A new study commissioned by the hard-discounter Lidl US demonstrates its market entry was offsetting larger impacts of food-price inflation on Long Island, N.Y., with competitors surrounding Lidl’s first four stores there cutting prices by up to 15%--a rate considerably more aggressive than what typically greets a Walmart entry.
Katrijn Gielens, professor of marketing at UNC Kenan-Flagler, led the study, which followed a similar look at the so-called “Lidl Effect” in 2018. In that study, Gielens found that retailers near Lidl stores had lower prices on key staple items like milk, as compared to markets where Lidl is not present.
Her latest study captures prices on 47 items both before and after Lidl entered the Long Island market, through its acquisition and subsequent conversion of four conventional Best Market stores in the Long Island towns of Center Moriches, West Babylon, Huntington and Patchouge. This analysis, she said, indicated those surrounding units raised prices slightly upon the closure of Best, then cut them significantly as those sites reopened under the Lidl banner.
“The main conclusion here is that it’s not just the fact that you have an additional store where you can shop at nice prices, but that the presence of that store will also keep the prices at all the other retailers in check,” Gielens said in a conference call discussing the study’s results. “So overall, it actually creates a sort of consumer value surplus. … From a welfare point of view, if you want to call it that, this type of competition is really beneficial in the sense that it really translates into dollar savings and price savings, despite the fact that we are currently living in a more of an inflationary type of period.”
Gielens said she conducted the research independently of the Alexandria, Va.-based retailer, but there are benefits to Lidl ahead in the form of at least another 20 Best Market-to-Lidl conversions on Long Island still to come, and in markets affected both by a recession and a reduced amount of “shopping around” that has come with safety concerns amid the coronavirus.
“If consumers were going to three or four different stores before COVID, they’re now going to just one or two,” said Edris Bemanian, CEO of Engage3, the Davis, Calif.-based pricing strategy firm. “So it’s critical to get pricing right.”
Bemanian, who reviewed the study on behalf of WGB, noted that it would appear to reflect macro trends of retailers moving to localize and tailor their prices even to the shelf level, and increased price transparency that has come with online shopping. “Consumers are paying attention,” he said. These more sophisticated pricing strategies are helping U.S. retailers meet the challenge of their efficient rivals while sidestepping the kind of large-scale pricing bloodbaths that accompanied their expansion in places like Europe, Bemanian added.
Interestingly, the study noted even Lidl’s hard-discount rival Aldi found room to reduce prices upon the arrival of the German counterpart. Aldi prices increased by 2.1% upon the closure of Best, then slashed them by 14.9% as Lidl arrived. That represented the largest percentage cut of the eight retailers included in the study. Aldi’s prices are currently at parity with Lidl, Gielens noted, along with those at Costco and Walmart. Those retailers represented the next largest adjustments to the new entry, lowering prices by 8.5% and 8.3%, respectively.
Other chains in the study also slashed prices but less aggressively and remain priced at a premium to Lidl for the studied items. Stop & Shop cut prices by 5.3%; BJ’s by 5.2%; Trader Joe’s by 4.2%; Target by 4.1%; and King Kullen by 3.8%.
Prices at Lidl were substantially lower compared to competing retailers on Long Island. Based on data collected before there were supply shortages due to the pandemic, Lidl’s food prices were about 45% lower than specialty retailer Trader Joe’s; 39.6% lower than King Kullen; and 33.8% lower than Stop & Shop.
The price-cutting effect, Gielens noted, was more pronounced than previous academic findings about Walmart’s entry into a new market where price decreases typically varied between 1% and 2.5%.