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A lady shops at Aldi, a retail grocery store chain in Wheaton, Illinois, U.S., April 13, 2017. REUTERS/Nandita Bose |
WHEATON, Ill. (Reuters) – German grocery chain Aldi Inc is trying to
beat the world’s biggest retailer at its own game: low prices.
Already with 1,600 U.S. stores, Aldi’s internal studies show its
prices are 21 percent lower than its lowest-priced rivals, including
Wal-Mart Stores Inc
, according to Chief Executive Jason
Hart. He plans to maintain that gap going forward.
His strategy, previously unreported, centers on adding more
private-label goods, which are a retailer’s in-house brands, to win over
price-sensitive customers, and a massive expansion to further disrupt a
U.S. grocery sector that has seen 18 companies go bankrupt since 2014.
Hart’s plan calls for spending $1.6 billion to expand and remodel
1,300 U.S. stores, and open 400 new stores mainly in Florida, Texas and
on both coasts by end of 2018. He also pledged Aldi will be willing to
change prices more frequently to respond to rivals if needed.
“We are re-merchandising, remodeling, enhancing our product range and
are focused on gaining volume so more customers start their shopping at
Aldi and we are able to complete their shopping lists moreso than we
have in the past,” said Hart, who added Aldi’s U.S. sales have doubled
in five years.
Though it only accounts for only about 1.5 percent of the U.S.
grocery market, Aldi is growing at 15 percent a year, whereas Wal-Mart
currently controls about 22 percent of the market and its U.S. sales are
estimated to grow about 2 percent this year, according to analysts.
Aldi’s growth potential has competitors taking notice. Reuters
reported in February that Wal-Mart is running price tests in 11 states,
pushing vendors to undercut Aldi and other rivals by 15 percent and is
expected to spend about $6 billion to regain its title as the low-price
leader. For a graphic, click http://tmsnrt.rs/2le6v0Y
Price wars are roiling the entire retail sector – from department
stores to discount chains – but it is nowhere as intense as in the
grocery sector. Beyond Wal-Mart’s move to match Aldi on price, German
discount chain Lidl plans to open up to a 100 U.S. stores in a year, and
Amazon.com Inc
is aggressively testing out various
brick-and-mortar grocery formats along with growing Amazon Fresh, its
grocery delivery service. For a graphic, click http://tmsnrt.rs/2qRbNT9
“We have not seen anything like this in the grocery sector in the
United States before,” said Scott Mushkin, managing director of Wolfe
Research and a leading pricing analyst.
Such heated competition risks a dangerous race to the bottom that could result in more retailers shutting their doors.
“Given Aldi’s expansion, Lidl’s entry, Wal-Mart’s response and
Amazon’s growing ambitions in this space, it is fair to expect a
significant acceleration in the bankruptcy and liquidation cycle in this
sector over the next few years,” said Burt Flickinger, managing
director at retail consultancy Strategic Resource Group. For more on
Wal-Mart’s stock performance vs Amazon, click [L1N1IC270]
GOAL: EVERYDAY LOW PRICING
Aldi, has a simple strategy to win more customers: everyday low pricing, according to Hart.
“We don’t confuse our customers with yo-yo discounts, sales, coupons and loyalty cards that require membership fees,” he said.
Four analysts and consultants contacted by Reuters confirmed Aldi now
offers the lowest prices in private label consumer products in the
states it operates, although they did say Wal-Mart is gaining ground in
the states they are conducting price tests.
Depending on the product, Aldi’s prices are cheaper than most rivals’
private label items and even most branded items, analysts said. Hart
said the 21 percent difference in price is calculated by monitoring
competition on a basket of groceries.
Aldi counts on its no-frills shopping experience to help keep costs
low, and limits much of its inventory to items that sell in huge volume.
But its focus on offering far more private label items than branded
products is central to allowing Aldi to adjust pricing whenever it
chooses, Hart said.
Aldi and Wal-Mart do no break out the figures, but analysts including
Mushkin and Flickinger say Aldi carries about 1,200 stock keeping units
(SKUs) or type of products, 90 percent of which are private label.
Wal-Mart stocks about 30,000-40,000 SKU’s of products similar to ones
Aldi sells, and only 30 percent of that are private labels.
That different product mix can potentially make it more difficult for
Wal-Mart to adjust prices because it often first needs buy-in from
suppliers, and many times faces push back from packaged goods makers
like Procter & Gamble
, Unilever and even
smaller brands. Such vendors fear steep discounting can erode the value
of their brands, analysts said.
A Wal-Mart spokesman declined comment, saying the company would not
comment on a competitor’s strategy. P&G and Unilever did not respond
to Reuters requests seeking comment.
But the explosive growth in private label products is on the radar of
Wal-Mart Chief Executive Doug McMillon. Last month he told analysts
that private label goods will play an even more important role as the
widespread availability of branded products online will compress those
products margins over time.
“Aldi is disrupting the sector the way Wal-Mart did when they started,” said Strategic Resource Group’s Flickinger.
STEPPING UP THE GAME
Aldi’s aggressive push to remodel its stores will allow it to add new
private label merchandise in rapidly growing categories like fresh
food.
“The remodels are aimed at increasing our volumes which means more
purchasing power that will help us lower prices further,” said Scott
Patton, Aldi’s vice president of corporate buying.
At a recent visit to an Aldi store in Wheaton, Illinois Reuters found
newer-looking shelves, wider aisles and brighter lighting than a
typical Aldi store. There was also a bigger assortment of fresh,
organic, gluten-free products and antibiotic-free meats versus what it
stocked earlier – categories Aldi said is growing the most rapidly at
its stores.
For example, its Simply Nature range of private-label products grew 53 percent to $300 million in 2016 from a year ago.
Aldi has also opened stores close to Wal-Mart’s supercenters to
benefit from its budget-conscious shoppers. Its total store count of
2,000 stores by the end of next year will be about 42 percent of
Wal-Mart’s U.S. store base.