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Walmart Launches Grocery Price War: Can It Take on Aldi?

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Walmart (WMT - Free Report) , America’s largest retailer, is reportedly testing a “price-comparison test” in as many as 1,200 U.S. stores in the hopes of closing the pricing gap between itself and top competitors like Kroger (KR - Free Report) and popular German discount chain Aldi, according to Reuters, who cite sources familiar with the matter.

Walmart launched the test in 11 Midwest and Southeastern states, including Iowa, Illinois, and Florida. The retailer’s, whose grocery business makes up more than half of its total revenue, main goal is to find specific price points for specific products, adjusting prices on an as-needed basis in order to get more customers into its brick-and-mortar stores.

Apparently, Walmart met with some of its biggest vendors last week, like Conagra (CAG - Free Report) , Procter & Gamble (PG - Free Report) , and Unilever (UL - Free Report) , and demanded they cut what the charge the retailer by 15%, says Reuters’ sources. They also said that Walmart expects its suppliers to help it edge out its rivals on “head-to-head pricing 80% of the time.”

The Aldi Way

Aldi has been a part of the American grocery landscape since it opened its first U.S. store in 1976. It now operates around 1,600 stores stateside, under both the Aldi and popular Trader Joe’s banners. Aldi is known for its incredibly low prices, and the discount grocer keeps prices low by doing a number of things.

90% of its store products are Aldi-exclusive brands, which allows the company to provide high-quality items without the hidden costs that comes with advertising and marketing national name brands. Staffing levels are kept low, and customers end up doing tasks normally done by store employee, like bringing their own bags and bagging their own groceries. This saves Aldi a ton of money.

Aldi also has product arrive at its stores in boxes that have one side missing, so that they can be put onto a shelf without having to be unpacked, and which saves the company the money of having to pay someone to stock shelves. There’s also a 25-cent deposit to use a shopping cart, allowing Aldi to not have to hire anyone to police and round-up carts.

In addition to Aldi’s $3 billion 5-year expansion plan that will add more than 650 new locations by 2018, its top German competitor, Lidl, has plans to open its first stores in the U.S. this summer. Aldi and Lidl run very similar, no-frills, discount grocery shopping experiences, and together, they pose a serious threat to Walmart’s grocery business.

Walmart Wages War

In addition to Aldi and Lidl, Walmart faces heated price competition from Kroger, Publix Super Markets , and let’s not dismiss Amazon (AMZN - Free Report) , especially with the rise of online grocery delivery.

According to Reuters’ numerous spot checks, where the news publication tested Walmart’s prices against Aldi’s in five of the 11 cities, “Walmart’s prices for a basket of 15 staples averaged 8% less than Aldi’s products,” and in some cases, were as much as 10% less than at Aldi. Reuters tested products like private-label milk and butter and even branded items like Crest toothpaste and a two-liter bottle of Coca-Cola (KO - Free Report) .

Now, to be able to sell products that much cheaper than Aldi is pretty impressive. Aldi shoppers like myself can attest to that fact. Whenever I go in to a store, which is usually about once or twice a month to stock up on pantry items and other grocery essentials, I always leave a little surprised by how cheap my bill was. Like, should I go back and give them more money? It’s a great feeling, especially in comparison to the feeling I get when leaving Whole Foods .

But the real question for Walmart will be how they can maintain these extremely low grocery prices without hurting its bottom line. Aldi and Lidl have already worked it into their clever business models, but Walmart is much more than just a grocery store. It’s a clothing store, a pharmacy, a consumer goods store, an electronics store, a home goods store, a hardware store, and much, much more.

In its most recent quarter, Walmart’s gross margin fell by 8 basis points, while its net income slipped 18% compared to the prior year quarter, mostly due to price investments, which is more or less the cost of cutting prices.

According to Reuters, its vendor sources told them that Walmart plans “to maintain margins on average and lose money on some goods,” and “it will absorb some of the losses so suppliers can adjust to the new pricing demand.” Walmart is also hoping to improve logistics, asking its vendors to ship orders punctually and in full in order to lower delivery expenses and avoid having items out of stock.

Bottom Line

No matter what Warren Buffett says about Walmart, it’s clear that this company is one of the few taking action amidst the changing retail and grocery landscape. And even if they never catch up to Amazon, Walmart is showing investors that it’s willing to change how they do business in order to stay relevant, and to draw consumers back to its stores, whether that be physical or online.

It’s recent e-commerce shopping spree, where Walmart scooped up Jet.com, Shoebuy, and Moosejaw, shows how seriously they take the threat of Amazon, and this new price-comparison test for its grocery business demonstrates, again, the company’s awareness of a potential risk to its business, and them facing it head on.

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