Grocery store owners struggle as groceries become cheaper

It's a rough time to be a grocery store, with competition from new rivals squeezing margins on all sides.

But it's a killer time to be a grocery store shopper. They've never had so many companies vie to offer the lowest price.

The expansion of foreign discount stores Aldi and Lidl - the latter of which just opened its first U.S. stores last week - are challenging traditional grocery stores on cost, with prices that beat those in existing U.S. stores by 20 to 30 percent, on average.

On top of that, Amazon's recent announcement that it plans to acquire organic giant Whole Foods threatens to take a bite out of grocers' high-end business.

To stave off the new competitors, chains such as Wal-Mart, Kroger and Albertson's may have to make significant changes.

'Prices will go lower, that's for sure,” said Daniel Lucht, the global research director at ResearchFarm, a British retail consultancy. 'There will be lots of promotions, lots of special offers, lots of brands being pulled in, as well. This will be a great year for consumers.”

In some parts of the country, that great year already has begun - particularly where Lidl and Aldi have moved in. The two chains, both of which are German-owned, offer a limited selection of produce and packaged foods in relatively small, no-frills stores. That narrow focus has allowed them to optimize their supply chains and offer prices well below those of mainstream grocers.

A recent analysis by RBC Capital Markets, which compared Lidl sale fliers with those of other stores, found that its prices were about 22 percent cheaper than Food Lion's and 20 percent cheaper than Kroger's. Scott Mushkin, an analyst with Wolfe Research, has said that Aldi products typically cost about 20 percent less than Wal-Mart's.

For brand-name products - think Coca-Cola or Oreos - analysts have found as much as a 200 percent gap between Aldi-bought products and mainstream-grocery-bought ones.

That historically hasn't posed an existential threat to mainstream U.S. stores. Aldi has been in the United States for 40 years, for example, and still represents a tiny portion of sales by volume.

On June 12, however, the company announced plans to spend $3.4 billion over the next five years to open an additional 900 locations, which will make it the third-largest grocer in the United States. At the same time, Lidl plans to have 100 U.S. stores by this time next year, and analysts are predicting that within five years it could have as many as 600.

Conventional grocers have taken notice, spending millions of dollars on improvements to existing stores and developing new formats that emphasize offerings the discounters don't have, such as prepared foods, coffee shops and pharmacies.

Many also have begun aggressive pushes to lower their prices relative to Lidl and Aldi.

'That is probably the most immediate effect you're going to see,” said Bill Urda, a retail analyst at the Boston Consulting Group. 'There are many factors that go into customer loyalty, but price is always up there.”

To wit, Wal-Mart, the country's largest seller of groceries, embarked on a three-year, multibillion-dollar plan in February 2016 to lower its prices. While the company would not elaborate on the details of that project, citing competitive interests, Reuters reported that Wal-Mart significantly dropped its prices in more than 1,200 Midwestern and North Carolina stores earlier this year. In the cities where Wal-Mart was running the price experiment, Reuters found, a basket of its products cost eight percent less than their Aldi equivalents.

The company also has been in talks with thousands of its suppliers to reduce costs. Phillip Keene, a spokesman for the company, said its price reductions intensified this year and will continue into 2018.