German grocery chain Aldi is trying to beat the world's biggest retailer at its own game: low prices.
Already with 1,600 U.S. stores, Aldi's internal studies show its prices are 21 percent lower than its lowest-priced rivals, including Wal-Mart Stores, according to Chief Executive Jason Hart. He plans to maintain that gap going forward.
His strategy, previously unreported, centers on adding more private-label goods, which are a retailer's in-house brands, to win over price-sensitive customers, and a massive expansion to further disrupt a U.S. grocery sector that has seen 18 companies go bankrupt since 2014.
Hart's plan calls for spending $1.6 billion to expand and remodel 1,300 U.S. stores, and open 400 new stores mainly in Florida, Texas and on both coasts by end of 2018. He also pledged Aldi will be willing to change prices more frequently to respond to rivals if needed.
"We are re-merchandising, remodeling, enhancing our product range and are focused on gaining volume so more customers start their shopping at Aldi and we are able to complete their shopping lists more so than we have in the past," said Hart, who added Aldi's U.S. sales have doubled in five years.
Though it only accounts for only about 1.5 percent of the U.S. grocery market, Aldi is growing at 15 percent a year, whereas Wal-Mart currently controls about 22 percent of the market and its U.S. sales are estimated to grow about 2 percent this year, according to analysts.
Aldi's growth potential has competitors taking notice. Reuters reported in February that Wal-Mart is running price tests in 11 states, pushing vendors to undercut Aldi and other rivals by 15 percent and is expected to spend about $6 billion to regain its title as the low-price leader.
Price wars are roiling the entire retail sector - from department stores to discount chains — but it is nowhere as intense as in the grocery sector. Beyond Wal-Mart's move to match Aldi on price, German discount chain Lidl plans to open up to a 100 U.S. stores in a year, and Amazon.com is aggressively testing out various brick-and-mortar grocery formats along with growing Amazon Fresh, its grocery delivery service.
"We have not seen anything like this in the grocery sector in the United States before," said Scott Mushkin, managing director of Wolfe Research and a leading pricing analyst.
Such heated competition risks a dangerous race to the bottom that could result in more retailers shutting their doors.
"Given Aldi's expansion, Lidl's entry, Wal-Mart's response and Amazon's growing ambitions in this space, it is fair to expect a significant acceleration in the bankruptcy and liquidation cycle in this sector over the next few years," said Burt Flickinger, managing director at retail consultancy Strategic Resource Group.