German discount grocer Aldi aims to disrupt U.S. brick-and-mortar competition by undercutting stateside discount food and beverage offerings from the likes of retail giant Walmart.
Aldi already has some 1,600 grocery stores across the U.S. and prices that are 21 percent lower than its discount rivals. The company plans to spend $1.6 billion on U.S. expansion and remodeling efforts. By the end of 2018, Aldi reportedly looks to remodel 1,300 U.S. grocery stores and to open 400 new grocery stores.
“We are re-merchandising, remodeling and enhancing our product range and are focused on gaining volume so more customers start their shopping at Aldi and we are able to complete their shopping lists more so than we have in the past,” Jason Hart, CEO of Aldi, told Reuters.
Hart, who noted that Aldi’s U.S. sales have doubled in the past five years, has also pledged that Aldi will change prices more frequently to respond to rivals if need be. Some 90 percent of Aldi’s products are private-label, which enables a greater pricing flexibility for the supermarket chain.
Walmart, of course, is working to defend its low-price title. Reuters expects Walmart to spend some $6 billion running price tests and urging vendors to undercut discount rivals by another 15 percent.
The worry among analysts is that the growing intensity of grocery’s discount games will only lead downward to more shuttered doors and bankruptcies. The retail grocery segment stateside has seen 18 companies go bankrupt since 2014.
“Given Aldi’s expansion, Lidl’s, entry, Wal-Mart’s response and Amazon’s growing ambitions in this space, it is fair to expect a significant acceleration in the bankruptcy and liquidation cycle in this sector over the next few years,” Burt Flickinger, managing director at retail consultancy Strategic Resource Group, told Reuters.
Perhaps an end to food price deflation could work to buffer grocers’ bottom lines from some of the losses that could be incurred in the coming discount wars.
Retail prices for major food sources ended 2016 down 1.3 percent for the year, a trend which continued into this year. Grocery stores’ operating profits declined about 5 percent in the same period and U.S. supermarkets had to eat from their margins to stay afloat.
But there’s a turnaround in sight. Moody’s anticipates domestic food prices to rise about 1 percent in 2017, taking off a good amount of deflationary pressure. As a result, the U.S. supermarket sector expects operating profits to grow about 8 percent in 2017.
This doesn’t necessarily mean that the grocery space will look the same it did as before the deflationary period began. Moody’s data projects that natural and organic foods sales, as well as sales of private-label food products, will continue to grow their market share in 2017.
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With earnings season in full swing, international food retail group Ahold Delhaize (AD) closed out the week on a high note, up 1.09 percent to €19.94 ($21.89) from Monday’s (May 8) open amid Q1 results that pleased investors. Sales were down from last year due to price deflation and a cadre of seasonal factors, though profits were up. All told, AD raked in $10.6 billion from U.S. sales in Q1.
Whole Foods (WFM) saw shares spike to hit a year high of $37.98 on last Thursday’s market open following a shareholder value update and Q2 2017 earnings release. WFM addressed the company’s ability to provide shareholders with value through 2020 along with accelerated initiatives to increase profitability and boost operational performance.
For the quarter, Whole Foods reported $3.7 billion in sales and an adjusted EPS of $0.37, both meeting analyst expectations. Additionally, the organic grocer appointed five new independent directors and a new board chair to address investor pressure. For the year to date, Whole Foods saw total sales increase 1.5 percent to $8.7 billion, while comp sales fell 2.6 percent.
WFM closed out last week on a low note, losing 1.6 percent by the end of Friday trading.
Kroger (KR) closed last week flat, though mid-week value saw a bit of a boost. When all was said and done, KR was worth $29.52, up 0.3 percent from Monday’s open. Kroger isn’t slated to release Q1 2017 earnings until mid-June. Now that the period of food price deflation appears to be coming to an end, analysts project that Kroger stands a good chance to reap the most benefit, said Seeking Alpha.
Last of the grocery stocks we cover, Costco (COST) closed the week out down 2.21 percent from last week’s opening bell, hitting $170.88 on Friday’s close. Still, COST is up 11.4 percent year-to-date. The company will release its quarterly financials at the end of the month.