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Lidl’s entry pressures grocery stores to cut prices at new levels

Woman with cart shopping between store shelves

Lidl’s recent entry into the Long Island market pressured grocery retailers to cut their prices by up to 15%, according to a study by Katrijn Gielens, professor of marketing at the UNC Kenan-Flagler Business School.

Gielens is an internationally recognized expert in international retailing, and has written extensively about private label marketing and dynamics in the retailing industry.

The study findings show Lidl’s price-cutting effect is erasing the steepest increase in food prices seen by consumers in decades. Gielens led the independent study, which was commissioned by Lidl US.

Gielens analyzed prices of 47 grocery products, including dairy, meats, produce and canned and frozen goods. She examined prices collected at Aldi, BJ’s Club, Costco, King Kullen, Stop & Shop, Target, Trader Joe’s and Walmart before and after Lidl entered the market. Prices were collected during visits of 27 stores on Long Island between April 2019 and March 2020.

“Given that U.S. households are facing the fastest-rising rise in food prices in a generation and a looming recession, understanding how supermarket competition can keep grocery prices at bay is more important than ever,” said Gielens. “Lidl’s competitive price-cutting effect is continuing to pressure other retailers to drop their prices. The data shows the effect is greater than Walmart’s entry in a new market reported by previous academic studies.”

Lidl’s prices were about 45% lower than Trader Joe’s in head-to-head comparison.

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.

  • Lidl set prices 39.6% lower than King Kullen and 33.8% lower than Stop & Shop.
  • At Target and BJ’s, price differences were 18.5% and 10%, respectively.
  • For Costco, Aldi and Walmart, no price differences with Lidl were found.

Lidl’s competitive price-cutting effect is substantially stronger than Walmart’s effect.

Retailers on Long Island decreased prices considerably after Lidl opened new stores compared to prices collected before Lidl entered the market. The price-cutting effect 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 % or 5% at most.

  • Aldi cut its list prices by 15% and Walmart cut its list prices by 9% after Lidl’s entry.
  • Stop & Shop and King Kullen decreased their prices an average of 5.3% to 3.8%, respectively.
  • Costco reacted to Lidl’s entry by decreasing prices by 8.3%.
  • Target and Trader Joe’s reacted by decreasing their prices by 4% each.

Prices for individual products highlight competitive price-cutting effect.

Despite a general rising trend of more than 2% in grocery prices between April 2019 and March 2020, competing retailers on Long Island set their prices for individual products, including staples, substantially lower after Lidl opened new stores.

  • For higher priced items like frozen seafood, laundry detergent and olive oils, prices decreased 15%.
  • In staple categories, such as pasta, butter and breakfast cereals, prices decreased more than 10% to 15%.
  • For some frequently purchased goods, such as refrigerated drinks, peanut butter and frozen pizza, prices were reduced by 10%.

Lidl’s competitive price-cutting effect is enduring and eliminates observed food price inflation.

Retailers on Long Island increased their prices significantly in fall 2019 when stores were being remodeled and Lidl had not yet opened stores. With less grocery store competition, King Kullen and Stop & Shop raised their prices by about 12% and 9%, respectively. Target and BJ’s increased prices up to 8%. Costco raised prices by 6% at that time. After Lidl entered the market, price increases were completely wiped out.

The findings corroborate the results of a study Gielens conducted in 2018, which showed that Lidl exerted a significant level of pressure on leading retailers to drop its prices soon after it first opened stores. Three years after its entry in the U.S., Lidl’s competitive price-cutting effect has shown to be enduring and more than offsets the trend of rising grocery prices.