hearts anymore.

What is Lidl’s business model? What are the lessons for grocery and other retailers in the US?

Business Insider recently did a series of articles about Lidl, visiting their newly opened stores in the US. Here are some key takeaways from those visits:

·      Lidl’s stores are smaller, averaging 20,000 square feet. By contrast, a Walmart Supercenter is 260,000 square feet and a Kroger Marketplace can be as large as 145,000 square feet (Wikipedia).
·      90% of the products at Lidl are private label. (Business Insider)
·      Product selection is limited. Lidl averages 2,000 products in its stores while the average supermarket has about 20,000, with about 60,000 at supercenters (Business Insider)
·      Focus is on “fast moving items.” Narrow and Deep. Simplify to what customers want to buy, for the sake of argument, 90% of the time. By that logic, 90% of the space in traditional supermarkets or supercenters is for what consumers buy 10% of the time?
·      Cost efficiency-
o   It displays the goods in boxes they were shipped in-either vendor boxes or PDQs assembled at the vendor.
o   Customers weigh their own produce.
o   Presentation is kept simple- with the above packaging is super fast and easy to restock, saving on labor costs.
o   Natural lighting reduces energy costs (Business Insider)
·      AS a result, prices are amazing. Recently, CNBC visited the 14th Lidl store in Chesapeake, VA, where hundreds of people queued up to get in. Wow. Some highlights:
o   Pineapple-89 cents
o   Award-winning red wine- $2.89
o   A package of prosciutto(size unknown but have you ever seen one for this price?)-$1.99
o   Jar of wholegrain mustard-$.69
o   10 oz of fresh salmon-$6.49
o   Lidl’s prices, according to CNBC, were about 15% lower than Kroger, 10% lower than Walmart and 5.7% lower than Walmart Supercenters. NOTE: They were about the same as Aldi (another German supermarket category killer). (CNBC)

One customer, interviewed by CNBC at the time, flatly stated that based on her (brief) experience at Lidl, she would not be shopping anywhere else in the future. But let’s note: AS amazing as the prices were, they were not massively lower than Walmart Supercenters. My conclusion is: Category killers’ success is not totally about price; it is about merchandising focus,  the perception of value and the experience.

(I have not been to a Lidl or an Aldi other than Trader Joe’s (which is also about value and experience, not price). However, last winter, on a visit to Parma, Italy, I did visit a Conad supermarket, whose operating principle is similar to Lidl and Aldi. I was blown away by the prices, value, quality, and the freshness of everything. The vegetables were not fresh-they were sparkling)

Does this bring the point home? Consumers are not stupid; conversely, they are very savvy about where and how they spend their money. Sure, they will go to Dick’s to buy a basketball for $.99; but where will they spend most of their time and money on sporting goods in the future? That is the key question for retailers- where is the stable future?

Category Killers are the future of retailing; at least the main component of its future growth, OR those who will be taking up the space that traditional retailers vacate. Why will this space be vacated-or, why is it being vacated? Each retailer has their own unique situation. But the common thread is, as Edward Stack, CEO of Dick’s Sporting Goods said recently, that they are in “panic mode.” That statement does not include a clear plan for present and future stability other than frantic promotion. The tail is wagging the dog: consumers have figured it out, but some major, traditional retailers have not. And their passionate response is driving retail sales growth today.

I note that I unwittingly use the term “traditional” for retailers like Macy’s, Dick’s, Kroger, etc. The fact that I can use that word is indicative of the problem. Once I have a new characterization to hold on to, problem solved.

In my earlier article, “Wow! Fire Sale! Retailers in ‘Panic Mode.” I wrote about category killers and their business model as one antidote to the steep decline of American traditional retail. Maybe changing business mode to Category Killer is not the only road to survival and a bright future for American “traditional” retail, but it is a force to be reckoned with, and a really good model to learn and adapt.

LIdl plans to open 100 stores in the US this year. I hope one of them is in my neighborhood.








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