YOU might not know it from looking at the cost of everything from burritos to berries, but the United States is on the cusp of a supermarket price war.
Walmart Inc said last week that it would use most of its US$2.9bil in tariff refunds to slash the cost of household essentials.
Just a few months ago, Kroger Co said it would cut prices on thousands of products.
Across the grocery industry, advertised promotions increased by 10% in the 12 months through June 30, according to data provider Numerator.
With consumers under pressure, tariff windfalls, Amazon.com Inc making a fresh push into food and a president not shy about calling out companies he thinks are overcharging, such skirmishes are inevitable.
But there’s another, less obvious, reason for the outbreak of hostilities: German discounters Aldi and Lidl are putting huge firepower behind their American expansions.
If Britain’s experience is anything to go by, this is just the start.
US food retailers must intensify their efforts to combat the no-frills supermarkets – or risk losing valuable sales and market share to the European interlopers.
The increased competition is certainly welcome for hard-pressed US consumers, and the Federal Reserve.
As my colleague Jonathan Levin has noted, food inflation has remained stubbornly high, helping to explain why Americans feel despondent about the economy and persistently rising prices.
It’s no coincidence that the brawl is happening now. Aldi arrived in the United States in 1976, but now has critical scale.
It has just under 2,700 US stores, and plans to have 3,200 by the end of 2028, overtaking Kroger and bringing it closer to the number of large Walmart stores known as supercentres.
Lidl has had a tougher time since arriving in 2017, but Americans are now warming to its US 49-cent butter croissants, and it has more than 200 stores across nine East Coast states.
The German discounters only need a footprint of 10,000 to 20,000 sq ft, so they can make inroads into towns where the giants have long dominated.
A typical supermarket can be up to about 50,000 sq ft, while a Walmart supercentre can be more than 200,000 sq ft.
When a discounter opens, local competition ratchets up for both traditional grocers and big-box retailers such as Walmart and Target Corp, Elizabeth Lafontaine, director of research at Placer.ai, which tracks store visits, told me.
Like Walmart, Aldi and Lidl have penny-pinching cultures.
But unlike the listed food retailers, they’re privately held, giving them more financial flexibility.
According to a survey by analysts at Bank of America Corp in Atlanta in July, Aldi was 12% cheaper on average than Walmart.
While Walmart didn’t comment on the price gap, chief executive officer John Furner told analysts last week that the retailer was gaining market share from its traditional competitors, as well as drug and dollar stores, by cutting prices.
Aldi and Lidl carry only a few thousand product lines, compared with more than 100,000 at a Walmart supercentre.
Retailers that enable customers to buy everything under one roof can charge more – but not much more, as Britain’s food retailers found to their cost.
Although the German discounters arrived in Britain in the 1990s, the great financial crisis sent the cash strapped middle classes searching for cut-price toilet paper and fancy wine.
Britain’s big supermarkets, including Tesco Plc and J Sainsbury Plc, were caught off guard, forced to sacrifice profit to offer better value for money.
Aldi and Lidl now control about 20% of the United Kingdom grocery market, compared with less than 4% in 2007.
The United States now looks to be approaching a similar tipping point.
Walmart, for one, seems aware of the danger, perhaps because it used to own British supermarket Asda Group and has been tracking the growth of Aldi for years.
The United States market leader said last week that it had implemented about 11,000 temporary price reductions, known as “rollbacks”, at the end of the second quarter, up from 7,200 in the preceding three months, and double the typical level of about 5,000.
Reductions were targeted at products where costs had risen the most, such as ground beef.
This appears to be paying off. Walmart’s foot traffic in July has been stronger, also helped by back-to-school selections, Lafontaine told me.
Walmart’s scale means it can wring the biggest discounts from suppliers.
Grocery sales in stores open at least a year rose by a percentage in the mid-single digits in the second quarter, and manufacturers typically reserve the best deals for retailers that can sell the biggest volume of goods.
The company has other levers it can pull, like its fast-growing online business.
Although Aldi has an agreement with Instacart, Lidl doesn’t offer home delivery.
Target is taking a different approach, offering buzzy new food and drink lines.
With Aldi and Lidl stocking only a limited assortment, there’s scope to sell the things they don’t, particularly if the products offer value for money.
But US food retailers should consider adopting some of their British peers’ strategies for tackling the no-frills supermarkets.
One is specifically matching Aldi and Lidl on prices, and communicating this clearly to customers in advertising and shelf-edge labels.
Another is offering special, even lower, individual prices to members of loyalty programmes, such as Walmart Plus and Target’s Circle (which already gives cardholders 5% off at checkout), in order to prevent shoppers from trying out the new arrivals.
Tesco and Sainsbury, Britain’s two biggest supermarkets, have implemented both of these tactics.
They’ve successfully put a brake on Aldi, although Lidl continues to grow strongly.
But it’s taken UK grocers more than a decade and billions of pounds of investment to stem some of the discount tide.
The prospect of more price punch-ups is good news for Americans facing a cost-of-living crisis.
For investors in US food retailers, not so much. — Bloomberg
Andrea Felsted is a Bloomberg Opinion columnist covering consumer goods and the retail industry. The views expressed here are the writer’s own.
