Is this a great time for supermarkets to be rolling out new formats or expanding to new geography?

The outlook for either isn’t too promising.

As readers of “The Robin Report” well know, the industry has experienced the long goodbye of Fresh & Easy, Tesco’s entry into the U.S., followed by the quick and startling demise of Haggen. An 18-store supermarket retailer, Haggen acquired nearly 150 Albertsons supermarkets in new and remote territories. In fewer than six months, the whole thing collapsed and Haggen is now liquidating.

Moreover, Walmart is shuttering its fleet of 100 small-format Express food stores after just two years. Yet, hope springs eternal and there’s now another company seeking to launch new stores in the U.S., and others are entering new and distant markets for the first time.

Let’s take a look at a few of these and assess what the prospects for success of each looks like.

Lidl’s Dubious Strategy

As I have reported, Lidl, the deep-discount food retailer owned by Germany’s Schwartz Group, announced a couple of years back that it intended to enter the U.S. with a batch of newly built stores. We now have sufficient detail about the plan to consider seriously whether it has much prospect for success.

Many retailers seeking entrance into a new country would attempt to keep its plans secret for as long as possible to prevent the premature formation of competition. Not so with Lidl. It’s trumpeting its intentions with a new website that discloses much about its plans, and asks for help in securing store sites in undisguised terms: “If you know of a property that’s a good fit, please fill out the form below.” It goes on to stipulate that store sites must be in its initial target area of Pennsylvania to Georgia, including every contiguous state. Its U.S. headquarters is based in Arlington, VA.

The website stipulates that store sites must be 3.5 acres to support a 36,000 sq. ft. store and parking for 150 cars. It must be highly visible, with local traffic of at least 20,000 cars per day, and a dense population within three miles.

The website also solicits potential product vendors, corporate- and store-level employees to step up. As for longer-term plans, the site says Lidl will start with stores in the East, “then expand steadily throughout the U.S.”

Although the website doesn’t disclose this, Lidl intends to have 100 or more sites secured and stores built before the first one opens before or during 2018. Stores will be supplied with product from distribution centers now under construction in Virginia and North Carolina.

Problematic Planning

What are the prospects for Lidl’s rollout? I would argue that despite Lidl’s great success in Europe—10,000 stores and annual revenues of $100 billion—there’s good reason to doubt that success will come easily in the U.S.

Here’s why:

• Customer confusion: The store size Lidl envisions is problematic. It’s a bit too large for a deep-discount, limited-assortment food outlet, which is Lidl’s stock in trade. To be sure, some Lidl stores in Europe feature hard and soft lines in addition to food; products such as kitchen appliances, furniture and women’s fashion. It’s also too small to have a credible offer of both food and non-food.
• Do or die: Lidl’s start-up costs will be huge. Constructing and outfitting two distribution centers and a hundred or more stores before a single unit of product is sold is exceedingly risky. The fact that Lidl says it intends to spread from the East coast to the rest of the country means Lidl is convinced that failure isn’t possible. So even if customer reaction is well below expectations, there will be no way to make a quick and cheap exit. This is the very strategy that led to the failure of Tesco’s Fresh & Easy.
• Website: Lidl’s use of a website to seek store sites, employees, and product vendors suggests that its own internal resources are insufficient for these tasks. Not only that, but it offers full disclosure of its intended strategy in ample time for competitors to get ready. Of course, the Internet with its speed, transparency, and efficiencies has changed how we conduct business, but this looks like an expediency driven by a lack of management expertise and depth.

Wegmans’ Wanderings

Now let’s take a quick look at another food retailer that has been pursuing a large-scale geographic expansion: Wegmans. Founded in 1916 in Rochester, N.Y., which remains its headquarters, Wegmans operated exclusively in upstate New York for most of its history.

Wegmans eventually struck on a very successful retailing concept. In addition to the usual food and non-food offerings of a supermarket, a larger amount of in-store space is devoted to fresh product, from produce to seafood. Also included is a large array of restaurant-quality freshly-prepared food offered from service counters.

Full meals can be sourced from the area, and it’s also possible to get sandwiches, pizza, and the like for more casual occasions. Many Wegmans supermarkets feature in-store dining areas seating up to 300 patrons. Some stores are as large as 140,000 square feet. The concept is labor intensive, which drives up price points, but customers don’t balk at that. One
could argue that the higher prices are masked by the dynamic in-store theater of the fresh areas.

In recent years, Wegmans started to introduce its stores in markets well outside its traditional operating area. Now it has about 90 stores in five states in addition to New York, ranging from Massachusetts to Virginia, with annual revenues of about $8 billion. Sites are selected to ensure that the upscale concept will be well received, and further expansion is certain, with North Carolina likely to be next.

Wegmans’ rollout strategy has been conservative. Instead of building additional distribution capacity, product was trucked from Rochester to distant stores while the success of each new store was evaluated. When good consumer acceptance was assured, Wegmans developed a second distribution center in Pennsylvania to accommodate all product lines.

This is the prudent way to expand, and it’s the model followed by other supermarket companies, such as Publix, which is now marching from its base in Florida to as far north as Virginia. H-E-B also expanded gradually and opened stores to the south of its Texas base into Mexico.

Strange Strategy

These three companies, Wegmans, Publix, and H-E-B, have a well-reasoned expansion strategy and are meeting with success. Lidl seems sanguine with its leap of faith, which is sort of a strategy too.

Sometimes, a totally mysterious strategy surfaces. And that’s Albertsons presence in Florida. At one time Albertsons had about 100 stores in Florida, but over the years nearly all were sold to Publix and others, or closed. In the aftermath, Albertsons, for some reason, retained three stores in the state—one on the Gulf coast, one in the center of the state and one in the Southeast.

Albertsons (which acquired Safeway last year) now intends to convert those three stores to the Safeway banner, a nameplate that has never been used in or near Florida—and is doubtless unknown to most consumers there. Stranger still, the stores will be part of the Houston division and product will be supplied from Texas, which means truck runs of 1,200 miles, or more, in each direction. This looks like an unsustainable distribution distance.

Unless Albertsons is making this a temporary stalking-horse venture to quickly test the acceptance of the Safeway banner in Florida. To supermarket experts, it defies understanding.

Learning Lessons

So, what lessons do these various events have for retailers in general?

Know the new market: Before moving stores into a new area, do some due diligence with market research. This seems so obvious, but it’s not always done. Haggen’s experience shows the high price of failing to take this basic step.

Consider promotional costs: In the supermarket industry, there are two pricing strategies in general use. The Hi-Lo approach means most products in the store are priced to the high side, but several products are put on sale each week at a very low price. The EDLP approach—everyday low price—means that all products are priced to the low side, and little if any price specializing is used. Hi-Lo needs constant advertising to highlight the price specials. EDLP needs much less advertising activity. So in terms of advertising costs, EDLP is the least expensive strategy to use. Lidl will be an EDLP operator, which will work in its favor. It also helps a lot to have an identity that’s easily conveyed in occasional promotions, similar to Wegmans, with its vast fresh-prepared sections, or Publix with its high service levels. Haggen fell by the wayside because it was unable to broach any sort of offer to consumers.

Failure happens: Be aware that even the most rigorous market research may be flawed and failure is possible no matter how positive the analysis. Don’t make the cost of failure so high that losses over a protracted period of time become the preferred option.

Go for it: Conversely, if a retailer has a particularly winning formula, and it tests out well, it is most likely worth the risk of expansion. It’s better to cautiously edge out from a core of existing stores to test the waters. But when that strategy is exhausted or impossible, make a well-considered leap to see what happens.