DISCOUNT DOOMSDAY

Whole Foods’ big new threat: the cheap German supermarkets that conquered Europe

American grocery stores are bracing for a German invasion.

Industry researchers say the US market is ripe for disruption, which is one reason two discount grocers from Europe—Lidl and Aldi—are preparing to double-down on their efforts to upend the world of US supermarkets.

“We consider the US a nascent discount grocery market,” according to a new report by Boston Consulting Group. “Discounters have yet to establish a serious presence here and have a market share of less than 15%.”

With that sort of data in hand, Lidl is planning to open its first 20 stores in the US this year, in Virginia, North Carolina, and South Carolina, and expects to add another 80 locations in 2018. At the same time, Aldi is expected to ramp up its 1,300-store US presence to roughly 2,000 locations.

That’s unsettling news for any US grocery chain but it comes at an especially vulnerable time for Whole Foods, which built its brand around quality products but also sky-high prices, and after a run weak sales has only just begun to get serious about competing on price. That battle would have been hard enough to fight against traditional US competitors, which in the meantime have been picking off Whole Foods customers by offering up similar selections—including organic produce—often at cheaper prices. Now it will have to contend with a new batch of rivals with a highly successful track record in other countries.

Of course, it was the Lidl and Aldi brands in 1990s Germany that really pioneered what’s become a winning model for discount supermarkets. Back then, those chains offered low prices on a very targeted assortment of (usually) private-label products that were seen as slightly lesser than brand-name items. Stores were packed to the gill with products, and customers felt they were getting a better deal. These days, the trend is that private-label products are often really good. They are even beating out leading brands in taste tests, according to the report.

In Ireland, the first discount supermarkets began to appear in about 2000. By 2015, those stores had stolen away a quarter of the overall market share from more entrenched chains. Like Ireland more than 16 years ago, the US is very much a blank slate when it comes to discount groceries—and analysts say they expect the American locations for Lidl and Aldi will be tailored for the audience.

“Those stores will be significantly larger than Lidl’s European locations, with elements such as cold beer and free bakery samples,” the Boston Consulting Group report states. “In addition, Aldi, which operates in some US states, will revamp 1,300 of its stores and open another 650 by 2018, for a total of more than 2,000.”

Not all hope is lost for Whole Foods, which still maintains a loyal following and could be nudged along by Jana Partners, an activist investor firm that recently amassed an 8.8% stake in the chain and is keen to work with the company on its corporate structure and brand development, among other things.

If the issue for Whole Foods is that it charges too much, perhaps it’s time to draw up a new compact with its customers—one that will be able to withstand the strong competition that’s about to arrive on its shores.

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