As German low-cost grocer Lidl plans its U.S. launch, its American supermarket chain counterparts prepare for a surge in competitive pressure. Discount grocer Lidl plans to open its first 20 stores in America on June 15, expanding with more than 100 more by next summer. Currently, the German retailer operates 10,000 stores in Europe that are popular for their price competitiveness and streamlined shopping experience.
Analysts at Oppenheimer say four Lidl stores will be within one mile of a Kroger Co. (KR) store, while nine will be located within one mile of a Wal-Mart Stores Ind. (WMT) outlet. When expanding the radius to 10 miles, all of the initial 20 Lidl stores will overlap with at least one Walmart and a majority (13) will overlap with a Kroger.
Slashing Prices in Preparation
Oppenheimer’s Rupesh Parikh notes that Cincinnati-based Kroger has already began rapidly cutting prices on certain private label products and advertising the price cuts on billboards primarily around its Southern stores. The price reductions have been focused in the “center of store categories and in some private label perishables,” with an average discount of 20%, according to the analysts’ analysis.
Parikh also expects that aside from Lidl’s entrance to the U.S. market, Kroger will maintain its long-time pricing war with Bentonville, Ark-based Wal-Mart. “We suspect the price reductions we observed are here to stay and likely to reflect proactive reductions ahead of Lidl’s entry and/or to Walmart,” wrote Parikh. “We do not believe Kroger management will let their pricing gaps erode vs. Walmart and others.” Oppenheimer indicates Kroger’s price cuts “could be a move to lower every day prices” and “appear significant on paper.” The U.S. grocer has reduced prices by an average of 7% on select Hain Celestial Group Inc. (HAIN) and Kraft Heinz Co. (KHC) products.
In general, Kroger foresees the price change’s ability to drive market gains and preserve the firm’s long-term competitive prowess as outweighing any negative impact to profitability. (See also: German Supermarket Giant Lidl Makes its U.S. Debut.)