The biggest threat to Wal-Mart's grocery dominance? It isn't Amazon

As Wal-Mart turns its attention to boosting its e-commerce fortunes, fast-growing competitors from Germany are looking to play spoiler in the U.S. grocery space.

Between its $3.3 billion acquisition of web commerce upstart Jet and increased investment in its digital operations, Wal-Mart Stores is getting a warm reception on Wall Street these days.

The brick-and-mortar retail giant's online efforts have nothing if not room to grow: Wal-Mart increased its e-commerce sales just 0.4% in its most recent quarter, with online sales representing just 3.1% of its total revenue, according to eMarketer data supplied to Retail Dive. By comparison, arch-nemesis Amazon generated $32.7 billion in e-commerce sales during the third quarter, up 29% year over year. 

Wal-Mart is responding by integrating Jet's signature “smart basket” dynamic pricing technology into its flagship Walmart.com site and shifting the emphasis of its $11 billion capital investment strategy to digital sales, slowing previously planned physical store openings as a result. Moody’s Investor Service, for one, expressed confidence in the approach. 

“Wal-Mart's statement that it was pursuing online sales growth rates of 20%-30% reflects the emphasis the company continues to place on this critical channel," Moody's lead retail analyst Charlie O’Shea said in a statement emailed last month to Retail Dive. "Our view is the low end of this range would be impressive, and would be sufficient to justify the increased investment in the online channel.”

For many analysts, the beauty of Wal-Mart’s expensive e-commerce strategy is that it acknowledges how formidable Amazon is. “Wal-Mart is a brick-and-mortar retailer that’s trying to strike a balance and trying to remain relevant,” wrote Laura Kennedy, Kantar director of retail insights, according to MarketWatch. “By our account, Wal-Mart and Amazon are neck-and-neck with penetration in American households… It’s a battle to be America’s retailer because there’s a lot of competition.”

But e-commerce may not be Wal-Mart's only weakness. Redoubled competition from no-frills grocery companies hailing from Germany — fast-growing Aldi and sibling Trader Joe’s, and U.S. newcomer Lidl — pose a dramatic threat to Wal-Mart's grocery sales, which account for more than half of its revenues.

Nick Egelanian, president of retail real estate consulting firm SiteWorks, says that Wal-Mart is distracted by Amazon in particular and digital sales more generally, and doesn’t seem to realize there’s another, more dangerous shark in the water.

“If I ran Wal-Mart, I would be much more concerned about [Lidl coming to America] than about Amazon,” Egelanian told Retail Dive.

European takeover

Lidl, part of the Schwarz Group retail conglomerate (Europe's largest retailer, and one of the largest in the world), operates nearly 10,000 stores in 26 countries throughout Europe. It established its U.S. headquarters in Arlington County, VA last year; a Lidl U.S. spokesperson told Retail Dive that while the grocer hasn’t yet determined how many stores it will ultimately open nationwide, its focus is on the East Coast, from New Jersey and Pennsylvania down to Georgia. Lidl's first stores, with their preferred store footprint of 36,000 square feet, will open by 2018, the spokesperson added.

Aldi was founded in 1946 by brothers Karl and Theo Albrecht, and 15 years later split into into two companies, Aldi Nord and Aldi Süd, each operating independently within designated areas of Europe. Aldi has followed a similar approach since expanding to the U.S. in 1973, with Aldi Süd running Aldi’s nearly 1,600 stores across 34 states while Aldi Nord oversees more than 450 Trader Joe’s stores after acquiring the similarly low-key California retailer in 1979.

Aldi is in the midst of what it calls an accelerated expansion plan that will expand its U.S. footprint to nearly 2,000 stores by the end of 2018, an increase of almost 50% in five years. (Trader Joe's is especially tight-lipped about new store openings and didn't respond to a request for comment, but runs a web page to invite recommendations about where to establish new stores, and another page features a slew of new store announcements.)

Both Lidl and Aldi run their stores with limited merchandising and bottom-barrel prices, an approach that defies the common notion that the U.S. consumer wants choice. For example, you may only find one type of peanut butter in their stores, offered in just one size, and it’ll be a store-label unbrand at that. But their prices are as much as a third lower than many rivals. Moreover, Lidl also sells merchandise like apparel and home goods, further boosting its consumer appeal.

Aldi and Trader Joe's have been attracting loyal customers in the U.S. regions where they operate, and as Lidl readies its entry into the United States, many observers are wondering what its arrival means for the future of the grocery category. Experts repeatedly told Retail Dive to look at Britain’s grocery wars to understand the devastation that could be wrought by Aldi and Lidl: Wal-Mart’s Asda U.K. grocery unit and rival supermarkets Sainsbury, Tesco and Morrisons have been slashing prices to neutralize the German threat. 

“There are phony price wars, and there are real price wars. This is a real price war,” Fraser McKevitt, head of retail and consumer insight at market research firm Kantar Worldpanel, told the Financial Times in 2014, adding that larger grocers were losing market share “hand over fist.” 

Although the depressed post-Brexit British pound has slowed Aldi and Lidl's momentum somewhat two years on, not much else has changed since McKevitt’s red flag... and that has some analysts warning that Lidl and Aldi could do to Wal-Mart in the U.S. what they did to Wal-Mart in Europe.

Keep in mind that Wal-Mart limped away from its German grocery effort in 2006, selling its 85 stores to homegrown German retailer the Metro Group at a $1 billion loss after an eight-year struggle to establish a beachhead there, losing hundreds of millions of dollars a year in the process.

Asda has faced similar challenges in the U.K. market, with sales falling for seven straight quarterly periods as more shoppers head to Aldi and Lidl. "[Asda] was the greatest division a few years ago,” Howard Davidowitz, chairman of New York retail consulting and investment banking firm Davidowitz & Associates, told Retail Dive. “Then Aldi and Lidl went across England, and now Asda is doing very badly.”

London-based Bloomberg columnists Andrea Felsted and Chris Hughes said in August that it’s “time for Wal-Mart to cut Asda's apron strings” in the U.K., too. “The U.S. retail giant has struggled with the U.K. supermarket it bought for 6.7 billion pounds ($8.9 billion) in 1999,” they wrote. “A sale to a private equity firm would make sense” considering that U.K. grocery retailers, already battered by the ongoing price war, are unlikely to be interested.

Instead, Wal-Mart (which declined to comment on this story) appears to be shoring up Asda's resources. A year ago, Asda announced a turnaround effort including price cuts and store improvements as well as a halt to plans for "click-and-collect" sites, and in June, Wal-Mart replaced outgoing Asda CEO Andy Clarke with Sean Clarke, most recently president and CEO of Wal-Mart China.

Wal-Mart vowed to play hardball with competitors. “With the U.S. business recovering, you can expect that we will shift the balance from protecting profit to protecting share,” David Cheesewright, Wal-Mart International CEO, told reporters at the company’s annual investor meeting earlier in June, according to the Financial Times

Wal-Mart's fresh challenge

Of course, Wal-Mart can’t exactly cut out of the U.S. grocery market: It's the country’s largest grocer, with nationwide sales of $167 billion last year. At Wal-Mart's 46th annual shareholders meeting in June in Fayetteville, AR, U.S. CEO Greg Foran noted the company had doubled sales of local produce in the U.S. over the last six years, and said executives are “focused on winning in fresh” and building direct relationships with grocery suppliers. Wal-Mart has also been assertive about delivery and in-store pickup services for its grocery customers and is now testing specialized food carts to better present and preserve fresh foods. 

But Wal-Mart continues to underestimate Aldi’s and Lidl’s appeal to its own customers, experts maintain.

“Aldi is soon going to have 2,000 stores, and I’m just telling you how tough these people are. They have rock-bottom prices, and they have a formula that lets them get to those rock-bottom prices, similar to Costco,” Davidowitz said, drawing comparisons with the warehouse retailer's limited assortment and bare-bones in-store fulfillment, sans baggers, elaborate shelving and high-grade lighting fixtures. 

Not to mention that Wal-Mart’s “always low prices” aren’t remotely lower than Aldi and Lidl, Davidowitz said. “Their prices are 30% below Wal-Mart. 30%! In the food business! They have one kind of ketchup, and it's private label, but people don’t mind that. Not at that price.”

Wal-Mart isn’t even out-pricing its U.S. grocery rivals, Davidowitz added, making them all the more vulnerable to the price whacks ahead. “In the days when I traveled to stores with [Wal-Mart founder] Sam Walton, no one had lower prices,” he said. “But Wal-Mart, under 15 or 20 years of misguided management, their prices aren’t that different than their other competitors. Then along comes Lidl. They’re going to fry Wal-Mart’s brains.”

And don't let the bare-bones approach fool you, Davidowitz adds: Aldi and Lidl are very sophisticated players.

“Aldi and Lidl really know what the hell they’re doing, and Lidl is even more of a direct threat to Wal-Mart than Aldi and Trader Joe’s,” he said. “Their stores are bigger [than Aldi and Trader Joe’s], and they have all kinds of other merchandise.”

That makes Lidl particularly worrisome for Wal-Mart, especially since its stores are likely to be located within close physical proximity of Wal-Mart locations in the U.S., says SiteWorks' Egelanian.

“Wal-Mart has tended to be successful in most of what they’ve done, but Lidl is coming in with soft goods" in addition to groceries, Egelanian said. “It’s like a new niche, and Wal-Mart isn’t good at creating new niches. Look at their small Walmart Express stores [all of which Wal-Mart closed earlier this year]. They’re throwing their hands up and saying, 'We’re just going to the web.'"

So while Amazon remains a supremely formidable threat to its future (especially given its own grocery aspirations), Wal-Mart can no longer ignore the danger coming from across the Atlantic, and must dig in its heels to survive.

"These European guys are very good, very well tested models," Egelanian said. "Lidl is going to make sense to Wal-Mart customers."

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