Wal-Mart competitors Target and Aldi make strategic countermoves

German-based Aldi and Minneapolis-based Target Corp. have taken moves to beef up their online shopping and home delivery capabilities, a response to the successful investments made by Wal-Mart Stores, Kroger and other large retailers and grocers.

This week Aldi announced a partnership with Instacart to accelerate grocery home delivery tests in three of its competitive markets — Dallas, Atlanta and Los Angeles. The new service will provide shoppers with the opportunity to have their orders delivered in as little as one hour.

IGD Analyst Stewart Samuel said while Atlanta and Dallas are well-established markets for the retailer, Aldi just entered California for the first time last year. However, it has developed a network of almost 40 stores within the first year, around half of which are in the core Los Angeles market, helping to drive brand awareness.

Target announced plans to acquire start-up Grand Junction, a transportation tech company expected to help Target’s delivery capabilities. Analysts say Target is behind Wal-Mart and Amazon in terms of investments made in delivery and other shopper conveniences.

Of the two developments, analysts tend to agree that Aldi’s move is the bigger play as they see Target struggling to stay relevant in the grocery space. They do like to see Target investing in its own delivery capabilities as it seeks to improve its supply chain reliability. Target has been seen as a laggard by Wall Street against competitors Wal-Mart and Amazon which continue to invest in products and services to drive better customer experiences.

“Both these moves are a clear indication of where the shopper is heading, and the growing importance of grocery e-commerce in the U.S.,” Samuel said.

ALDI TEST
When it comes to grocery market share Aldi carried about 1.3% of the U.S. total last year, compared to roughly 22% at Wal-Mart. But Aldi customers are loyal and as the retailer expands its U.S. footprint to 2,500 stores over the next five years the deep discounter will likely attract more value-conscious shoppers.

“Beyond offering wine and special buys for home delivery in the U.K., and selling through Tmall in China, where it doesn’t have any physical stores, Aldi has not made any significant moves into the channel. It is interesting that the U.S. is where it will cut its teeth on grocery e-commerce. The move also enables Aldi to differentiate itself versus Lidl, it’s hard discount competitor, which appears to have launched with some success into the U.S. market recently,” Samuel told Talk Business & Politics.

He likes that Aldi chose to partner with Instacart saying it will potentially help the retailer reach new customer groups and gain share in the fast-evolving e-commerce business.

“I expect to see much more activity in this area this year. Many retailers will be accelerating their plans in light of Amazon completing its acquisition of Whole Foods Market and the potential for the Seattle-based company to grab a larger share of the online grocery market,” Samuel added.

He said Wal-Mart has moved at a fast pace over the last two years, rolling out its grocery e-commerce service, launching several fulfillment-based innovations and making several acquisitions to boost its capabilities in key categories. He said the moves will help keep Wal-Mart out front for the near term.

Keith Anderson, senior vice president of strategy at Boston-based Profitero, told Talk Business & Politics the Aldi experiment is interesting but he doesn’t see it making a major impact in the near term.

“If Aldi and Instacart can land on pricing and convenience fees that align with Aldi’s core value proposition, this test may help them reach new shoppers and ultimately sell more. Perhaps Aldi will be among the first to make online grocery economically sensible for the masses. I do wonder if this test isn’t a stepping stone to Aldi developing its own capabilities, which would seem better aligned with their focus on relentlessly excellent and low-cost operations.” Anderson said.

Samuel said the discount sector received a significant amount of attention this year in the U.S. with Lidl’s entry and Aldi’s expansion plans which led to intensifying price competition and new private brand initiatives from several major retailers.

“With Aldi also moving into e-commerce, it could start to impact two of the fastest growing channels in the U.S,” Samuel added.

TARGET DEAL
While Target did try and expand its grocery offering over the past year, the retailer’s market share in grocery stood at just 1.5%, a hair better than Aldi as of last year. CNBC Mad Money host Jim Cramer said Monday (August 14) he doesn’t know why Target continues to dabble in grocery when they do so well in apparel, a much higher margin business.

Wall Street largely viewed Target’s announcement to acquire Grand Junction as an effort to and gain some relevance in the growing e-commerce space.

“Target faces significant challenges on the demand side of its digital operation as it isn’t getting anywhere near the traffic or traction that Amazon, Wal-Mart, and Jet are, but owning another element of the logistics & fulfillment capability stack should position them to improve service levels without depending on third parties,” Anderson said.

Terms of the Grand Junction deal were not disclosed but Target management did say Grand Junction CEO and founder Ron Howard would become a vice president of technology at Target. Grand Junction’s software platform connects retailers to more than 700 carriers and supports same-day and local delivery service throughout the U.S. and Canada.

“Grand Junction’s technology and algorithms will help Target deliver to guests faster and more efficiently,” said Arthur Valdez, executive vice president, chief supply chain and logistics officer at Target. “This acquisition is part of Target’s ongoing efforts to strengthen Target’s supply chain to provide greater speed, reliability and convenience for guests.”

He said once the deal closes Grand Junction’s employees will become Target team members.

Samuel said Target’s acquisition of Grand Junction builds on work by the retailer to improve the speed of delivery in the wake of Wal-Mart and Amazon’s more expedient delivery options.

“Changing lifestyles and technology companies are resetting expectations around fast delivery, with same-day delivery becoming the norm for many,” he added.