When you’re in the retail business there’s no end to the way competitors and disruptors can derail you. Online competition has to be top of mind, but there are cultural disruptions as well, such as the decline of shopping malls plus the just plain old-aging out of old-line retailers. Sears comes to mind.

Then there are the Germans.

Germans? Well, if you’re in the food retail business, you might have noticed that our German friends have suddenly become major players in the grocery discount sector. Chains that are German-owned or -influenced now account for most of the sales growth in the U.S food retail sector, and they’re fielding the biggest part of new store development. None of these discounters are American owned.

Discounters pose the biggest competitive challenge to conventional supermarkets on the horizon today. For example, long-time supermarket stalwarts Kroger and Publix are both facing sales declines and drops in same-store sales. That’s new. Both chains had chalked up gains in those metrics for years, but they’re losing ground now.

And as we’ll see, the discounters are just getting started, so a lot more competitive activity, including some online retailing, is in the offing.

The three discounters that pose the biggest threat to incumbent supermarkets are Aldi and Lidl, both German owned, together with Save-A-Lot, which is Canadian owned, but has a new top executive team in place that has a Lidl connection. German-owned Trader Joe’s is also part of the discount equation.

Save-A-Lot

Let’s take a quick look the discounters, starting with recent developments at Save-A-Lot, where there has been a lot of action lately. Save-A-Lot is a home-grown discount concept, founded in Missouri in 1977. As is the case with all discounters, Save-A-Lot seeks to sell a limited number of products in a small store space at a substantial discount to the prevailing market.

Two decades ago, Save-A-Lot was acquired by Supervalu, the grocery wholesaler based in Minnesota. Eventually, Save-A-Lot grew to well over 1,300 stores spread across 37 states.

More recently, Supervalu encountered economic headwinds and sought to generate needed cash by spinning off Save-A-Lot into a separate company, or by selling it outright. The latter happened. Not long ago, Save-A-Lot was acquired for $1.4 billion by Onex Corp, the investment firm based in Toronto. Onex then brought in two top executives, Kenneth McGrath and Kevin Proctor, as Save-A-Lot’s CEO and chief investment officer, respectively. Both those executives were key members of the management team Lidl sent to the U.S. to ready the market for store rollouts.

As for Supervalu, it’s expected to sell off the bulk of its remaining retail assets to facilitate a return to more or less pure grocery wholesaling.

Lidl

That brings us to Lidl. As readers of The Robin Report well know, Lidl is a gigantic discounter based in Germany with 10,000 stores in 26 countries. Its U.S. headquarters is in Virginia.

A few years ago, Lidl made known its intention to open stores in the U.S. It has since acquired many store sites in New Jersey and Georgia, and is looking for more sites in Ohio and Texas. It has already developed distribution centers in Maryland, Virginia and North Carolina and is just now opening its first round of 100 new Lidl stores in the East, with another batch of 80 or so to follow.

Interestingly, it had a backstage distribution operation in place long before the first store was opened. The distribution capacity seems vast for the number of stores it contemplates for the near-term future. That could indicate that Lidl doesn’t entertain failure as an option. Or there may be some other strategies at work.

In Europe, Lidl’s parent company, the Schwarz Group, has experienced quite a bit of topside executive churn as it brought in new executives to institute strategy changes. In Germany, Lidl has abandoned new format experimentation and is trimming new store rollouts as it becomes an online retailer of non-food goods, such as kitchenware and household goods. If that strategy is to be migrated to U.S., it could explain its dense and currently largely idle distribution apparatus.

Aldi

Then there’s the German-owned Aldi, which is now expanding aggressively in the U.S. after many years of quiescent expansion. Aldi’s U.S. headquarters is in Illinois. It now has 1,600 stores in the U.S. and plans to have 200 more open in a year or so. Aldi is also renovating stores in numerous locations where Lidl plans to run stores.

At the moment, Aldi is one of the chief threats to supermarket operators, especially those in the Midwest, but in many other places too. Here’s how Aldi is powering up over the competition: Aldi recently started opening numerous stores in the Southwest, prompting, in part, Save-A-Lot to abandon Nevada and California. Closer to its home, Central Grocers, the wholesaler-retailer based in Illinois, is liquidating, while Indiana-based Marsh Supermarkets is bankrupt. Ironically, Supervalu recently became Marsh’s wholesale supplier.

What’s going on here?

To fathom the impact discounters can have, consider that Aldi’s price points are about 21 percent below Walmart’s. That means that prices prevailing at smaller supermarket chains are being undercut by several additional percentage points.

Trader Joe’s

Finally, let’s add Trader Joe’s to the German-retailer mix. It’s a sort of soft discounter; a store that doesn’t have the lowest prices, but still manages to dwell a little below prevailing market prices. Trader Joe’s was also developed domestically, but is now German owned—in fact owned by a division of the same family that owns Aldi. Those parent companies are separate, so Aldi and Trader Joe’s share no connection in the U.S. Nonetheless, Trader Joe’s becomes the fourth player in the discount trifecta.

What Happened?

It’s curious that the discount food retailers noticed a market niche that was under-exploited by the supermarket companies that have operated for generations in the U.S. The reason may be that discounters don’t look much like conventional supermarkets. They run much smaller stores—perhaps a quarter the size of many supermarkets—and they offer very limited lines of product.

In short, long-established supermarket chains overlooked the discount sector because it didn’t fit the mold of how they operated or the price points they could afford. That continued during a time when consumers were looking for ways to live more economically. Consumers still do so despite ongoing improvements in the economy.

It’s also curious that the discounters are positioned against heritage supermarkets in the same way Amazon is positioned against non-food heritage retailers such as department, apparel and consumer-electronics. Both discounters and Amazon have a relatively low overall market share at the moment, but both own just about all the share- and sales-growth activity and potential.

Beyond that, nearly all forms of retailing are seeing shifts from the big-store format to the value channel, and to online retailing. The bright spot for food retailers is that they’ve been comparatively immune from online competition, although that is changing.

Time to Worry

Now let’s take a look at why the discounters saw that an unoccupied retailing niche existed.

We’ve already seen that inertia by incumbent food retailers accounts for a lot of their failure to anticipate the discount sector, but there’s one more factor at work and it’s one that should have manufacturers of branded grocery products and supermarket operators alike worried. That factor is private brands.

Aldi’s product mix is 95 percent or more private brands. Much the same is true of Trader Joe’s. If Lidl follows the models it uses in most of its operating areas, it too will have a very high percentage of private label goods.

Save-A-Lot tends to sell a much higher percentage of national brands, probably a function of the fact that it’s supplied by Supervalu, which must keep a lot of national brands at the ready for its various retail clients. That’s likely to change under the new ownership.

The private brands used by the German discounters are far from being generic-like. They are high-quality products in attractive packaging. Most consumers, regardless of their economic means, are proud to have them in their pantry. And, truth be told, they’re more interesting than the ubiquitous branded goods.

European-based retailers picked up on the private brand strategy because that’s how stores in Europe operate, especially continental Europe. Even conventional supermarkets there have a very high percentage of their goods in private brands, upwards of 50 percent. In the U.S., private brands account for roughly 20 percent of goods, often less.

The reason for that is U.S. and U.K. supermarkets are especially dependent on allowance money from branded goods manufacturers—sometimes so dependent that such monies account for food retailers’ entire profitability. The incentive to stay far away from private brands is high since private label manufacturers offer no allowance money.

So, in a way, the story of the discounters is the story of the ascendency of private brands over branded goods. The discounters aren\’t alone. Other retailers such as Ikea, H&M, Uniqlo, Ann Taylor, Gap, and even Apple are essentially private-brand retailers.

The tectonic plates are shifting.