The Effect Behind the 'Lidl Effect'

Lidl’s U.S. debut may have missed the mark on store size and assortment, but competitors appear to be taking no chances that the discounter got pricing right.

Grocery retailers located near Lidl stores in the U.S. set prices on average 9.3% lower and up to 55% lower on key staple items like milk, as compared to markets where Lidl is not present, according to a study released Wednesday by the University of North Carolina Kenan-Flagler Business School.

The study—which was commissioned by Lidl US but carried out independently by Katrijn Gielens, a UNC associate professor of marketing—confirms what company officials have said about Lidl’s impact since it opened its first stores in June. But in effect, the study makes a bigger commentary on pricing in markets where Lidl is not currently doing business—at least, not yet.

The study examined the competitive price effect of Lidl’s entry into six markets and the reaction of competitors Aldi, Food Lion, Kroger, Publix and Walmart, and compares pricing to six similar demographic markets in the same mid-Atlantic states where some or all of those same competitors exist but Lidl does not.

Sources, however, expect Lidl could build as many as 400 stores in the mid-Atlantic states, so the study presumably allows the discounter to arrive in so-called control markets with fresh ammunition.

Related:How Aldi and Lidl are Shaking Up Retail

“The University of North Carolina study validates what we have seen on the ground in every market since launching our stores,” Will Harwood, a company spokesman, told WGB Wednesday. “Other retailers are dramatically dropping their prices in the vicinity of our stores, and the effect is profound. Shoppers in our markets are the ultimate winners, and those that live elsewhere deserve the same deals.”

Gielens said she looked at prices for a basket of 48 grocery products, including dairy, meats, produce, and canned and frozen goods, which were collected through store visits in October. Gielens said she selected private label items from competitors and adjusted for sizes where necessary, focusing on shelf prices.

“We know that supermarket chains systematically compete with each other on price. The level of competitive pressure Lidl is exerting on leading retailers to drop their prices in these markets is unprecedented,” Gielens said. “In fact, the competitive price-cutting effect of Lidl’s entry in a market is more than three times stronger than the effect of Walmart’s entry in a new market reported by previous academic work.”

In markets surveyed where Lidl is present, retailers on average set prices 25% above similar items at Lidl, the study said. Prices are about 100% higher at Publix, 50% higher at Kroger, 36% higher at Food Lion, 9% higher at Walmart and 5% higher at Aldi.

Related:Lidl Looms Large

According to the study, the price for a half gallon of milk is about 55% lower in Lidl markets compared to markets where Lidl is not present. Price reductions of more than 30% can be found in categories such as avocados and bread-related products, while items such as ice cream, bananas and cheese have been reduced by more than 15%.

The study also showed retailers tended to react differently in different markets. Aldi, for example, appears to have fought hardest on price against Lidl in Orangeburg, S.C., whereas Kroger's reaction was stronger in wealthier Henrico County, Va.