Competition in the U.S. grocery sector is about to get more fierce.
Continue Reading Below
Discount grocery chain Aldi is expected to unveil on Monday plans to invest $5 billion to open nearly 900 stores and remodel hundreds more in the U.S.
The expansion, over the next five years, puts the German grocer on track to becoming the third-largest food retailer in the U.S. by store count, behind the larger Wal-Mart Stores Inc. and Kroger Co., and a growing threat to traditional food retailers.
Aldi said it is expected to have a total of 2,500 locations across the U.S. by 2022. Its plan comes as another German discounter, Lidl, is set to open its first 10 stores in the U.S. on Thursday as part of a multiyear expansion.
Executives at Wal-Mart and Kroger have been preparing for the growth of the discounters for years. Wal-Mart has been sprucing up its stores and slashing prices on some products in select markets, while Kroger continues to drive down costs to compete.
But the discounters could have a big impact on the U.S. grocery market as they did in Europe. Their market share there has steadily grown while traditional supermarkets have seen theirs fall.
Continue Reading Below
Deep discount chains in the U.S. are expected to grow by up to 10% a year through 2020, five times the rate of traditional grocers, according to a recent report by consulting firm Bain & Co.
"It should absolutely be more than scary to traditional grocers and retailers," said Mikey Vu, a partner in Bain's retail practice.
Many shoppers in the U.S. are unfamiliar with Aldi. The chain has been in the U.S. since 1976, but long has focused on lower-income shoppers by offering budget items. Aldi doesn't invest in big marketing campaigns as part of its strategy to keep prices low, grocery executives said.
Aldi has improved its stores and products in recent years and is now having more success in attracting a larger mix of shoppers, Mr. Vu said.
Officials at Aldi and Lidl, which is new in the U.S., said they are a step ahead of their competitors given their longstanding use of store brands to drive down price. About 90% of the goods carried at Aldi stores and the coming Lidl ones will be private label, they said.
Traditional grocers say that direct comparisons with the discounters on price aren't possible given that they carry name-brand goods that Aldi and Lidl don't stock.
A Wal-Mart spokeswoman said that the retailer remains committed to offering low-prices, but they are also focused on "quality, freshness, assortment, experience and convenience."
Kroger declined to comment.
European shoppers are much more accustomed to buying private-label products than Americans. But loyalty to brands in the U.S. is slowly eroding and could lead more shoppers to try Aldi or Lidl, especially millennials, said Mike Paglia, director at research firm Kantar Retail.
"[Millennials] are value oriented and don't hold the same stigmas about private-label items that older generations do," said Mr. Paglia, who has consulted with suppliers to Wal-Mart and other major retailers to help them prepare for the expansion of deep discounters.
A recent Kantar Retail shopper survey found that 64% of respondents said they trusted store brands from big retailers, and 42% said that buying them made them feel like smart consumers. Scott Patton, an Aldi divisional vice president, said its private-label offerings makes the grocer stand out from competitors.
"Many of our competitors are trying to copy our blueprint," said Mr. Patton. "We have a tremendous head start on them."
Aldi said the new openings are also expected to create 25,000 jobs over the next five years.
Lidl spokesman William Harwood's said: "We're building on the success we've had all across Europe."
Write to Heather Haddon at firstname.lastname@example.org
(END) Dow Jones Newswires
June 11, 2017 21:14 ET (01:14 GMT)