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European discounter Lidl, which has struggled to get a foothold in the US since it first opened an office here more than three years ago, announced this morning that it is acquiring Best Market, a privately held, family-owned 27-store chain of supermarkets in New York, mostly on Long Island, and New Jersey.

Terms of the deal were not disclosed. Scott Moses of PJ Solomon advised Best Market on the deal, while Citibank served as financial advisor to Lidl.

According to the announcement, “Lidl plans a step-by-step transition process that will begin next year and will involve the remodeling, reinvestment and reflagging of Best Market stores to converted Lidl stores. All Best Market employees in New Jersey and New York will have guaranteed employment opportunities with Lidl following the transition.”

Newsday reports that Best Market “recently has been undergoing its own expansion, having taken over a former King Kullen store in Syosset in April.”

The Lidl press release emphasizes that “Lidl stores have been proven to drive down prices for shoppers in areas where they open new stores. Earlier this year, a study from the University of North Carolina found that retailers in the immediate vicinity of Lidl stores dropped prices on individual products by as much as 55 percent on average in areas where Lidl operates.”

The story also puts Lidl’s interest into context: “Lidl has 10,500 stores in 29 countries. The chain opened its first U.S. stores in summer 2017 and now has 59 stores from Augusta, Georgia, to Union, N.J.

“Lidl entered the (New York) metropolitan area with the Union store this week and it plans to open a location in Staten Island.

“When the chain entered the U.S. market, it announced grand expansion plans, with the intent to have 100 stores open by summer 2018. But its expansion plans slowed.”
KC's View:
“Slowed?” That seems like considerable understatement.

There have been a lot of reports about how Lidl has been unable to get the kind of traction it expected to in the markets where it first opened stores, with some people pointing to format problems, others suggesting real estate choices, and still others saying that the company had infrastructure issues that needed to be addressed. And this doesn’t even factor in the fact that competition may have been tougher for Lidl than expected - the company likes to say that when it comes to a market the result is lower prices, but what it may not be saying is that this was a response by competition that prevented it from gaining the kind of momentum it needed.

This move, I think, indicates that Lidl has concluded that it needs to move into a new phase of US expansion, and that the acquisition of store groups in certain markets makes a lot of sense. My guess would be that this is just the first in a series of acquisitions that Lidl will make, and it seeks out companies with enough stores, favorable labor deals, and strategically located real estate that will give it a jump start in those markets.

(If I were Lidl, one of the first things I’d do is call IGA and ask how much it would cost to buy everything - every store in the system. I’d tell IGA that it can work out the financial details with its members, but that I’m willing to write a check for what moist people would agree are largely undercapitalized and unprepossessing stores that have some pretty good locations but are a) unable to really compete in this market, and b) are going to get killed by discounters that eventually enter their market. Lidl has total company sales of more than $100 billion a year … it can afford it.)

One of the things that this move by Lidl does, I’d guess, is raise the bar for what Aldi - still a much larger presence in the US - is going to do to maintain its advantage. Might it look into acquiring some appropriate chains? Will it accelerate its US growth plans? I’d bet the answer is yes to both questions.

At the same time, companies like Walmart, Kroger and Albertsons have to consider what this means to them, and how they need to sharpen their value proposition. Ahold Delhaize, which has just said it wants to acquire more stores in the US, now is facing an acquisition terrain that is more crowded than it might’ve expected.

And the dominoes continue to fall, as mainstream, middle-of-the-road retailers see their continued path to profitability narrow considerably. They’ll have a few choices. They can get a lot better at what they do, which is only going to happen with investment of capital and a disruptive attitude. They can do the same-old, same-old, and pray for a miracle. Or, they can tell whoever answers the phones, “If anyone from Aldi or Lidl calls, put them through immediately.”

This may be a purchase of 27 stores by a German retailer that hasn’t made any sort of an impact in the US. But it has the potential to be much, much more, because there is now another very well-capitalized buyer out there ready to compete with Kroger, Albertsons and Ahold for the regional grocers that would likely benefit from a larger owner.

Stay tuned. This is just the beginning.