Inflation helps European discount stores win over Walmart

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Associated British Foods Plc’s Primark isn’t the only European discounter winning over US shoppers.

Research from footfall analytics firm Placer.ai shows budget grocers Aldi Einkauf SE and German rival Lidl, part of Germany’s Schwarz Group, are also gaining traction with US consumers. This could accelerate further as inflation weighs heavily on household spending. And that should worry major U.S. food retailers, such as Walmart Inc., Target Corp. and Kroger Co.

Aldi and Lidl are best known for their cheap prices and limited ranges. Consumers turned away from these so-called hard discounters during the pandemic because they couldn’t find all the products they wanted. Instead, they opted for a weekly store at a big-box store where they could find everything under one roof.

But with the biggest rise in food prices in 40 years, buying habits are changing.

Aldi has been in the United States for nearly 50 years, but is now growing rapidly. It has 2,100 stores in 38 states and is set to open 150 more this year. It is on track to become the third-largest U.S. grocer by number of stores by the end of 2022.

Lidl only came on the scene five years ago, and after a slow start it is now gaining momentum. It has about 170 stores in the United States and clearly attracts American shoppers.

A great strength of these discounters is their ability to adapt offers to their local markets. For example, they introduced more fresh produce and fine wines but still at reasonable prices to appeal to the cash-strapped middle classes.

What is clear is that when Americans discover German discounters, they stick around. Placer.ai analysis showed those buying from both Walmart and discounters were down, suggesting the world’s largest retailer is losing some customers to European upstarts. Walmart needs to keep this in mind when assessing food price inflation that it can pass on to its customers.

Much of the concern about how U.S. retail will fare this year has centered on businesses most exposed to low-income consumers, as they spend more of their income on food and fuel and will therefore be more affected by the rise in prices.

But that’s not the whole story. Value chains stand to benefit from these customers switching to cheaper items. It’s really middle-market retailers, known for their more expensive items, like department stores, that are most vulnerable to a squeeze on household spending. As Primark continues its expansion plans in the United States, Five Below, Inc., which sells inexpensive toys, gifts and home furnishings, also plans to triple the number of its stores in the country to reach 3,500 over the next five years.

In tough times, the bargain basement is a better place than the tight middle. This is something Aldi and Lidl know all too well.

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail sectors. She previously worked at the Financial Times.

More stories like this are available at bloomberg.com/opinion

Mary I. Bruner