Back in February we reported that as America’s deflationary wave spread through the grocery store supply chain, the scramble for America’s bottom dollar was on, and it prompted America’s largest low-cost retailer Wal-Mart to not only cut prices, but to squeeze suppliers in a stealthy war for market share and maximizing profits, a scramble for market share which is oddly reminiscent of the OPEC 2014 price fiasco and is certain to unleash a deflationary shock across wide portions of the US economy.
As Reuters reported at the time, Wal-Mart had been running a “price-comparison” test in at least 1,200 U.S. stores and squeezing packaged goods suppliers in a bid to close a pricing gap with German-based discount grocery chain Aldi and domestic rivals like Kroger. Citing vendor sources, Reuters said that Wal-Mart launched the price test across 11 Midwest and Southeastern states such as Iowa, Illinois, and Florida, focusing on price competition in the grocery business that accounts for 56% of the company’s revenue.
Notably, while Wal-Mart was considering cutting prices to match its competition, the near-monopoly retailer was also seeking offsetting cost cuts from its own vendors, in what could lead to a deflationary shock that would ripple across the entire US grocery store supply-chain, with dropping prices leading to margin collapse inside the entire industry, and eventually a default domino effect.
And, as we also reported, as part of the relentless competition among the largest grocers Wal-Mart would have no choice but to proceed with even more aggressive price cuts in the future. The reason for this is that Germany-based discount grocer Aldi had emerged as one of the relatively new rivals quickly gaining market share in the hotly competitive US grocery sector, which already boasts Kroger, Albertsons Cos Inc and Publix Super Markets as stiff competitors on price.
A second Germany-based discount grocer, Lidl, was planning to enter the U.S. market this year, which together with German Aldi would pose a serious threat to Wal-Mart’s U.S. grocery business.
Now, thanks to a follow up by Reuters, we can safely assume that the upcoming grocery price war is about to turn nuclear because the abovementioned German discount grocery chain Lidl, which is opening its first U.S. stores this summer and is eager to capture US market share at all costs, said its products would be up to 50% cheaper than competitors… which are already caught up in a margin-crushing price war.
“This is the right time for us to enter the United States,” Brendan Proctor, chief executive officer for Lidl U.S., told Reuters at a media event in New York late on Tuesday. “We are confident in our model. We adapt quickly, so it’s not about whether a market works for us but really about what we will do to make it work.”
And as the first order of business, what Lidl will do is generate huge losses by massively undercutting prices in hopes of capturing market share from established names like Walmart, Kroger, and Albertsons. Think Uber but for grocery stores.
There is already a case study of what happens next, should the two German invaders prove successful. Lidl, which runs 10,000 stores in 27 countries, and German rival Aldi Inc have already upended Britain’s grocery retail market, hurting incumbents like Tesco Plc and Wal-Mart Stores Inc’s ASDA supermarket chain.
Looking ahead, Lidl said it would open its first 20 U.S. stores in North Carolina, South Carolina, and Virginia, starting on June 15. Eighty more will follow in the United States within the first year, which Procter said would create 5,000 jobs. Analysts cited by Reuters estimate the company will have more than 330 U.S. stores by 2020.
The stores will be 20,000 square feet in size and have only six aisles. The retailer’s in-house brands will account for 90 percent of the products.
And while the latest German invasion may lead to dramatic changes within the hierarchy of established US grocers, one thing is certain: the US consumer is about to be the biggest winner yet again, as prices for (subsidized) groceries are about to plunge across the nation.
Via Zero Hedge