Why Wal-Mart Is Worried About a German Grocer

By Sarah Nassauer and Heather Haddon Features Dow Jones Newswires

BENTONVILLE, Ark. -- Here at the headquarters of the world's largest retailer, Wal-Mart Stores Inc. executives are bracing for the arrival in the U.S. of a European grocer with a track record of disruption.

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Lidl, a German discount chain whose entrance in the U.K. in 1994 has helped upend that country's grocery sector, says it will open 20 stores in Virginia, North Carolina and South Carolina by summer, with some arriving in the next few weeks. Two hundred or more are planned in the coming years, according to real-estate analysts.

Ratcheting up the pressure: Another German discounter, Aldi, which entered the U.S. market in 1976, is fortifying its American business. It plans to spend $1.6 billion to remodel and expand 1,300 U.S. stores and build 650 more by next year.

Wal-Mart executives have been laying the groundwork to compete, working to hone store-brand product selection, lower some prices and get the basics right, like speeding up checkout lines, its chief executive, Doug McMillon, said in an interview last month.

Since Mr. McMillon became the company's fifth CEO in 2014, Wal-Mart has focused on improving stores, moves that have helped boost sales. "The work that's been done to be positioned to compete started happening two years ago," he said.

With nearly $100 billion in sales and around 10,000 European stores, Lidl and Aldi have eaten into large European grocers' territory and sales with low-price, popular store brands and fresh produce. In the U.K., where Wal-Mart's local Asda chain already competes with Lidl and Aldi, Asda sales haven't grown in the past 13 consecutive quarters. Aldi and Lidl now command 12% of the British market, growing steadily while Asda, Tesco PLC and other local grocers' shares have fallen, according to Kantar Worldpanel.

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Of the U.S. market, where the company sees an opportunity for inexpensive, high-quality groceries, William Harwood, a Lidl U.S. spokesman, said: "We feel we'll be able to plug some key gaps that exist."

Speaking to a group of Wal-Mart suppliers in Bentonville last month, Kantar Retail director Mike Paglia said to expect the first Lidl stores to open around Lidl's Arlington, Va., U.S. headquarters, with fresh produce in the front of the locations, along with abundant natural light and a wine selection.

Lidl is working to build around 150 stores, according to Beitz and Daigh Geographics, a location analytics company that scans property transactions. Mr. Harwood declined to elaborate on the company's expansion plans or strategy but said that in addition to the 20 stores in Virginia and the Carolinas, Lidl would open up to 80 more stores on the East Coast by the summer of 2018.

Lidl's U.S. chief executive, Brendan Proctor, is expected to discuss the timing of the store openings and its expansion during an event in New York City Tuesday.

Lidl's arrival and Aldi's growth come at an already fraught time for the U.S. grocery industry. Food-price deflation has eaten into grocers' earnings for the past 17 months as of April, the longest stretch of year-over-year declines in retail food prices since 1956.

Though that trend could be easing, economists say, Wal-Mart is contributing to it by making its own price cuts to shore up its low-cost image. Its executives have told suppliers that its prices should be 15% lower than competitors' 80% of the time, as it fights online retailer Amazon.com Inc. and other discounters.

Kroger Co., the biggest U.S. supermarket chain by stores and revenue, in March reported its first quarterly decline in same-store sales in 13 years, while Publix Super Markets Inc. said this month its sales fell for the first time since the recession.

Kroger executives have visited European cities where the discounters operate to learn how other retailers have fought back. Kroger, which operates under the Harris Teeter banner near Lidl's planned Southeast stores, will continue to cut prices and make sure its store brands can compete with the discounters, Chief Financial Officer Michael Schlotman said.

Procter & Gamble Co., Nestlé SA, Unilever PLC and other consumer-goods companies count on Wal-Mart for millions of dollars in annual sales, so many are worried that price competition among retailers could squeeze them as well. One major supplier to Wal-Mart is considering offering distinct products -- for example, a different size or flavor than Wal-Mart carries -- to Lidl as a way to avoid a pricing battle with Bentonville.

Wal-Mart stores need to be as convenient as possible to compete with discount retailers, said Mr. McMillon. To that end, the company is testing a system that lets shoppers scan products with a smart phone while shopping to bypass registers. It is also testing express lines at the pharmacy and money order counters.

"We still have some more to address," he said. "But we are on a path to doing so."

Not everyone is convinced that Lidl and Aldi will wreak as much havoc in the U.S. as they have across the Atlantic. There are more players and more price competition in the U.S., Sanford C. Bernstein & Co. said in a recent research note, "explaining Aldi's current around 1% market share despite four decades" in the U.S.

Jason Hart, CEO of Aldi U.S., said he welcomes the stepped-up competition from Lidl and other retailers. "We see an opportunity to continue to expand our market share and attract new customers," he said. "We've seen attempts to beat Aldi prices before, and we've always been able to go lower."

Write to Sarah Nassauer at sarah.nassauer@wsj.com and Heather Haddon at heather.haddon@wsj.com

(END) Dow Jones Newswires

May 16, 2017 05:44 ET (09:44 GMT)