Despite the buzz surrounding Amazon’s acquisition of Whole Foods, there are even larger changes in store for the world of grocery: German retailers Aldi and Lidl are now staking their claim in the United States. Some will know Aldi in its current low-cost U.S. incarnation, operated by Aldi Süd, or for Trader Joe’s, operated by sister division Aldi Nord, which has won customers through its quirky branding and high quality, affordable products.
While the U.S. grocery sector is already quite saturated, the industry has largely been dominated by indistinguishable middle-tier supermarkets, who carry mostly identical brand-name items. Unlike other retail industries (clothing, for example), the U.S. hasn’t seen discounters begin to take market share just yet, and this is definitely of interest to Aldi and Lidl. The former plans to remodel its existing 1,700 stores and build an additional 1,300 in the next five years. Lidl is following suit by opening 100 stores in the coming year.
So why are Aldi and Lidl poised to win the grocery war? What about these two German discounters’ strategies and the changing customer landscape will set them up for success in the long run against industry titans like Amazon and Walmart? And more importantly, what can we learn from the broader changes occurring in the sector? Here's what we at Vivaldi think.
1. Low Prices, High Quality
The price of an average basket at Aldi and Lidl is 5.25 percent and 9.1 percent lower than at Walmart, respectively, yet both brands offer a range of organic, gluten free and other high-quality options. While mid-tier grocers have traditionally catered to the middle class, the quality promised by Aldi and Lidl, along with the price savings they can offer, serve all customers better than the established US grocers currently can. In the UK, 31 percent of Aldi and Lidl shoppers are from upper or middle income, and this demographic in the US may also choose to do their shopping with the new German discounters.
2. The Perceived Value of Brand-Name Products is Diminishing
Consumers are spending less each year on branded possessions in order to maximize their available income on experiences, and retailers are taking note: by going generic and thereby avoiding the “brand tax,” they can pass those savings onto consumers.
So, what does this mean for shoppers at Aldi and Lidl? Aldi and Lidl’s models rely heavily on selling private label goods, purchased through third-party suppliers at quantity discounted levels and repackaged under house brands. As the value of branded goods diminishes, generic brands and the discounters that sell them thrive. If Aldi and Lidl can effectively communicate their price advantage over Walmart while maintaining the high-quality people expect from places like Amazon, they stand to win a much larger share of American customers.