Aldi is betting $5bn that Americans will fall for its discount pickles, power tools and rollmop herrings. The German retailer’s success in Europe suggests it has a better chance of succeeding where rivals failed, but US rivals will put up a robust defence.
If the private company can replicate its UK playbook, investors in US retail stocks should be worried. In the aftermath of the financial crisis, the stigma of discount shopping evaporated in the face of prices up to 50 per cent cheaper than mainstream shops. Aldi is now the UK’s fifth-biggest supermarket. Rivals trying to compete on price have seen margins on earnings before interest and taxes fall from 5 per cent to 2 per cent in four years.
Aldi seems to be making a similarly ambitious bid for the US. Its plan for store openings will make it the third-largest grocery chain by store numbers with 2,500 locations.
US grocers could do without another squeeze on margins. The sector is already contending with negative food price growth and online competition from Amazon. In March, Kroger reported its first quarterly same-store sales decline in 13 years. However, the $700bn US annual grocery spend is more diverse and difficult to corner than the UK. Aldi has operated in the US since the 1970s, but its existing market share is less than 1 per cent.
The new approach involves an emphasis on fresh produce that sounds suspiciously like Tesco’s US plan — an experiment that racked up £1bn in losses. That was blamed on a failure to realise American customers like frozen produce, lots of choice and brands they know. Aldi’s low-cost model relies on a limited selection of own brands.
Selling everything from milk to spades is also less of a novelty to US shoppers. The omnipresent Walmart, with stores 10 times the size of Aldi’s, is cutting prices to defend its 20 per cent market share and has increased same-store sales for 11 consecutive quarters. Aldi can export its stores, but it should be wary of trying to export its price wars.
Email the Lex team at firstname.lastname@example.org
Get alerts on Aldi when a new story is published