How Aldi and Lidl are Shaking Up Retail

Aldi and Lidl are “canaries in a coal mine” heralding fundamental disruptions in grocery retailing, so declared Mike Paglia, director of retail insights at Kantar Retail, to attendees of the Private Label Manufacturers Association annual convention this week.

Much to their own peril, many food retailers are mildly dismissing the two discount chains’ impact, said Paglia, who issued a stern warning during his keynote at PLMA’s Retail Trends Breakfast that the German discounter duo have the potential to be more disruptive in the grocery sector than Amazon.

“A lot of folks say, ‘I’m not going to lose sleep over these guys,’” Paglia said. “Well, you know what? I think it’s time to start losing a little sleep,” he urged, noting that Aldi and Lidl are doing business in a way that indicates where food retailing in general is going.

Paglia set up his premise by laying out several broad economic and consumer trends. The economy has recovered from the recession of the late 2000s as much as it ever will, he said, but the recovery has been very uneven, geographically and across income classes. Consumers are gravitating away from norms in terms of income, household composition (fewer families with children); choice of residence (away from suburbs toward either cities or small towns); and choice of retail venue (away from big-box stores toward online sales and smaller stores).

Paglia identified five “pillars of disruption” for Lidl and Aldi:

Formats. Lidl effectively uses assortment, merchandising and design to look more like a conventional supermarket than a stereotypical discounter. “You walk in and you say, ‘Wait a minute, this is a supermarket,’” Paglia said. Shoppers see produce and floral displays, a baked goods section, and other offerings not associated with traditional “dirty, dingy and gross” discounters. Aldi is making progress in this regard also, he said. These offerings come in a format that, at about one-third the square footage of a regular supermarket, makes shopping faster and more convenient.

Price points. Aldi and Lidl are effectively lowering prices on pretty much everything, Paglia said, referring to a market basket comparison he did where Lidl came up 23% less expensive on private label than Walmart. “I work with a lot of retailers out there, and they are scared stiff,” he said.

Quality. Both Aldi and Lidl are using private label brands to undercut the expectation that discount must necessarily mean lower quality. “Both of these retailers are leveraging private label to really stress-test that traditional value equation that we all kind of intuitively have in our heads, which says that if I want to pay a little bit less, I have to be willing to trade off a little bit of quality,” he said.

Assortment. Both Aldi and Lidl are known for rotating product at a high rate through their limited shelf space. This creates the potential to surprise and please shoppers on every trip.

Aldi and Lidl “create a sense of urgency and newness and delight and discovery that keeps shoppers in again and again and again,” Paglia said.

Trip missions. Because of the four “pillars” above, Aldi and Lidl can effectively serve as destinations to several kinds of shopping trips: stock-up, fill-in, immediate consumption and treasure hunt. In other words, they can perform the functions of a conventional supermarket, a discounter and a club store. “We’re talking about one box, one store, that can be multiple formats,” he said.

Other retailers will try to broaden their appeal as Aldi and Lidl have, Paglia said: “They are the first in an evolution toward multi-capable retailers who can convey value and relevance to multiple shopper groups at the same time.”

Manufacturers of private label products should react by evaluating every product in their portfolio and asking which trip missions they can fulfill, Paglia said. They should also help retailers exploit points of differentiation with Aldi and Lidl, such as higher levels of service or offerings such as a pharmacy or in-store pickup.