Grocery chains in price-cut war playing it rough
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.