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WGB Exclusive: Lidl Pursuing Smaller Sites

Flexibility to speed expansion, company says, but questions remain as deals die and model evolves

Lidl, the German retailer which made a grand introduction to the U.S. behind a gleaming 36,000-square-foot discount prototype, is now considering significantly smaller sites for its continued expansion.

The discounter – which built and in many cases, owns the sites on which its 47 stores sit – is now seeking leasing opportunities along the East Coast for existing properties as small as 15,000 square feet and as large as 25,000 square feet. The revamped site criteria, newly published to Lidl’s web site, was confirmed to Winsight Grocery Business by a company spokesman Friday.

A smaller box would indicate big changes in assortment and design are also forthcoming at Lidl, whose first U.S. stores – all of which feature the same soaring glass design and footprint – were not only considerably larger than the chain’s European models but also of established hard discounters with a U.S. presence such as Lidl’s German rival Aldi.

The new real estate strategy comes amid reports that indicate Lidl has delayed, dropped or may alter plans for multiple sites that were in planning stages – moves that some sources said reflected lackluster sales volumes and relatively high costs for the discounter, particularly in smaller towns where many of its early stores were located.

Lidl spokesman Will Harwood, however, characterized the move to a smaller box as a means to accelerate the chain’s expansion. He also said the company would continue rolling out its 36,000-square-foot prototype “for the foreseeable future,” although he also acknowledged it was possible that some of the sites Lidl had plans to build large stores could see a smaller box built there. The projects that have been held up, he said, came as part of a routine review.

“The new site criteria give our real estate teams the flexibility to dramatically accelerate our expansion and increase our penetration,” Harwood said in an interview. Smaller sites would also allow Lidl to better penetrate dense urban markets, he added.

The revamped site specifications indicate Lidl is pursuing sites that would differ from its prototype by drawing from a 2-mile radius vs. a 3-mile radius; having 100 and not 150 parking spaces; and in shopping centers with co-tenants vs. stand-alone or pad sites, among other differences. The company is also continuing toseek sites for its 36,000-square-foot prototype.

Harwood declined to identify any particular locations where a smaller store could be rolled out, and declined to say what changes to assortments, design and layout could be in store for such units. Lidl’s attractive 36,000-square-foot prototype allows for a large array of general merchandise, 11 check-out lanes, and features like on-site fresh bakeries that are typically unable to fit in 20,000-square-foot hard discount models like those operated by Aldi.

While stores at Lidl’s grand opening had as many as 60 employees on hand – far more than optimal for a typical hard discounter – some accounts indicate workers and hours have dramatically fallen since then as initial sales volumes subsided.

Sources told WGB last week they expected Lidl could reveal more details of its smaller box within 60 to 90 days. One source said Lidl was in the process of testing a model smaller prototype  built at a distribution facility, as it had with its initial store prior to its debut, but Harwood would not confirm that.

Since its intentions to expand to the U.S. were first revealed four years ago Lidl has assembled more than 400 real estate projects in various stages of development but the company has publicly committed at this point to opening “up to 100” stores by June of 2018. Harwood said Lidl is currently seeking leased locations in existing markets along the East Coast between New Jersey and Georgia – and not in Ohio and Texas, although the company has acknowledged those states were also on its roadmap for growth, and local reports have indicated Lidl has plans to build stores in both states.

As previously reported by WGB, Lidl also recently altered the cadence of its initial promotional strategy, moving from promoting five fresh items changing twice a week to a plan to promote six fresh items for a full week.

Its U.S. division is also in the early months of new oversight: In September, Lidl’s Neckarsulm, Germany parent company, the Schwarz Group, appointed Michael Aranda to a divisional board of supervisors with oversight to the U.S., succeeding Daniel Marasch. A source in Europe told WGB that move indicated Schwarz’s demanding CEO, Klaus Gehrig, was moving to exert tighter control over the U.S. business. One newspaper in Germany said Gehrig earlier this year expressed concerns over the cost of the “glass palaces”  that some of the company’s divisions were building.

Lidl operates more than 10,000 stores in 26 countries in Europe.

Lidl’s real estate practices in the U.S. have been the subject of industry scrutiny well before its first stores opened in June. Some researchers analyzing proposed sites argued many of the locations lacked adequate ingress and egress and that demographic studies indicated Lidl was likely to experience wildly varying store volumes.

At the International Council of Shopping Centers’ Deal Making event in New York last week, several real estate professionals told WGB that they felt Lidl had made numerous missteps in assembling sites, related mainly to its decision to eschew using local real estate brokers – potentially more expensive but standard practice among expansion-minded food retailers – and relying instead on internal staff, which they said lacked local market experience. “They fell in love with the deals and didn’t pay enough attention to the quality of their sites,” one attendee said. Another source said Lidl had been making lease demands that were unusually difficult for landlords to grant.

In a panel discussion on grocery stores at the ICSC event, David Jamieson, EVP and COO of neighborhood shopping center landlord Kimco Realty, said Lidl was “finding its footing.”

“It’s established that they want a large presence in the U.S. market. They came out with their 20 locations, but they’ve pulled back a bit and they’re pivoting,” Jamieson added. “I would expect the next wave [of stores] to kick in soon. From the landlord perspective, that’s another opportunity for us. … It’s another demand for space.”

Despite mixed reviews of its performance to date and a difficult task of changing customer shopping habits, Lidl’s pricing power has made an impact nearly everywhere it has arrived so far, with grocery stores in its trade areas slashing prices by up to 30% to stay in range with the new arrival, Harwood said. That goes beyond the billions in service and pricing investments made in preparation for its arrival by companies like Walmart, Aldi and Food Lion. Lidl was said to be devoting around $4 billion to its U.S. expansion.

The move to a smaller box, Harwood maintained, is part of “constant evolution,” that officials upon its arrival promised. “This is Lidl, everywhere we do business,” Harwood said. “It’s about constant feedback and adaptation, not being beholden to any particular dogma, and open to change.”

 

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