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US grocery battle heats up with German retailers seen as 'disruptive' force US grocery battle heats up with German retailers seen as 'disruptive' force
2 Hours Ago | 00:39
Supermarkets are putting on a brave face but a new German entrant opening its first U.S. stores Thursday is about to shake up the already highly competitive domestic grocery industry.

Lidl, one of the world's largest retailers, plans to open 10 small-format U.S. grocery stores Thursday at locations in Virginia, North and South Carolina. They intend to open an additional 20 stores on the East Coast this summer and have up to 100 stores planned to open within a year from New Jersey and Pennsylvania down to Georgia.

"The Lidl launch is going to have a dramatic impact on supermarkets and other people selling fast-moving grocery products," said Bill Bishop, a longtime grocery consultant and chief architect of Brick Meets Click, an Illinois-based food retail advisory and research firm.

Privately based Lidl, owned by Germany's Schwarz Group, comes into the U.S. market with expertise gained from operating stores in 27 countries throughout Europe. Schwarz Group ranks as a top-five retailer worldwide with annual revenues in excess of $100 billion.

The small-store format will reduce the retailer's overhead costs and its no-frills approach means customers will bag their own groceries and there's reduced labor costs. There's also a focus on private label brands, which tends to be higher margin and provide more opportunities for deep discount pricing.

"We're building on the foundation that's made Lidl so successful across Europe," said Will Harwood, a company spokesman. He added that the assortment of foods and style of the U.S. stores is the result of focus group tests done with American consumers.

About 90 percent of Lidl's products will "premium private label," according to Harwood. He said about 80 percent of the food will be sourced from the U.S. and the chain also will have European specialty products.

Wolfe Research analyst Scott Mushkin said "center of store" private label food items can sometimes save consumers up to 50 percent off the cost of the name brands. He used the example of major brand of mustard to illustrate how consumers today might not just enjoy a savings on the unit cost of the item by buying private label but also could get a larger size container for that discounted price.

"The quality has come up significantly on private label so now you can get brand equivalent quality or higher for private label pricing," said Mushkin.

One of Lidl's arch competitors in the U.S. market is another private German-based retail behemoth, Aldi, which just this week announced its own ramp up nationwide and plans to invest about $5 billion over the next five years.

"Private label is what we're focused on and we have a tremendous head start," said Scott Patton, vice president of corporate buying for Aldi U.S. "Seeing the reaction from competitors who try to copy our playbook is a testament that the Aldi blueprint works."

Bishop forecasts Lidl could reach about 1,000 stores over the next five years and generate between $21 billion to $27 billion in revenue by that time. He also believes that Lidl's U.S. expansion, when combined Aldi's aggressive nationwide push should have a "very disruptive effect" on U.S. retail grocery landscape by "compressing" the overall market for other players.

Loop Capital analyst Andrew Wolf said Lidl's entry into the U.S. market should concern Wal-Mart Stores the most but he believes other food retailers may feel it too, especially with Aldi already proving to be a formidable force in the discount segment of the U.S. grocery business.

"Clearly, the traditional [supermarket] industry wishes they weren't coming," said Wolf. "Essentially, Aldi and Lidl appear to be in a race. They are going right after Wal-Mart's customer."

Last month, there were reports Wal-Mart was taking price drops in major U.S. markets where Kroger and Aldi compete.

Analysts say Kroger already is feeling the impact of Aldi's expansion and has around a dozen stores currently in Kroger's home town of Cincinnati and more planned in the region. Aldi also has stores in many other markets where Kroger operates and Lidl also is planning outlets in many locations where Kroger has a presence.

Kroger, operator of nearly 2,800 stores in 35 states, is scheduled to report its fiscal first-quarter results on Thursday before the market opens and its conference call with industry analyst may include an update of additional price investments it might be taking to stay competitive as well as potential impacts on margins.

Last month, Kroger CFO J. Michael Schlotman was asked about new entrants and the smaller-format stores during a Goldman Sachs investment forum and he seemed to downplay it. He indicated the company already has smaller format stores all the way up larger ones and is doing various tests with newer concepts.

"Kroger is probably facing its most trying time since the Wal-Mart invasion of the late 90s," said Mushkin. "The challenges facing the business over the next 12 to 24 months have done nothing but grow."

Kroger declined comment for this story, citing a quiet period ahead of its earnings report.

Reflecting on the increased competition in grocery space, Wal-Mart spokesman Phillip Keene said, "As a company, we feel good about our plan and our customers are telling us we are strong as a business and headed in the right direction, both in-store and online."

Aldi, which currently operates more than 1,650 discount supermarkets in 35 states, this week announced a goal of 2,500 stores by the end of 2022. That would make it the third-largest grocery store by outlet count in the nation, according to Supermarket News. Today, Aldi operates over 10,000 stores in 18 countries and on four continents.

Bishop believes it's inevitable that "marginal stores" operating in the grocery segment will lose share, get sold or go out of business in future years due to the hard discount food chains such as Aldi and Lidl. As a result, he said the two discounters could capture a larger share of the overall U.S. food retail industry.

"They will take a bite out of the market and shrink the market so all of the incumbents are going to be competing for their fair share of a smaller market," said Bishop.

Bishop estimates the Lidl and Aldi's combined sales will exceed $50 billion in the next five years and potentially reach $67 billion. At the same time, he sees them together eventually reaching at least 15 percent grocery market share in the mid-Atlantic region but believes Wal-Mart Stores will still hold onto a larger share.

By 2021, Lidl's U.S. sales could reach between $21 billion to $27 billion, according to Bishop's estimates. He sees Aldi's U.S. sales growing to between $32 billion and $40 billion during the same period, up from an estimated $16 billion to $18 billion at present.
Wow, so grocery stores are now going global as well. Just wow. Globalism at its finest.

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