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Will Roll Out Plans by Lidl, Grocery Rivals Spark Bidding Wars for U.S. Store Sites?

German Discount Chain Actively Seeking Land In Mid-Atlantic Markets as Battle Among Supermarket Chains for Best Store Sites Grows Heated
April 13, 2016
Germany-based Lidl, now acquiring its first U.S. store sites for a planned roll out of as many as 150 stores in the Mid-Atlantic region, is joining a pitched battle among both established grocers and new players in the U.S. market who are in expansion mode from Southern California to South Carolina.

Lidl, a division of German retailer Schwarz Group that operates 10,000 stores across Europe, is beginning to snap up U.S. properties on the East Coast that meet simple but clear-cut criteria and quick due diligence.

So far, it has focused its U.S. expansion in Georgia, South Carolina, North Carolina, Virginia, Washington, D.C., Maryland, Delaware, New Jersey and Pennsylvania. Although the company has declined to say how many U.S. stores it intends to open, sources estimate the chain will open 100 to 150 stores in the Mid-Atlantic region by 2018.

The grocer is actively looking for high-traffic signalized intersections in densely populated, established retail locations, preferably pads on a minimum of 3.5 acres it can purchase to accommodate its 36,000-square-foot standalone stores, according to the retailer's acquisition criteria.

MGP Retail Consulting, LLC, Lidl's real estate arm, recently located and quickly closed on the purchase of two parcels in the Spartanburg, SC, market, according to Ben Hines, principle with Spartanburg-based brokerage Spencer/Hines Properties. Hines, along with partner Andy Hayes, brokered the deals to the supermarket chain.

"The locations they have chosen are phenomenal," Hines said, adding the retailer targets a 90-day due diligence period, much shorter than the six months it can typically take.

Local planning departments have reported applications from Lidl's representative for zoning and permits in several states. The real estate search has generated buzz that Lidl plans to open as many as 150 stores simultaneously in the Mid-Atlantic region.

But a U.S.-based spokesman for the grocer tells CoStar that the chain is "in the early stages of preparation to launch" in the U.S. and has not yet announced individual store locations or the scale and exact timing of the roll out.

"I can tell you we are actively pursuing sites along the east coast of the U.S.," said Will Harwood, spokesman for Lidl US, based in Arlington, VA, in an e-mail. "We plan to have stores open in the U.S. no later than 2018."

Immediately after Lidl purchased one of the two South Carolina sites, a former Volkswagen dealership at 2200 E. Main St., Spartanburg County approved a $183 million high school to be built next door, ensuring plenty of traffic and attention to Spartanburg's eastern submarket, Hines said. Lidl also acquired a site at 8180 Warren H. Abernathy Road.

"They're really moving and I think they'll take the market by storm," he said, noting that more than one-third of Spartanburg County residents live within a five-mile radius of the sites.

Spartanburg now hosts two stores and counting by smaller German discount rival Aldi, on the east side and in Boiling Springs north of the city. Batavia, IL-based Aldi, owned by a German family trust established by Theo Albrecht, which has owned the Trader Joe's chain since 1979, operates 1,500 stores in 32 U.S. states.

But the uber discounter's current big prize is California, where it opened its first stores in March, and will open 10 more Southern California stores next week on April 21. Aldi plans to open a total of 45 locations in the Golden State this year, with a 10,000-square-foot format that is larger than other Aldi locations across the country but much smaller than standard grocery stores that typically have footprints of 50,000 square feet and above.

Some retail analysts believe Lidl and Aldi are well-positioned to shake up the U.S. supermarket landscape.

The entry of a host of new limited-assortment and discount grocers, including Aldi and other overseas chains, are competing strongly in an already robust traditional grocery landscape for the shopping dollars of lower-income families, noted James Cook, JLL director of retail research, Americas. A previous ill-fated roll out by a limited-assortment grocer from overseas, UK-based Tesco's Fresh and Easy stores, sputtered in part because the products largely were not what many American shoppers wanted to buy, Cook said.

"Aldi and its peers will be successful because they're selling what people are interested in buying," Cook said.

While the victors of the current battles aren't yet known, the expansion of grocery sellers is clearly a net plus for real estate demand, propelling much of the new retail construction and causing vacancy rates in existing neighborhood and community centers to drop by 60 basis points to 8.8% in 2015, according to a recent JLL report authored by Cook. More than two-thirds of the 81 million square feet of new retail inventory built in 2015 fell within categories dominated by "daily needs" retailers -- traditional grocers, limited-assortment grocers and super centers, Cook said.

"While there are key differences in market structure between the UK, a highly-concentrated grocery market, and the U.S., a more fragmented market, we believe that Aldi and Lidl will likely put pressure on weaker positioned U.S. competitors and will contribute to ongoing industry consolidation, though the impact may not be evident in the near term," Karen Short, an analyst with Deutsche Bank, said in a recent report.

Several executives for shopping center REITs and major grocery chains mentioned last month that they've met recently with Lidl representatives.

Supermarket competition is bound to get fierce in the Mid-Atlantic region with Lidl and other new entrants engaged in open bidding wars with established chains for store sites, predicted Conor Flynn, president and CEO of Kimco Realty Corp. (NYSE:KIM).

"There’s plenty of bidding going on for opportunity there, but it’s already a very tight market, so it’s very difficult to penetrate," Flynn said. "It’s going to be interesting to see who shakes out in terms of the winners and losers."

W. Rodney McMullen, chairman and CEO of The Kroger Co., the largest U.S. supermarket chain by revenue and the second-largest general retailer behind Walmart Stores, Inc., said "we have a lot of respect" for the Aldi and Lidl formats.

"We've spent as much time in Lidl stores as we have Aldi stores over the years and Lidl has done a great job when you look at a lot of the European countries," McMullen said.

Wheeler Real Estate, a Virginia Beach, VA-based firm focused on acquiring and developing grocery anchored centers in secondary and tertiary U.S. markets, Lidl and others like Wegmans Food Markets and Publix, has created fertile conditions for a burst of shopping center development activity in Virginia.

"From the standpoint of lenders, retailers and overall capital available for ground-up development, it’s a great time right now, and we’re in a good spot," CEO Jon Wheeler recently told investors.

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