Aldi raises stakes in U.S. price war with Wal-Mart

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 (WMT.N), 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 aretailer’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.

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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 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, andAmazon.com Inc (AMZN.O) is aggressively testing out various brick-and-mortar grocery formats along with growing Amazon Fresh, its grocery delivery service. For a graphic, click 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.

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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 vsAmazon, click [L1N1IC270]

GOAL: EVERYDAY LOW PRICING

Aldi, has a simple strategy to win more customers: everyday low pricing, according to Hart.

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“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 lowestprices 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.

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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 (PG.N), Unilever (ULVR.L) 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 seekingcomment.

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.

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“Aldi is disrupting the sector the way Wal-Mart did when they started,” said Strategic Resource Group’s Flickinger.