‘A litany of broken promises?’ Lidl left property developers in the hole as it aggressively scaled back US expansion, alleges lawsuit
Lidl – a predominantly private label retailer which operates in almost 30 countries – made its US debut in June 2017 with plans to open 100 stores+ by mid-2018.
To date, however, it has only opened half that number (53 stores along the east coast), leaving property developers it worked with in the lurch, according to a complaint** filed by property developer Leon Capital Group and various affiliates on June 8.
“This action [alleging fraud and breach of contract] arises from Lidl’s fraudulent and deceptive conduct and its intentional and wrongful termination of certain agreements, contracts, and promises with Leon regarding three real estate development projects in North Carolina located in Cary, Wilmington, and Charlotte.
“Lidl agreed to construct and operate a Lidl grocery store to anchor each of the developments; however, Lidl abruptly terminated its agreements to purchase the real estate parcels from Leon and reneged on its obligations to construct and operate the stores and repudiated its promises related to the same.
“Despite due demand, Lidl refuses to meet its obligations to Leon and other third parties and seeks to wrongfully leave Leon with substantial financial losses related to the developments.”
‘A litany of broken promises’
Lidl, it alleged, had pulled out of scores of similar deals across multiple states “leaving a litany of broken promises, foreclosures, defaulted contracts, unpaid contractors, and financial hardships for local property owners, contractors, subcontractors, architects, engineers, and developers.”
Between 2015 and 2017, Lidl acquired or entered purchase agreements for c. 400 US real estate sites, yet by its own admission, only intended to construct 100-150 stores by the end of 2018, added the plaintiffs.
Lidl either “knew it was gambling with its overly ambitious expansion plan and designed an emergency exit constructed on deception and bad faith” or was “grossly negligent” and “committed business malfeasance on an epic scale,” they alleged.
If the former, Lidl, likely knowing it would not close on many of its purchase and sale agreements (PSAs), added the plaintiffs, "delayed negotiations and execution of necessary agreements regarding cost sharing of site work and infrastructure for the developments until the planned closing dates, demanding that Leon and others similarly-situated carry such costs until or after closing so that if Lidl chose to terminate, Lidl would not be saddled with these expenses."
According to a lawsuit filed against Lidl on June 8: “After such a disappointing launch, Lidl has taken a hatchet to its plans and dramatically scaled back its expansion.
"In the wake of this abrupt about-face, Lidl has left real estate developers like Leon holding the proverbial bag on millions in development costs, which costs were fraudulently induced by Lidl through a continued and systematic series of lies, misrepresentations, and bad faith.
"Plaintiffs... relied on Lidl’s false promises and invested substantial resources and dollars on major developments on behalf of Lidl - investments for which Lidl deceptively vouched and promised to pay. All the while, Lidl knew that it would not complete its US expansion plan as it was represented to Leon and others and Lidl knew, well prior to advising Leon otherwise, that it would never construct and operate the Lidl stores in the subject developments as agreed."
‘A singular catastrophe?’
As early as the fall of 2017, Lidl’s US expansion plans were in “total chaos” prompting the departure of US operations chief Daniel Marasch, added the lawsuit.
It then went on to highlight an article in German business publication Manager Magazin published earlier this year, in which Klaus Gehrig, director of the Schwarz-Group, described Lidl’s US expansion as a “a singular catastrophe.”
According to Manager Magazin, Lidl’s US team didn’t conduct sufficient research into neighborhoods it planned to serve, with officials ‘usually content to look at locations on Google Maps’ before okaying choices, while then-CEO Brendan Proctor, who joined from Lidl’s Ireland division demonstrated “no feel for the American market [he was replaced in May by Johannes Fieber, former head of Lidl’s Swedish business].”
Lidl does not comment on pending litigation
A spokesman for Lidl US declined to comment on the lawsuit or on the evolution of Lidl’s business strategy in the US, adding: “Because this is pending litigation, we cannot go into further detail at this time.”
*Research from management consultant Oliver Wyman – which you can read HERE – suggests that Lidl shoppers are spending more than they used to, with satisfaction levels growing as the chain opens new stores and learns from its mistakes.
**The case is Leon Capital Group, LLC et al v. Schwarz Beteiligungs-GMBH, et al. 7:18-cv-00104 filed in North Carolina on June 8.
Lidl’s US stores – with a larger footprint and range (up to 4,000 skus vs 1,000-1,500 skus) and a greater emphasis on organic, locally-sourced and free-from products, higher-traffic locations and higher-quality fixtures and fittings (timber) – cost more to operate than their European counterparts, noted analysts at Bernstein during a visit to one of Lidl's stores last summer.
"Aldi prices with Harris Teeter service and quality is not sustainable… But the model won't be static from here. In our view Lidl still has a lot to learn, including in general merchandise, the labor model and adapting the wine offer. We expect the model to flex and adapt to the US market as the company searches for the optimum proposition.”
Writing in Bricksmeetclick this week, retail expect Bill Bishop said he too is optimistic about Lidl's US prospects:
"We are bullish on Lidl and think that despite a rockier start than expected, there are good reasons to expect that Lidl and Aldi will grow their combined market share and increase pressure on both traditional retailers and name brands."