US Retail

Invasion of the German Discount Supermarkets

  • Why it matters

    Why it matters

    German retailers, especially discount grocery stores, are expanding in the United States and elsewhere, where sales growth far exceeds the possiblities back at home in Germany. Wal-Mart and other US retailers are determined to protect their turf.

  • Facts

    Facts

    • Within two years, discount grocery business Aldi-Süd is predicted to achieve higher sales in the United States than in Germany,
    • Aldi-Süd already has 1,600 stores in the United States and plans to increase that number to 2,500 by the end of 2022.
    • Aldi rival Lidl has just entered the US market, with plans to open about 100 supermarkets along the US East Coast within a year.
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    Audio

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83510726 Aldi AP Big
Mild-mannered facade for an aggressive expansion: An Aldi store in Salem, New Hampshire, in the US. Source: AP

Aldi-Süd, part of the Aldi Group that forms Germany’s largest discount supermarket business, made its first foray into the United States in 1976, when it bought a small chain of some two dozen stores in the American midwest. Since then, Aldi-Süd has expanded to some 1,600 U.S. stores stretching from California to New York, and earlier this month, the firm announced an aggressive plan to continue its rapid growth, announcing it will invest some $5 billion (€4.6 billion) to open an additional 900 stores in the country by 2022.

Aldi’s announcement to continue its push into the US market comes at a time when its German competitor, Lidl, is making its own entry into the US market, opening its first US stores in Virginia, North Carolina and South Carolina this month. Lidl says it will open 100 stores on the East Coast within a year, followed by another 500 stores in subsequent years.

These German companies are being drawn to the US by massive potential for growth. The US is the world’s largest grocery store market, with some $700 billion in annual sales. German discounters are projected to grow by 8 to 10 percent annually in the US through 2020, according to an analysis by the Bain consulting firm. That is five times the growth rate for traditional US retail grocery businesses. This trend is triggering worries among normally self-confident US firms such as Walmart, the world’s largest retail group, which in response to the expansion of German discounters is lowering some of its prices, promising fierce competition.

Foreign markets are becoming critically important for almost all large German retail groups. The domestic market is saturated.

While Aldi-Süd’s growth in Germany is slow and steady, its sales in the US are skyrocketing. Within two years, Aldi-Süd’s sales in the US will surpass the levels of its business in Germany, according to Boris Planer, an expert with the Planet Retail. By 2022, he says, Aldi’s sales may reach some $24.5 billion.

This marks a significant turning point for Aldi. But it is not alone. Foreign markets are becoming critically important for almost all large German retail groups, particularly since the home market has the highest concentration of supermarkets, discounters and drugstores in Europe, resulting in limited growth potential. Retailers are therefore looking abroad for growth, and they are not just targeting the US market.

Schwarz Group, which owns Lidl and Kaufland, is planning an expansion in the UK and eastern Europe, while Kaufland has already secured trademark rights in Australia. Recently, both Aldi and Lidl ventured into the Chinese market with online shops, as have German drugstore chains DM and Rossmann. Even apparel discounter Kik wants to follow the example of Aldi and Lidl, planning to open its first store in the United States in 2019.

Discount grocery stores began to flourish in Germany in the 1960s and 1970s. While in other countries, retailers competed on the basis of having the largest range of products or the best service, in Germany a retail culture based primarily on efficiency and low prices became entrenched, in large part due to the popularity of Aldi. The country’s discount chains have often sought opportunities to enter new markets during economic downturns, when consumers are compelled to economize.

In fact, Aldi-Süd’s US growth is due in part to the economic crisis that hit in 2008, according to Mr. Planer. While many US firms suffered due to the drop in disposable incomes, Aldi attracted a new clientele of financially-stretched, middle class families looking for cheap prices. In fact, Aldi’s robust sales growth continued unabated during the US recession.

When Aldi opened its first US stores in places like Ottumwa, Iowa, some four decades ago, it immediately undercut its competitors, offering prices that were nearly one-third cheaper. Aldi’s utilitarian, no-frills shopping experience – sparsely decorated stores, less product diversity, no plastic bags for customers – came off as odd to US customers. Yet, many still came for the prices.

Though Aldi-Süd eventually moved its original Ottumwa store from downtown to a newer shopping area on the edge of town, the sparse shopping experience has not changed. On a recent day in in Ottumwa, Edward Keller, a tattoed military veteran who pulled into the Aldi parking lot in a black pickup truck, said that while other stores in the area were more fun to shop at, he still drove some 22 miles (35 kilometers) from his home to shop at Aldi because of the prices.

“No one shops here because they like to,” he said. “But the store is the cheapest by far.”

This article orignally appeared in Handelsblatt sister publication WirtschaftsWoche. To contact the author: henryk.hielscher@wiwo.de

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