Pressure builds on Twin Cities grocery stores as Aldi, Walmart turn up heat

A price war between discount grocers Walmart and Aldi is spreading across the country and could soon roil the Twin Cities food market.

For years, Walmart watched Aldi stores locate near its own stores and sometimes, as in Roseville earlier this month, right next door.

And last week, Germany-based Aldi said it would spend $5 billion to build 900 new stores and remodel more than 1,300 others as it aims to become the third-largest grocer in the U.S., after Walmart and Kroger. In the Twin Cities, Aldi will spend $34 million to remodel 28 of its 35 stores between now and 2019.

Aldi's expansion was just part of a newsy week in the U.S. grocery industry. Another German-based discounter, Lidl, began opening its first U.S. stores too. Meanwhile, Kroger forecast an earnings miss that sent its stock plunging to its worst single-day drop in 17 years. And on Friday came the biggest news of the week: Amazon.com Inc.'s $13.7 billion purchase of Whole Foods Markets Inc., the biggest sign yet that the online giant is moving deeply into brick-and-mortar retailing.

Until recently, Walmart didn't appear to take Aldi's invasion too seriously, even as Aldi was boasting that its private-label products were about 20 percent less expensive than Walmart's store-branded items.

But in February, Walmart started going head-to-head with Aldi by cutting prices in markets in 11 states, including Iowa. Walmart intends to undercut Aldi and other rivals by 15 percent and is spending $6 billion to solidify its reputation as the low-price leader.

"We continuously look for ways to drive down costs and deliver those savings to our customers because we believe they shouldn't have to trade down or sacrifice quality to save money," said Anne Hatfield, Walmart's director of communications. "That's why we're giving customers in select markets even lower prices on the national and private-label brands."

Across the country, the expansion of low-price grocers shows no signs of letting up. Discount supermarkets are expected to grow at five times the rate of traditional grocers through 2020, according to Bain & Co., a consulting firm.

In the Twin Cities, the exit three years ago of Roundy's Inc.'s Rainbow Foods created a competitive opening for chains like Aldi that only had a small presence here. "The Twin Cities became a wide open market after Rainbow closed," said David Livingston, a grocery industry analyst in Milwaukee.

With the remodels and new stores that have opened this year, Aldi is transitioning from a lower-income customer model to more of a mainstream one. To attract bigger spenders, it has adopted a slightly larger, more colorful store design, doubled the size of the refrigerated produce section and brought in trendier items.

Aldi shoppers can now grab a larger selection of organics, salad greens, gluten-free items and specialties.

The Aldi store in Crystal is newly remodeled, and one in Richfield will be completed by June 29. A store in Shakopee will get a face-lift by year's end. And 25 others will be remodeled over the next two years.

It's not just Aldi feeling pressure to raise the stakes. Nearly all of the larger, local supermarkets are renovating and adding locations at a quickened pace. "Supermarket retailers are betting that shoppers will go to newer, nicer, better-lit stores with better assortments and more convenience," said Burt Flickinger of Strategic Resource Group.

Hy-Vee, Whole Foods and Fresh Thyme have also opened or will open new stores this year. Walmart, Target, Cub, Lunds & Byerlys, Kowalski's and Coborn's are in the process of remodeling existing stores.

John Dean, a Twin Cities supermarket consultant, said that each new store and expansion takes another little piece out of the same pie that all the grocers rely on. "The independents will keep getting weeded out," he said. "At some point some stores will close and things will start to even out."

Aldi has a 7 percent share of the Twin Cities market, according to Nielsen. "Its annual average sales per store have increased from $6 million 10 years ago to $23 million for its new and remodeled stores," Flickinger said.

"No one else offers limited selection with a discount," said Matt Lilla, division vice president of Aldi's Faribault division. "The new store design competes with others for the look and feel, but they can't match our prices."

Walmart is trying. In a price comparison of 15 private label items in February, Reuters found that Walmart's prices were about 8 percent cheaper than Aldi in Dubuque and Davenport, Iowa, as well as in several cities in Illinois on staples such as bananas, milk, butter, eggs and peanut butter.

In a price check in Dubuque two weeks ago by the Star Tribune, Aldi appeared to have swung the price pendulum back in its favor. Its prices were about 7 percent lower than Walmart's, and it beat Walmart's prices on five of seven items.

"We've seen attempts to beat Aldi's prices before, and we've always been able to go lower," Jason Hart, chief executive of Aldi U.S., said in a statement.

Andy Houselog of Dubuque, who was shopping at the Aldi's Dubuque store on June 3, likes Aldi. "It's cheaper, and it's easier to get in and out," he said. "We get milk, eggs, bread and produce. They're cheaper at Aldi than anywhere else."

Krystina Kisting of Kieler, Wis., who shopped at the Dubuque Walmart earlier this month, said she finds Aldi's produce more affordable but prefers Walmart overall. "When I want name brands, I go to Walmart. It's more one-stop shopping," she said. "I don't always like the taste of Aldi's products."

Walmart isn't saying if its price war with Aldi will expand to other markets, but consumers are paying less in the test cities. Aldi's prices on seven staples in Dubuque were 8 percent lower than at its Lake Street store in Minneapolis. Walmart's prices in Dubuque were about 25 percent lower than at its Bloomington store.

Aldi and Walmart locations in the Carolinas and Virginia will soon get even more discount competition.

Lidl last week opened nearly 10 stores in those states. The company (rhymes with "beetle") plans to open 100 stores on the East Coast and possibly Texas within a year.

Aldi and Lidl have taken a devastating toll on conventional supermarkets in Europe. "Walmart ought to be just as worried about Lidl coming to the U.S. as it is about Amazon," Flickinger said.

Lidl has not disclosed expansion plans in the U.S. beyond Texas and the East Coast. Flickinger said he believes Lidl could be in the Twin Cities by 2020.