Gro­cery chains in price-cut war play­ing it rough

Northwest Arkansas Democrat-Gazette - - BUSINESS & FARM - CRAIG GIAMMONA

The front line of the new war for the Amer­i­can su­per­mar­ket runs through the aisles of Winston-Salem, N.C. It’s a bat­tle over a few pen­nies on the price of milk, mus­tard, de­ter­gent and bar­be­cue sauce — and per­haps the fu­ture of gro­ceries.

Winston-Salem is home to one of the 10 new su­per­mar­kets opened in May in the Caroli­nas and Vir­ginia by the Ger­man dis­count chain Lidl, known for low prices on pri­vate-la­bel items.

The new store is a short drive from a Whole Foods Mar­ket, the up­scale gro­cery chain that is in the mid­dle of a pro­posed $13.7 bil­lion takeover by Ama­zon.com with the po­ten­tial to up­end the way Amer­i­cans shop for food.

The city of about a quar­ter­mil­lion peo­ple is also home to Kroger-owned Har­ris Teeter and Wal-Mart Stores, wellestab­lished na­tional com­peti­tors that sur­vive on ra­zor-thin profit mar­gins, as well as a host of in­de­pen­dent gro­cers. There’s even an­other Ger­man dis­count gro­cer: Aldi Sued, which op­er­ates 1,600 U.S. stores un­der the name Aldi, has an out­post just down the road from the new Lidl.

A re­cent visit to three of the new Lidl stores made it clear that a price war had al­ready started. Melinda Rahymer, a 52-year-old pet sit­ter from Winston-Salem who lives on a tight bud­get, is ac­cus­tomed to search­ing for deals at Publix Su­per Mar­kets, Har­ris Teeter, Aldi, Wal-Mart, and oth­ers. When Lidl opened across the street from a Wal-Mart Su­per­center — within a cou­ple of miles from at least five other gro­cery stores — Rahymer de­cided to stop by and check it out. She grabbed some pasta and paid $2.19 for a gal­lon of milk.

“I think Aldi can beat them,” Rahymer said.

She was right: Aldi was sell­ing milk for $2.18 a gal­lon. At the nearby Wal-Mart, the price was $2.20. Food Lion, down the block? It matched Lidl at $2.19.

Lidl’s U.S. ex­pan­sion, which be­gan with store open­ings June 15, would have been the big­gest event of the sum­mer for Amer­i­can gro­ceries had Ama­zon not an­nounced a deal to ac­quire Whole Foods the fol­low­ing day. That merger, if it closes in the com­ing months, prom­ises to chal­lenge gro­cers with a fierce com­peti­tor known to slash prices and use tech­nol­ogy to lower costs. For now, how­ever, the gro­cery in­dus­try is watch­ing the Caroli­nas and Vir­ginia to see how shop­pers and es­tab­lished su­per­mar­kets will re­spond to a lit­tle-known Ger­man giant.

Lidl plans to have at least 100 lo­ca­tions here by next sum­mer and could ex­pand to more than 500 lo­ca­tions over the next five years, ac­cord­ing to an­a­lyst es­ti­mates. Its ini­tial stores are open­ing in com­pet­i­tive gro­cery mar­kets, right on top of ri­vals’ lo­ca­tions. Aldi re­cently an­nounced plans to add an ad­di­tional 900 over the next five years, and it’s spend­ing $1.6 bil­lion to re­model 1,300 of its ex­ist­ing stores.

The Ger­man dis­coun­ters have bat­tled across Europe for years, steal­ing sales from tra­di­tional gro­cers as con­sumers get ac­cus­tomed to their pri­vate-la­bel prod­ucts.The ri­valry reaches the United States at a time of ram­pant food de­fla­tion, with fall­ing prices al­ready rav­aging gro­cers’ earn­ings. An­a­lysts pre­dict a rough road ahead, par­tic­u­larly for smaller chains that will strug­gle to match prices.

Lidl and Aldi op­er­ate with roughly the same busi­ness model: small, no-frills stores, low over­head, low prices, a lim­ited as­sort­ment of pri­vate­la­bel items. A Lidl store might carry two types of mus­tard, while the nearby Wal-Mart has a dozen. Only about 10 per­cent of the prod­ucts at the stores are rec­og­niz­able na­tional brands.

The price cuts at Lidl’s com­peti­tors are part of a strat­egy to make sure cu­ri­ous shop­pers don’t get hooked on Lidl’s low prices. “It’s re­ally im­por­tant to starve them of oxy­gen,” said Dave Cle­ments, man­ag­ing di­rec­tor of re­tail at Dunnhumby, a data an­a­lyt­ics firm. “You have to take very se­ri­ously and not let them get es­tab­lished.”

Lidl has 10,000 stores across Europe and Aldi Sued op­er­ates an­other 3,500. Growth can be slow — it took about a decade af­ter en­ter­ing the U.K. for Aldi Sued and Lidl to con­trol about 5 per­cent of sales by the early 2000s — but the dis­coun­ters have proved to be a threat to ri­vals’ prof­its, even with small mar­ket share. Wal-Mart and Kroger, the two largest gro­cers in this coun­try, have the scale to fight the price war, but other chains could be in trou­ble.

“The smaller chains are go­ing to strug­gle to meet the price com­pe­ti­tion, said Mikey Vu, a part­ner in the re­tail prac­tice at Bain & Co. “Los­ing 3 per­cent of sales could put th­ese guys out of busi­ness.”

Dis­coun­ters cur­rently ac­count for about 4 per­cent of the U.S. gro­cery mar­ket, ac­cord­ing to Dunnhumby, and that num­ber could hit 11 per­cent in the next 10 years. Any growth in dis­count gro­ceries will have to come from some­where, and bank­rupt­cies and con­sol­i­da­tion among weaker chains could re­sult.

“That’s the pres­sure point,” said Roger David­son, an in­dus­try con­sul­tant. “The chains that can’t dif­fer­en­ti­ate aren’t go­ing to be around.”

While the Amer­i­can gro­cery store has mostly been im­mune to the on­line shop­ping that has led to store clo­sures in other parts of the re­tail in­dus­try, su­per­mar­kets have taken steps to ap­peal to cost-con­scious shop­pers.

Kroger, Costco, Weg­mans, Publix, and even Wal-Mart have im­proved the qual­ity of their store brands in a bid to build loy­alty with shop­pers. Trader Joe’s has long been pop­u­lar among younger, bud­get-con­scious shop­pers for its pri­vate-la­bel prod­ucts. Prod­ucts that don’t carry name brands, once per­ceived as cheap and low qual­ity, now at­tract deal-hun­gry shop­pers across the in­come spec­trum.

This means that Lidl’s ar­rival comes as Amer­i­cans are al­ready shift­ing to­ward pri­vate-la­bel prod­ucts. The new Lidl stores are bright and clean, with large glass win­dows that let nat­u­ral light flow into the stores. The shelves are placed lower than at a con­ven­tional store, giv­ing the aisles a less cramped feel­ing. The shelves are also eas­ier for work­ers to stock, help­ing keep la­bor costs down. The prod­ucts are slapped onto the shelves in boxes, a fur­ther cost-sav­ing strat­egy. There’s or­ganic baby arugula, an as­sort­ment of fruits and veg­eta­bles, meat and some house­hold clean­ing items.

Lidl is cur­rently ben­e­fit­ing from the cu­rios­ity of lo­cal shop­pers who want to see what the new stores are all about. Last week, the stores were busy through­out the day, with few empty park­ing spa­ces. Television ad­ver­tise­ments had gen­er­ated cu­rios­ity. The ques­tion now is whether cus­tomers will stop to do a full shop or sim­ply pop in to grab a few things — what’s known in the in­dus­try a “fill-in” trip.

Woodrow Haney, a 72-year-old re­tired brew­ery worker, was mak­ing his third trip to the new Lidl store in Winston-Salem. He grabbed three bags of veg­gie chips and a cooler bag from an area where Lidl stocks ran­dom house­hold items. He said he’d prob­a­bly keep shop­ping mostly at Har­ris Teeter, fa­vor­ing their se­lec­tion of wine and cheese.

“The prices on the wine weren’t bad,” Haney said, “but I didn’t rec­og­nize the brands.”

Lidl has plans to ex­pand rapidly in the United States, and an­a­lysts be­lieve that their deals will res­onate with cus­tomers in the mar­kets they en­ter. But there were signs dur­ing a re­cent visit that the com­pany is still iron­ing out its U.S. op­er­a­tions. The stores in Winston-Salem and Spar­tan­burg were strug­gling with meat re­frig­er­a­tors that weren’t work­ing.

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