A German grocery chain that's invading America is already dominating Walmart on prices — here's why it's so cheap

Business Insider/Hayley Peterson

The European grocery chain Lidl has arrived in the US and bargain hunters should be excited.

A recent price check on a basket of 20 items by Jefferies analysts found that Lidl was about 9% cheaper than Walmart, the largest grocer in the US. Lidl claims to offer products for as much as 50% less than rival stores. 

So far, Lidl has opened 10 stores along the East Coast and plans to open 80 by the middle of next year. 

Lidl has already upended the grocery-store market in the UK, sending some of the largest supermarket chains into vicious price wars. Analysts are now expecting it to do the same in the US. 

How does the grocery chain manage to keep prices so low?

1. Most of its products are private-label brands

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Around 90% of the products in Lidl stores are private label brands. These are products manufactured specifically for Lidl. 

The benefits of selling these brands are two-fold. Lidl cuts out the middleman, which eliminates any additional costs from a supplier. The company also has greater control over manufacturing costs and can set its own prices. In turn, this means that products can be sold for higher margins than national brands as the initial costs are much lower. 

 

 

2. It has a limited selection of products

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"There is a lot of volume through a limited number of items," retail analyst Scott Mushkin of Wolfe Research told Business Insider. For instance, according to Mushkin, the store might only stock two types of mustard: its own brand and a national brand. This limited variety gives Lidl more buying power with its suppliers as it is ordering larger quantities of fewer products. 

Doug Koontz, head of content at research firm Planet Retail RNG, told Business Insider that Lidl has around 2,000 different products in its store. This is considerably less than the 20,000 unique products stocked at equivalent grocery stores or the 60,000 unique products typically stocked at a supercenter, he said.

 

3. It stocks "fast-moving items"

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Lidl favors everyday items that shoppers buy often, Mike Puglia, director of retail insights firm Kantar Retail, told Business Insider. 

"The assortment is limited to the fastest moving items, which drives gross profit dollars," he said. "Higher velocity items mean less money tied up in inventory."

In a visit to one of the new stores, Puglia noticed that the focus was on everyday items such as cereal, juice, and produce, rather than niche or specific products. 

 

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