A red and white flag of the Statue of Liberty, emblazoned with “100% made in the USA”, greets shoppers at the entrance to a new grocery store in Hackensack, New Jersey. Inside, the shop is buzzing with shoppers scooping up watermelons, hot dogs and other supplies for July 4 barbecues.
The store’s debut is one of hundreds that Aldi, the German discount grocer, has planned as part of a $3.4bn expansion drive across the US. The company, looking to capitalise on the annual sales spike for America’s independence day, introduced itself in the suburb of New York as the “first stop 4th of July shop”, filling the store with promotions for ground beef at $1.79 a pound, star-spangled-banner bamboo torches and patriotic citronella candles.
July 4 is the supermarket equivalent of a Super Bowl moment, with Americans projected to spend more than $7bn, according to the National Retail Federation. But this year’s celebration comes as the $700bn US grocery market is under attack. The price of food eaten at home in the US has fallen for 18 straight months, the longest stretch since the 1950s, which has in turn triggered a price war among supermarket operators which need to boost volumes to maintain revenues.
“It’s absolutely brutal,” says Bryan Roberts, director at TCC Global Retailer, which consults large US grocers.
The battle is only set to intensify as Lidl and Aldi, the German grocers that have ravaged European rivals with a no-frills, low-price strategy, set their sights on the US. Aldi last month said it would increase the number of its US stores to 2,500 in the next five years, while Lidl opened its first US shop on June 15. The next day, Amazon unveiled plans to buy upmarket grocer Whole Foods for $13bn, in a deal expected to upend US food retail.
“The US is about 15 years behind Europe,” says Mr Roberts. “There’s an ‘it will never happen to us’ mentality. Lots of European supermarkets assumed [Aldi and Lidl] stores were for low-income shoppers . . . but they’ve lost 10 per cent of their market share to them.”
He says US retailers’ reactions to German encroachment on their turf have ranged from “insanely methodical research and preparation” to “indifference” from a grocery industry that has fared better against online disruption than other retailers focused on books or electronics.
A number of US grocers are forecasting flat or declining comparable sales growth this year. Kroger last month slashed its profit outlook and reported that gross margins fell 45 basis points during its most recent quarter, as discounting eroded profits.
Amazon’s bid for Whole Foods fired a shot at already beleaguered grocers, with competitors swiftly losing $30bn in market capitalisation as investors contemplated how the ecommerce group might redefine their trade.
James Thomson, a former business development manager at Amazon, says the most important weapon it gains from the deal is customer data.
“Amazon will know exactly what people are buying both online and offline . . . they will know exactly what to put on the shelf,” he says, noting the company can also afford to try out ideas without the pressure for short-term profitability that grocers face. “If you’re a national grocery brand today, you’ve got to be scared out of your mind,” he says. “Amazon bought 400 Petri dishes [by buying Whole Foods’ stores]. There is no such thing as failure to Amazon.”
In this environment more consolidation is likely, says Mr Roberts. Walmart is large enough to compete on prices, he argues, and premium chains like Whole Foods will not be chasing the same customers, but for those “stuck in the middle, it’s like death by a thousand cuts”.
Lidl US says it is “paying attention” to Amazon in light of its move to take over Whole Foods and that competition “keeps everyone sharper”. Liz Ruggles, marketing director for Aldi US, says “the grocery industry has seen many changes over the years . . . but Aldi has never lost focus”.
Aldi first entered the US 40 years ago and has quietly built a chain of 1,600 stores in 35 states. Now, it is ramping up the pace of openings. Lidl plans to open 100 stores along the east coast by next summer.
Aldi and Lidl say their US stores will offer prices up to 50 per cent cheaper than competitors, although analysts estimate the gap to be closer to 15 per cent. A gallon of milk at Hackensack’s Aldi store costs $2.89, compared with $3.50 at the Target less than half a mile away.
Discount groups make up less than 5 per cent of US grocery sales, although Bain expects that to increase 8 to 10 per cent a year as Americans become acquainted with the German discounters.
At Aldi’s Hackensack store Katia, a teacher buying groceries with her husband, says she is impressed by the low prices and gluten-free snacks, but finds the experience less consistent than her mainstays: regional chains Giant and Shoprite. “It seems like the bare minimum,” she says. “I bought figs here yesterday, and came back today for more, and they’re gone.”