As a professional stock analyst and avid grocery shopper, I‘m always on the lookout for attractive investment opportunities in the fast-moving consumer goods space. One company that‘s been on my radar for years is Lidl, the German discount supermarket chain that‘s taking Europe by storm and making inroads in the U.S. With its ultra-low prices, curated assortment, and ruthlessly efficient operations, Lidl is the epitome of a "category killer" that‘s shaking up the grocery industry.
There‘s just one problem: Lidl is privately held, meaning average investors have no way to directly participate in its growth story. That‘s a shame, because based on my analysis, Lidl stock would be a compelling addition to any consumer staples portfolio. In this deep dive, I‘ll unpack what makes Lidl such a formidable competitor and explore some alternative grocery stocks for investors to consider.
The Lidl Business Model: How to Win in the Cutthroat Grocery Game
At its core, Lidl‘s business model is all about offering unbeatable value to price-conscious shoppers. By leveraging its massive scale and no-frills approach, Lidl is able to undercut competitors on price while still earning healthy margins. Here are some of the key pillars of Lidl‘s strategy:
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Limited assortment: Lidl stocks just 2,000-3,000 SKUs per store, compared to 30,000+ at a typical supermarket. This enables Lidl to drive much higher volumes per item, extract better terms from suppliers, and streamline operations. Over 80% of Lidl‘s products are private label, further boosting margins.
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Small stores: With an average size of around 14,000 square feet, Lidl stores are a fraction of the size of most supermarkets. This allows Lidl to open more locations with less capital, achieve higher sales per square foot, and make stores easier to navigate for shoppers.
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Lean staffing: Lidl runs a very tight ship when it comes to labor. Stores are staffed with a bare-bones crew (as few as 10 employees), and much of the grunt work is outsourced to suppliers. For example, produce arrives pre-bagged and meat is pre-packaged to minimize in-store prep.
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No frills: Don‘t expect to find a deli counter, butcher, or coffee bar at Lidl. Stores are decidedly spartan, with products displayed in their original boxes and minimal decor. This saves on buildout and maintenance costs.
By adhering to this playbook, Lidl has grown into a juggernaut with over 11,000 stores across Europe and estimated annual revenue of €89 billion (~$105 billion) as of 2019, according to Deloitte. To put that in perspective, that‘s more than the combined U.S. grocery sales of Kroger, Albertsons, and Publix.
Lidl‘s U.S. Invasion: Off to a Slow Start, But Watch Out
Lidl sent shockwaves through the U.S. grocery industry when it first announced plans to jump the Atlantic in 2015. Industry incumbents braced for impact as Lidl outlined an ambitious goal of opening 100 stores within a year of launch and 500 within five years. Some analysts predicted Lidl could eventually capture up to 5% of the $800 billion U.S. grocery market.
However, Lidl‘s U.S. foray has hit some speed bumps so far. After debuting its first 10 stores in June 2017, Lidl has fallen well short of its initial growth targets, with just over 100 locations as of early 2021. The company has struggled to find suitable real estate, adapt its assortment to American tastes, and build brand awareness in a crowded market.
That said, Lidl appears to be finding its footing and is poised for a new phase of growth. The company recently appointed a new head of U.S. operations and is tweaking its real estate strategy to focus on smaller formats in higher-density areas. Lidl has also earned high marks from U.S. shoppers on value and quality, outpacing fellow German discounter Aldi on key metrics like Net Promoter Score.
Looking ahead, I expect Lidl‘s U.S. store base to steadily climb toward 300-400 locations by 2025 as it optimizes its model and fills out its footprint in core East Coast markets. While that‘s well shy of initial projections, it should be enough for Lidl to reach critical scale and noticeably pressure incumbents on price in key battleground markets.
The Lidl Valuation Guessing Game
One of the biggest challenges in evaluating Lidl as an investment is the lack of transparency around its financials. As a subsidiary of the privately held Schwarz Group, Lidl does not disclose detailed P&Ls or balance sheets. The company also remains tight-lipped about its strategic plans.
However, we can triangulate Lidl‘s value based on available data points. In fiscal 2019, the Schwarz Group posted total revenue of €104.3 billion, up 7.4% from the prior year. Lidl accounted for the lion‘s share at roughly €89 billion, with the remainder from the Kaufland hypermarket banner.
Profitability is murkier, but I estimate Lidl‘s EBIT margin is in the low-to-mid single digits based on the limited disclosure from Aldi and other hard discounters. At the midpoint, that pencils out to EBIT of around €3.5 billion on a ~4% margin. Slapping a conservative 12x multiple on that implies an enterprise value upwards of €40 billion.
Reality check: That‘s roughly on par with the market value of industry giant Tesco (UK), which does 2x Lidl‘s revenue, and nearly half the market cap of Kroger, which is 4x larger. But the comparison isn‘t apples-to-apples given Lidl‘s much stronger top-line growth and margin profile. On a sales basis, Lidl is trading at 0.4x revenue – a substantial discount to slower-growing public peers.
The bottom line is that Lidl‘s true value likely lies somewhere between its impressive revenue scale and modest profit generation. If I had to pinpoint a number, I‘d wager Lidl is worth at least €50-60 billion including a growth premium. Not too shabby for a company that started as a single shop in a small German town a few decades ago.
The Schwarz Ownership Structure
Unlike most companies its size, Lidl is not beholden to public shareholders or quarterly earnings pressure. Lidl operates with the long-term mindset of a family-owned business – because that‘s exactly what it is.
Lidl is part of the Schwarz Group, a holding company controlled by one of Germany‘s richest families. The company was founded by Josef Schwarz in the 1930s as a wholesale fruit supplier before pivoting into discount retail under his son Dieter in the 1970s. Over the decades that followed, Dieter grew Lidl and Kaufland into global powerhouses while shunning the spotlight and outside investment.
Today, the notoriously reclusive Dieter Schwarz has an estimated net worth of $36 billion, making him one of the 20 wealthiest people on the planet. The 81-year-old remains at the helm of his empire and has given no indication he intends to take Lidl public. By all accounts, Schwarz is laser-focused on ensuring his company can thrive for generations to come.
This hermetic ownership structure gives Lidl immense leeway to play the long game. Without the distraction of activist investors or 90-day reporting deadlines, Lidl‘s management team is free to make bold bets and plow cash flow back into the business. Case in point: Lidl has funded virtually all its growth through internal cash generation rather than debt or equity raises.
On the other hand, Lidl‘s opacity makes it difficult for outsiders to track the company‘s progress and value potential. Prospective investors are left parsing nuggets of information from sources like supplier interviews, press releases, and regulatory filings. As much as I‘d love to kick the tires on a Lidl IPO prospectus, I‘ve learned not to hold my breath.
Lidl‘s Commitment to Sustainability and Social Responsibility
While Lidl is known for its no-frills shopping environment, the company has made substantial investments to bolster its sustainability bona fides. Lidl has set science-based targets to reduce carbon emissions, embraced energy-efficient store designs, and shifted toward renewable power.
On the supply chain front, Lidl has led the charge on issues like sustainable seafood, cage-free eggs, fair trade produce, and responsible soy and palm oil sourcing. The company has also rolled out initiatives to curb food waste and ramp up healthy product formulations and labeling.
Shareholders are increasingly factoring environmental, social and governance (ESG) considerations into their investment processes. While Lidl may not have public equity to showcase its ESG progress, its actions set the tone for the industry and help burnish its reputation with sustainability-minded shoppers. I expect ESG to be an even bigger priority under the next generation of Schwarz Group leadership.
Discount Grocery Stocks to Put On Your Shopping List
Lidl may be off limits for investors, but there are plenty of other grocery stocks to load up your cart with. Here‘s a taste of some of my favorite picks:
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Walmart (WMT): The world‘s largest grocer is leaning into its unrivaled scale and omnichannel prowess to gain share. Walmart‘s 4,700+ U.S. stores and expanding delivery capabilities make it a formidable player in the rapidly growing online grocery arena.
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Costco (COST): With a fiercely loyal member base and best-in-class buying power, Costco is a defensive staple for long-term investors. The company‘s high-volume warehouse model and fuel discounts are an ideal fit for inflationary times.
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Dollar General (DG): Think of Dollar General as a rural version of Lidl, offering cheap essentials in bite-sized stores. The company sees potential for a staggering 17,000 locations in the U.S. and is a prime beneficiary of budget-conscious shoppers trading down.
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Ahold Delhaize (AD.AS): This Netherlands-based grocer is a lower-risk way to gain exposure to both sides of the Atlantic. Ahold operates leading supermarket chains like Stop & Shop, Food Lion, and Albert Heijn and has a strong track record of stable growth and generous capital returns.
Bottom line: While Lidl stock may be the forbidden fruit of the grocery world, there‘s a bountiful harvest of alternative investments to feast on. Just be sure to do your own due diligence and consider your risk appetite before diving in.
Recap and Future Outlook
By now it should be clear why I‘m so fascinated by the Lidl story. The company has defied the odds to become one of the world‘s largest retailers while thumbing its nose at the conventions of the capital markets. Lidl‘s contrarian approach and unapologetic frugality are a throwback to the bygone era of the truly customer-obsessed merchant.
Looking ahead, I expect Lidl to continue marching to the beat of its own drum. The company‘s U.S. expansion will likely remain measured as it fine-tunes its model and builds brand equity. In Europe, Lidl will keep probing for growth in saturated markets while potentially exploring new geographies.
Strategically, the big question is whether Lidl will embrace e-commerce more aggressively to future-proof its business. The jury is still out on the economics of online grocery, and Lidl has been characteristically cautious in its digital rollout thus far. But as more spending shifts online, Lidl may need to bite the bullet to avoid losing touch with shoppers.
As for the prospect of a Lidl IPO, I‘ve learned to never say never in the world of investing. Dieter Schwarz is now in his 80s, and his succession plans remain murky. A new generation of leadership could opt to tap public markets to unlock value and fund new growth initiatives. An IPO or strategic merger are not out of the question if Lidl‘s growth stalls.
But even if Lidl remains private in perpetuity, the company‘s impact on the grocery industry will be felt for years to come. Lidl has helped spark a renaissance of value-focused shopping and exposed bloated cost structures across the supply chain. Its laser-like focus on efficiency and quality should be a model for retailers of all stripes.
As investors, we can‘t bet on Lidl directly, but we‘d be wise to study its playbook and align our portfolios accordingly. In the cutthroat world of grocery, Lidl is one of the few companies with the scale, discipline, and customer loyalty to keep winning. I, for one, will be watching with great interest – and maybe a cart full of private-label snacks.
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