New Retail Challenges Need Special Attention

There is little question the produce industry is convulsed by the portents of change in the buying base. Two independent events — the U.S. entry of Lidl, the so-called “deep discounter” with more than 10,000 stores in Europe, and the acquisition of Whole Foods by Amazon — hold out the threat, or the promise, of a reimagined distribution system for fresh produce in the United States and Canada.

The heightened media attention is testament to how these monumental events may change the grocery arena. But their impact today is rather inconsequential: Amazon accounts for about 0.2 percent of the U.S. grocery market; Whole Foods represents about 2 percent; and Lidl isn’t even a tenth of 1 percent.

So, why all the buzz? Lidl is the easiest one to see the impact and predict its trajectory. A proven entity operating in 28 European countries, Lidl is the primary European competitor to Aldi. In the U.K., Lidl first opened in 1994, or less than 25 years ago. Today it has more than 630 stores in the U.K. and does almost $5 billion a year in business. To put this in perspective, if Lidl were to have a similar growth track in the United States, but proportional to our larger population, in 2035, Lidl would have more than 3,000 stores in America. Also, it would do more than $25 billion (in today’s dollars) in business annually.

Journalists inexperienced in covering retailing have claimed Lidl is having trouble in America. This is because these journalists are not familiar with normal retail patterns whereby stores boom at grand-opening celebrations, settle down as the promotions die off and gradually build in the next five years. In the case of any foreign retailer coming to America, there is also a period of experimentation with product selection to determine what moves best.

Lidl, though, is a threat to American retailers in a way Tesco’s Fresh & Easy never could be for one reason. Though it is a giant company, just as Tesco is, and has excellent retailing expertise, just as Tesco does, Lidl has a secret weapon: The company is privately held.

One can give a thousand reasons for Tesco’s failure in America, but, in the end, it closed because Tesco gave up. It gave up because the pressure for a publicly held company to generate quarter-to-quarter earning gains is immense.

There has been plenty of response to Lidl’s entry in the U.S. market. Most notably, Aldi simultaneously announced a plan to grab real estate and open 1,000 stores along with a massive renovation project to upgrade its existing stores. Aldi also is privately held. It is notable that when it announced its renovation program, Aldi also said it would temporarily close many stores so they could be renovated quickly and efficiently. Again, a classic privately held move. Few public companies would risk announcing sales had slipped, so renovations would take longer at greater expense while the stores stayed open, even if closing the stores would produce the best returns in the long term.

Most American supermarkets never directly challenged Wal-Mart during its 30-year supercenter roll-out across America. Kroger bought Fred Meyer, but did nothing with it. It is a mystery why supermarket executives, when confronted with the fact many consumers saw value in the supercenter format, never elected to compete by creating their own supercenters.

Supermarkets today seem to be allowing the opportunity to pass once again. Despite evidence from Save-A-Lot, Aldi, Lidl, even dollar stores that there is profit in smaller deep-discount concepts, supermarkets seem more focused on trying to protect their own concepts turf than establishing the segmented concepts that resonate with consumers.

Amazon is considered a threat in no small part because, quite uniquely, it is a publicly held company that benefits from well-financed investors who choose to disregard short-term profitability. Because Amazon sells many items, it can be indifferent to the profitability of particular segments.

But, when it comes to Whole Foods, none of the supposed benefits of the merger show an easy path. Yes, omni-channel retailing is big, and Wal-Mart, with giant supercenters, can easily set aside space for pick-up lockers and more; but Whole Foods stores are small, and there is no significant real estate that can be devoted to these things without severely impacting the operation. And Amazon wants scale. It has already announced a restriction on local buying and merchandising. Its price-cuts are mostly publicity driven, because there is no sign the company has decided to accept lower margins overall.

But with centralized buying and a large portion of stores being used for order pick-up, they might as well close Whole Foods and just have 400-plus Amazon stores in prime locations.

Whatever happens with Lidl and Amazon, and however other retailers adjust, the good news is they will still need fresh produce.

The challenge is our production and sales efforts are not organized to align with specialized retailers. The future is increasingly niched, and what Trader Joe’s needs is a world away from what Dollar General needs. The challenge is to segment product development and sales, and to market the products these specialized channels need to boost consumer interaction and consumption, and thus keep growing. The challenge is intellectual and organizational. It requires an industry sea change . We have the tools, so we best get to using them.