German Aldi and Lidl in US supermarket war
The two chains are likely to further disrupt the American grocery sector
17 June, 2017
Competitor Lidl opened the first nine US stores last week.
A decades-long supermarket battle in Europe is moving to the US, adding to the competitive pressure in an industry embroiled in a deflation-fueled price war. Aldi, known for low prices on its private-label items, plans to spend $3.4bn over the next five years to open 900 supermarkets, the company said on 12 June. The investment came as its European discount rival, Lidl, opened its first nine US stores, with plans for as many as 100 by the summer of 2018.
The US expansion by the German private-label giants could put more pressure on conventional retailers like Wal-Mart Stores and Kroger to lower their prices. The new competition in the low-margin industry arrives during a deflationary spiral that has seen food prices drop for 17 straight months, the longest such streak in more than 60 years.
Aldi operates 1,600 US stores and earlier this year said it would add another 400 by the end of 2018 and spend $1.6bn to remodel 1,300 of them. The investment, which raises Aldi's capital expenditure to at least $5bn so far this year, comes at a time of intense competition and disruption in the industry. Aldi has added more produce and boosted its organic and gluten-free offerings in recent years as it tries to appeal to more mainstream shoppers. The company has also started offering fresh fish, improved its meat selection and increased its selection of national brands, part of a bid to shed its image as strictly a low-brow discounter.
German rival Lidl has opened the first nine of its 100 US stores on 15 June. In May, Lidl said it would price products up to 50% lower than rivals. Wal-Mart Stores, the largest US grocer, is testing lower prices in 11 US states and pushing vendors to undercut rivals by 15%. Wal-Mart, the world's biggest retailer, is expected to spend about $6bn to regain its title as the low-price leader, analysts said.
The furious pace of expansion by Aldi and Lidl is likely to further disrupt the US grocery market, which has seen 18 bankruptcies since 2014. In May, Aldi Chief Executive Jason Hart told Reuters the chain intended to have prices at least 21% lower than rivals and would focus on adding in-house brands to win over price-sensitive customers.
"We're growing at a time when other retailers are struggling," Hart said in a statement. Hart added that Aldi's prices were also up to 50% lower than traditional grocery chains, a move that appeared to follow rival Lidl's announcement on prices.
The latest store expansion will create 25,000 US jobs and make Aldi the third-largest grocery chain operator in the country behind Wal-Mart and Kroger, the German chain said in a statement. Aldi's 2,500 stores would equal about 53% of Wal-Mart's US outlets.
“There’s a tremendous amount of value at stake that will shift to Lidl and Aldi,” said Ken Knudson, a Bain & Co. partner, quoted by Bloomberg. “Traditional grocers can’t afford to lose sales right now given how competitive it is -- it will be very disruptive.”
Bain predicts that sales in the so-called “deep discount segment” of the grocery business, which includes Aldi and Lidl, will grow as much as 10% annually through 2020, five times higher than for traditional stores.