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A busy week in the U.S. grocery industry was highlighted by a stunning announcement Friday morning: Amazon.com was acquiring Whole Foods Market in a transaction valued at about $13.7 billion.

It was the latest -- and largest -- revelation in an intense competition across the $600 billion grocery sector, which has discount stores like Aldi and Lidl, established stores like Wal-Mart Stores Inc. and Kroger, and the e-commerce giant grappling for market share.

Earlier in the week, German-based Aldi added some fuel to the battle for consumers when it announced plans to invest $3.4 billion to expand its U.S. footprint and become the third-largest grocery behind Wal-Mart and Kroger. The announcement came days before another German-based company -- Lidl -- began its U.S. invasion by opening 10 stores along the East Coast.

The industry has become a hotbed of activity over the past few months, which already has led to food prices falling and discounts being offered in efforts to attract shoppers. Some of the repercussions were felt last week when Kroger reported same-store sales fell for the second straight quarter and lowered its earnings forecast.

Analysts believe Amazon's move in acquiring Whole Foods and its more than 460 stores worldwide will create even larger ripples because it gives the e-commerce company an established physical presence in the industry. Grocery shares tumbled in trading Friday morning after Amazon revealed its plan.

"The Amazon/Whole Foods deal is a blockbuster and will reverb across retail," Neil Stern, a senior partner at Chicago-based retail consultant firm McMillan-Doolittle said in an email Friday morning. "It instantly makes them a serious brick and mortar player and perhaps sets the stage for even more brick and mortar presence."

GERMAN COMPETITORS

Amazon isn't the only company threatening to shake up the industry. Analysts believe Lidl's entry in the U.S. market -- coupled with Aldi's growth -- has the potential to shake things up even further and cause more headaches for grocers as the price war continues to weigh on profit margins.

"Any major grocer who has a multibillion presence and a winning formula, which Lidl and Aldi have both exhibited in Europe, is a threat that can't be taken lightly," said Sucharita Mulpuru, an independent retail analyst.

Aldi opened its first store in the U.S. in 1976 and now has more than 1,600 stores, including eight in Arkansas, according to its website. But the company plans to expand to 2,500 locations over the next five years. The expansion is in addition to a $1.6 billion program announced earlier this year to remodel 1,300 stores by 2020.

The no-frills chain -- where only a few employees staff stores, customers bag their own groceries and most of the selection is private label -- has found its footing with U.S. shoppers because of low prices.

Lidl has about 10,000 stores in 28 markets worldwide and produced roughly $95 billion in revenue last year, according to consulting firm Kantar Retail. Its initial wave of U.S. stores will be just the beginning. Lidl intends to open 100 by the end of 2018, and Kantar Retail believes it could have 600 across the country by 2023.

Lidl has built its success around low prices. The grocery chain relies on private label items, and those in-house brands are expected to make up as much as 90 percent of its assortment.

Lidl's U.S. entry comes nearly 10 years after another European grocer, Britain's Tesco, moved into the market with Fresh and Easy stores. It wasn't successful and the company retreated nearly five years ago.

"Just because you're a grocery retailer that's been successful in Europe, it's not a given that you're going to be successful in the U.S., as exhibited by Tesco," Mulpuru said. "But the success of Aldi does suggest that there's a reason Wal-Mart should be worried."

WAL-MART STRATEGY

Wal-Mart has not been standing still, especially after getting an up-close look at the impact the German discounters had on the grocery business in the United Kingdom.

Asda, Wal-Mart's grocery business in the U.K., and other traditional grocers suffered as the discounters managed to double their market share in five years, according to Stern.

A survey conducted by research firm InfoScout also indicated that consumers in Lidl's debut states are currently shopping for groceries at Wal-Mart, and 90 percent of those customers are likely to give the new stores a try.

"It doesn't mean it works here in the same way, but you've got to get sharp on pricing," Stern said. "Of all the retailers out there, Wal-Mart is very well prepared to do that. But they've got the most at risk in some sense."

More than half of Wal-Mart's revenue comes from grocery-related sales, so it's no surprise the Bentonville-based company has taken an aggressive approach to protecting its turf.

Wal-Mart has cleaned up its stores and made improvements in its fresh offerings, which include fruits and vegetables, baked goods, meats, fish and dairy. The retailer has been aggressively lowering grocery prices in certain markets as well, according to reports, and has fine-tuned its private-label offerings to compete with the discounters.

"We're a house of brands and believe our customers want brands," Wal-Mart Chief Financial Officer Brett Biggs said last week during the dbAccess Global Consumer Conference in Paris. "Brands are the best place to show price differentiation as well with your customer. But if you can get a strong following, a strong loyalty with a private label, that can be a very important part of a retailer's offering and it's important to us. Lidl and Aldi, certainly, that's been their trademark over the years, and we'll get a sense of how well that works when they come to the U.S."

Analysts also believe Wal-Mart must play to advantages like its expanding online grocery business. The retailer continues to roll out its online grocery pickup service -- which is now available in about 700 stores -- and is testing other initiatives like an automated grocery pickup machine near Oklahoma City.

Chief Executive Officer Doug McMillon said earlier this month that Wal-Mart saw the competition from the discounters coming early on and has taken measures to sharpen service and prepare. While he is more comfortable with where Wal-Mart currently stands, McMillon acknowledged there is work to do.

"I think competition is good for the customer and over time it has made us better," McMillon said.

Stern said Wal-Mart must continue to respond to the threats from Lidl and Aldi, but predicts the discounters won't be "game-killers" in the industry. Amazon, he believes, remains Wal-Mart's biggest threat across retail, as is clear with the acquisition of Whole Foods on Friday.

Whole Foods will continue to operate under its current brand as part of the acquisition. The transaction is still subject to approval and is expected to be completed in the second half of the year.

Mulpuru thinks there could be some consolidation and other "shakeouts" industrywide as a result of the competition.

But shoppers, ultimately, will benefit as grocery chains continue their fight for sales.

"This is all win, win, win for consumers," Mulpuru said. "It's more choice, more competition and cheaper stuff."

SundayMonday Business on 06/18/2017

Print Headline: Amazon snaps up grocery market

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