Aldi reacting to Walmart's efforts to become low price leader

Recent reports say that Aldi is responding to Walmart's aggressive pricing in an effort to remain the nation's overall grocery price leader. Aldi's adoption of a more flexible pricing strategy comes as the company plans to spend $1.6 billion on store remodels (see "Aldi remodeling stores ahead of Lidl openings") and open about 400 new stores by the end of next year.

Aldi says that its remodeling strategy will expand its ability to merchandise more private-label products in certain fast-growing categories, including perishables.

Analysts believe that Aldi's strategy, combined with Walmart's price cuts and Lidl's entrance into the market, will put pressure on traditional food retailers. These analysts suggest that traditional supermarket operators should examine their own lowest tier private label assortments.

According to Jon Hauptman, an analyst with Willard Bishop, having a wide range of economy private labels throughout the store could help retailers enhance their price image.

"It is incredibly important to have a robust assortment of economy or second-tier private label items through the store, so that in those categories in which customers are willing to make a trade-off in order to save some money, that trade-off item is available," Hauptman said.

Walmart is reinvesting in its own Great Value line, according to CEO Doug McMillon. McMillon said in March that the increasing availability of name-brand products online will compress their margins over time, which highlights the need for a strong private label offering.

Aldi's sales in 2016 were about $12.8 billion, up 9.4% from the previous year.

Aldi and Lidl planning shake-up of U.S. grocery landscape

A Wall Street Journal article last month said "the two scrappy German discounters that have wreaked the most havoc in Britain are ratcheting up their U.S. ambitions." The discounters are, of course, Aldi and Lidl.

Aldi currently has over 10,000 stores in 18 countries. (Aldi is actually broken down into Aldi Nord and Aldi Sud, a breakup that occurred in 1960 as a result of a rift over cigarette sales between the Albrecht brothers. Aldi Sud operates Aldi in the U.S. and a number of other countries, while Aldi Nord includes Trader Joe's U.S. stores.) Aldi recently said it would invest about $3 billion into opening new stores in the U.S., and that it plans to increase its U.S. store count from 1,400 to 2,000 by the end of 2018.

The very next day, Lidl, which has over 10,000 stores across Europe, outlined its plans to enter the U.S. market, most likely in 2017 or 2018. As brokers, landlords and real estate developers up and down the east coast know, Lidl has been aggressively pursuing sites for the past year. Lidl is owned by Schwartz Group, Europe's largest retailer.

In Great Britain the success of Aldi and Lidl has contributed to continuing problems - falling share prices, lost jobs and closed stores - for the country's traditional grocers. On the other hand, the success of these discounters has proven to be a boon for consumers in the form of lower prices and more convenient shopping.

The two food retailers "are on everybody's radar in the U.S. today," according to Craig Rosenblum, a retail consultant at Willard Bishop.

With Aldi's aggressive growth plans and Lidl's planned entry into the market, U.S. discounters like Walmart and Save-A-Lot are on notice.

Sales in non-traditional grocery formats up 3.1%, according to study

An annual survey conducted by Barrington, IL firm Willard Bishop revealed that sales within traditional grocery formats increased 1% to nearly $523 billion in 2013, while sales within non-traditional formats rose 3.1% to about $442 billion.

The market share for traditional formats decreased 0.5% to 46%, while the market share for non-traditional formats increased 0.4% to 39%.

In addition, the survey found that convenience store sales accounted for 15% of sales - up from 14.9% - with stores selling gas accounting for 12.8% of the total.

E-commerce sales for food and consumables, which are included in the non-traditional grocery category, rose 13.7% to $21.1 billion, and the report projects that e-commerce sales will grow at a rate of 9.5% per year through 2018.

Food sales growth:

Fresh formats - 10.4%
Dollar stores - 8.9%
Limited-assortment stores - 4.1%
Supercenters - 4%
Super warehouses - 3.5%
Small grocery stores - 2.4%
Convenience stores - 2.4%
Wholesale clubs - 2.3%
Drug stores - 1.4%

Experts weigh in on Target's PFresh model

Tuesday's Supermarket News story on the impact of Target's PFresh food sections, which are in 875 Target stores and typically cover about 17,000 square feet, quoted several industry experts. Here's a sampling:

From Neil Stern, managing partner, McMillan Doolittle (Chicago):

- "The way Target has set up PFresh allows it to talk about a grocery offering without really competing in fresh. It's more of a strategic move to give the appearance of being in the food business without actually committing the space and resources to doing it, which is a very deliberate and very clever strategy."

- "If Target's market share moves from 3% to 4%, that's substantial in terms of dollars. But the fact that stores with PFresh are so spread out indicates that Target is getting those sales from a lot of players in a lot of different markets."

- "The biggest challenge for PFresh is the 'fresh' part. Perhaps Target needs to put 'fresh' in quotes because it's offering only a limited assortment of produce, meat and bakery items."

- "Target's aim is to achieve a balance where it can take advantage of increased traffic for food at low margins while selling fashion and home products at higher margins."

From Mark Wiltamuth, managing director, Morgan Stanley (New York):

- "PFresh is just one of many alternate formats that are pressuring grocers with new capacity. It competes indirectly with supermarkets - it's not a concerted strategy aimed at supermarkets, nor is Target trying to provide a full supermarket offering."

- "There may be some markets where PFresh is exerting more pressure, such as Philadelphia, Minneapolis and parts of California... But for most operators, PFresh is just there - it's not a debilitating factor for most grocery stores."

From Jim Hertel, managing director, Willard Bishop (Barrington, IL):

- "Until the assortment is more credible, particularly in perishables, Target is not going to have enormous share numbers. As a result, any impact is only at a micro level because Target's offering is quite a bit edited compared with a traditional supermarket... It's not going to become a food destination."

- "A Walmart supercenter is a food destination because you can do a full stock-up shop there. If Target were aiming to be a destination store for groceries, then the SuperTarget format would be better at driving traffic."

- "Management feels a larger fresh offering would mean more shrink, more labor and more expense, and it decided there were better ways to deploy capital. The company obviously has internal benchmarks for how much it wants to invest in food. The thinking is, let's enhance our business when people are already in the stores."

From David Rogers, principal, DSR Management Systems (Deerfield, IL):

- "PFresh was intended to generate more traffic to help Target through the recession in good shape, and it's doing its job. But I question the competitiveness of PFresh as a long-term offering because it lacks the range and selection to attract shoppers on a regular basis. It's only a convenience offering, and Target is not a convenience store."

From Bob Gorland, vice president, Matthew B. Casey (Harrisburg, PA):

- "I've been in stores on a Saturday morning where the out-of-stocks were as high as 50%. Target has a real problem with out-of-stocks in perishables, particularly meat, and that hurts, especially on advertised items."

From Adrianne Shapira, analyst, Goldman Sachs (New York):

- "Target has confused shoppers by emphasizing food and low prices at the expense of its cool image. These were good moves during the recession, but the pendulum may have swung too far, attracting more medium- and low-income shoppers at the expense of the higher-end shopper."

Bottom Dollar planning at least 9 stores in Pittsburgh

The Pittsburgh Tribune published a story last week about Bottom Dollar's expansion to the Pittsburgh market. According to the story, nine stores are in the works (or thought to be, anyway) for the area. If the growth of stores in Philadelphia is any indication, the number could rise quickly.

At this time last year we had just begun to talk about Bottom Dollar's entry to the Philadelphia market. Now we have 16 stores operating in the Greater Philly region, with more planned. I hear they aren't performing up to expectations, but they're obviously doing well enough to spur continued expansion - here and to our west.

The Tribune story also made some interesting points, including the following:

• Sales in the limited-assortment grocery segment (which include growing retailers Bottom Dollar, Aldi and Save-A-Lot) increased 14.4% to $27.1 billion in 2010, according to a report by Willard Bishop, a food retailing consultancy.
• "At one time, grocers had most of your wallet for grocery purchases," said a Willard Bishop managing partner. "Today, they only have about a third."

I think Bottom Dollar will be around for a while, although I expect parent company Food Lion will eventually have to close some of the under-performing stores in the Philadelphia area. It'll be interesting to see how they are received in Pittsburgh.

Related blog posts:

The subtle differences between Aldi, Bottom Dollar and Save-A-Lot

I stopped in the North Wales Bottom Dollar Food Store...