Aldi's US Investment Highlights Global Trend

German retailer Aldi has committed US$3bn to increase its rate of expansion in the United States, as discount store chains try to take advantage of an ongoing period of global popularity.

The discount retail chain currently has 1,300 stores in the US, and now plans to open an average of 130 stores a year for the next five years. Aldi's US investment comes on the back of heightened expansion across many Western countries, as consumers continue to feel a squeeze in real income and a rise in living costs. While headline economic data is increasing optimism on a macro scale, living standards continue to fall across many developed economies. In the UK, real wages have fallen in 2013 for the sixth successive year, having declined by almost 10% since early 2008. The Office for National Statistics (ONS) also predicts that 2014 will see no real wage growth. Similarly, while unemployment in the US is falling, the majority of this trend has come from a rise in part- time jobs, rather than full- time, permanent contracts. At ground level, and for the average family, restored economic growth across much of the developed world is not being felt.

As a result, many stores in such countries have seen marked rises in sales of their own private label offerings, as reported by chains such as Safeway and Kroger in the US, Sainsbury's in the UK and Woolworths in Australia. Discount stores have benefitted from the global recession, and will continue to do so as a living squeeze continues. To 2017, we forecast that discount store sales will grow at a greater pace than total MGR sales in Australia, Germany, France, the UK and the US, among other countries.

Low Income Gains Boost Discount Store Sales
United States Discount Store Sales Growth & Real GDP Per Capita Growth (% chg y-o-y)

German retailer Aldi has committed US$3bn to increase its rate of expansion in the United States, as discount store chains try to take advantage of an ongoing period of global popularity.

The discount retail chain currently has 1,300 stores in the US, and now plans to open an average of 130 stores a year for the next five years. Aldi's US investment comes on the back of heightened expansion across many Western countries, as consumers continue to feel a squeeze in real income and a rise in living costs. While headline economic data is increasing optimism on a macro scale, living standards continue to fall across many developed economies. In the UK, real wages have fallen in 2013 for the sixth successive year, having declined by almost 10% since early 2008. The Office for National Statistics (ONS) also predicts that 2014 will see no real wage growth. Similarly, while unemployment in the US is falling, the majority of this trend has come from a rise in part- time jobs, rather than full- time, permanent contracts. At ground level, and for the average family, restored economic growth across much of the developed world is not being felt.

Low Income Gains Boost Discount Store Sales
United States Discount Store Sales Growth & Real GDP Per Capita Growth (% chg y-o-y)

As a result, many stores in such countries have seen marked rises in sales of their own private label offerings, as reported by chains such as Safeway and Kroger in the US, Sainsbury's in the UK and Woolworths in Australia. Discount stores have benefitted from the global recession, and will continue to do so as a living squeeze continues. To 2017, we forecast that discount store sales will grow at a greater pace than total MGR sales in Australia, Germany, France, the UK and the US, among other countries.

International Discount Store Growth
Selected Countries - Difference Between Total MGR Sales Growth & Discount Store Growth (%), 2013- 2017

Aldi, among other discount retailers, is attempting to capitalise on this trend as quickly as possible. In addition to its recent commitment to the US, the company is in the process of investing US$660mn into the UK, and has set aside up to US$2bn for growth in Australia. In a similar vein, other discount chains such as Costco and Lidl have upped their expansion efforts worldwide.

From a share price perspective, discount retailers have offered the best return for investors since the onset of the financial crisis. Taking the beginning of 2009 as the base (except for Dollar General, which floated on 12 November 2009), the average return to date from Target, Costco and Dollar General has been 136%, while Walmart and Kroger have seen an average increase of 43%, less than the S&P500.

US Discount Stores Outperform
Selected Retailers' Rebased Share Price (100=02/01/2009)

Though the US, UK and eurozone are all expected to grow by some margin in 2014, consumers in such regions are unlikely to witness any tangible positive change in their ability to spend. Real wages in the developed world fell during the global recession, leading to a rise in the popularity of discount grocery retailers. As average incomes in such countries are unlikely to develop at a great pace across our forecast period to 2017, we believe that discount store sales will continue to rise, beating the mass grocery retail industry as a whole.

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Sector: Food & Drink
Geography: United States
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