investing

3 Grocery Stocks Under Threat from Aldi

The German supermarket's plan to open more U.S. stores is unwelcome news to investors in rival chains.

Aldi's intention to launch almost a thousand new U.S. stores is good news for consumers, but it's just the latest round of bad news for investors in the supermarket sector.

In yet another challenge to entrenched grocery companies, Germany's Aldi announced that it will spend another $3.4 billion to open new stores. The company intends to have 2,500 U.S. locations by 2022, up from 1,600 today. Aldi, which sells mostly private-label brands at deep discounts, had already committed $1.6 billion to remodel 1,300 stores.

Making matters worse, another German discount grocer is entering the U.S. market. Lidl is opening its first U.S. stores on June 15 and plans to price products up to 50% lower than the competition.

Grocery costs are falling as supermarkets fight a price war to attract and retain penny-pinching customers. The annual change in prices for food at home declined in 2016, something that hasn't happened in 49 years, according to the Department of Agriculture.

Against that backdrop, Aldi's moves only make life harder for much of the competition. "The increasing presence of discount grocers like Aldi, and soon Lidl, in the U.S. adds further pressure on Walmart and other grocery retailers to maintain price competitiveness," say analysts at Stifel. Why is this bad for business? Because lower prices mean companies have to make do with thinner profit margins. 

The bottom line is that the Aldi and Lidl onslaught threatens chains across the spectrum, from the biggest national names to smaller regional players. Here’s a look at three supermarket stocks that could use a break from Aldi.

Walmart Stores

Walmart Stores (symbol: WMT), for example, derives more than half of its revenue from groceries, which is why it has redoubled it efforts to offer everyday low prices. The strategy has been working so far, but it comes with costs, Stifel notes. The focus on everyday low prices has increased traffic and sales, analysts says, and yet it has also put pressure on the retailer's profitability. The increased competition from Aldi in the bricks-and-mortar world comes just as Walmart is making large investments in e-commerce to beat back the threat from Amazon.com (AMZN).

Shares in Walmart's have gained a respectable 15% over the past 52 weeks. (All returns are as of June 14.) The benchmark Standard & Poor's 500-stock index is up 17% over the same span. It would be easier for the stock to catch up if Walmart didn't have more Aldi's gunning for its market share.

Kroger

Walmart may be the world's largest retailer, but Kroger (KR) is the nation's largest supermarket operator. That leaves it widely exposed in the ongoing price war. Analysts at UBS say Kroger continues to deal with persistent food-price deflation and intensifying competition. Indeed, the chain might have to make an acquisition now that market-share gains have petered out amid intense competition and the limits of lower prices, Credit Suisse analysts write. They note that Whole Foods (WFM) would make an attractive target. Kroger acquired the more upscale Harris Teeter supermarket chain in 2014 for $2.5 billion.

Whatever Kroger chooses to do, it should probably do it pretty soon. The company's stock has lost 13% over the past year.

SuperValu

SuperValu (SVU) really finds itself in a pinch, as its Shop N’ Save and Cub Foods nameplates get squeezed from Kroger and Walmart on one side and by Aldi on the other. When SuperValu suffered an unexpected loss for its fiscal third quarter ended December 3, the chief operating officer said at the time that at least two-thirds of its stores have "an unprecedented amount of new competition." Note well that Aldi has been expanding in SuperValu's home turf in the Midwest. Results in the more recent fiscal fourth-quarter report were better than analysts expected, but the retail side of the business still saw flagging sales and declining profits. That's partly why earlier this year we said SuperValu is a stock investors should avoid.

Shares in SuperValu are down 11% over the past 52 weeks and have fared even worse as a longer term holding. The stock has lost 48% in the last three years.

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