The frontline of the new war for the American supermarket runs through the aisles of Winston-Salem, North Carolina. It’s a battle over a few pennies on the price of milk, mustard, detergent, and barbecue sauce—and perhaps the future of groceries.

Winston-Salem is home to one of the 10 new supermarkets opened last month in the Carolinas and Virginia by the German discount chain Lidl KG, known for low prices on private-label items. The new store is a short drive from a Whole Foods Market Inc., the upscale grocery chain that is in the middle of a proposed $13.7 billion takeover by Amazon.com Inc. with the potential to upend the way Americans shop for food.

The city of about a quarter-million people is also home to Kroger Co.-owned Harris Teeters and Wal-Mart Stores Inc., well-established national competitors that survive on razor-thin profit margins, as well as a host of independent grocers. There's even another German discount grocer: Aldi Sued, which operates 1,600 U.S. stores under the name Aldi, has an outpost just down the road from the new Lidl.

“You have to take very seriously and not let them get established”

A recent visit to three of the new Lidl stores made it clear that a price war had already started. Melinda Rahymer, a 52-year-old pet sitter from Winston-Salem who lives on a tight budget, is accustomed to searching for deals at Publix Super Markets Inc., Harris Teeter, Aldi, Walmart, and others. When Lidl opened across the street from a Walmart Supercenter—within a couple of miles from at least five other grocery stores—Rahymer decided to stop by and check it out. She grabbed some pasta and paid $2.19 for a gallon of milk.

“I think Aldi can beat them,” Rahymer said.

She was right: Aldi was selling milk for $2.18 a gallon. At the nearby Walmart, the price was $2.20. Food Lion, down the block? It matched Lidl at $2.19.

Lidl’s U.S. expansion, which began with store openings on June 15, would have been the biggest event of the summer for American groceries had Amazon not announced a deal to acquire Whole Foods the following day. That merger, if it closes in the coming months, promises to challenge grocers with a fierce competitor known to slash prices and use technology to lower costs. For now, however, the grocery industry is watching the Carolinas and Virginia to see how shoppers and established supermarkets will respond to a little-known German giant.

Lidl plans to have at least 100 locations here by next summer and could expand to more than 500 locations over the next five years, according to analyst estimates. Its initial stores are opening in competitive grocery markets, right on top of rivals' locations. Aldi recently announced plans to add an additional 900 over the next five years, and it's spending $1.6 billion to remodel 1,300 of its existing stores. The German discounters have battled across Europe for years, stealing sales from traditional grocers as consumers get accustomed to their private-label products. (The German grocery giant, Aldi Nord, also runs Trader Joe's.) The rivalry reaches the U.S. at a time of rampant food deflation, with falling prices already ravaging grocers’ earnings. Analysts predict a rough road ahead, particularly for smaller chains that will struggle to match prices.

The price fight was evident on several products last week. At a Walmart Neighborhood Market in Greenville, South Carolina, 75-ounce bottles of Tide were going for $8.94. Across the street, at the new Lidl, shoppers could take home 100-ounce bottles of private label detergent for $5.49, and the same name-brand Tide unit cost $8.97.

Ingles Market in Spartanburg, South Carolina, which proudly proclaims itself “American Owned” above the entrance, was fighting the new Lidl next door over the price of mustard. The store, part of a family-owned chain with about 200 locations, had a sale on 14-ounce bottles of its private-label Laura Lynn mustard at the cut-rate price of 10 for $10. At Lidl, meanwhile, yellow mustard in a 20-ounce bottle sold for 59 cents. 

The price cuts at Ingles Market and at other competitors are part of a strategy to make sure curious shoppers don’t get hooked on Lidl’s low prices. “It’s really important to starve them of oxygen,” said Dave Clements, managing director of retail at Dunnhumby, a data analytics firm. “You have to take very seriously and not let them get established.”

Lidl and Aldi operate with roughly the same business model: small, no-frills stores, low overhead, low prices, a limited assortment of private-label items. A Lidl store might carry two types of mustard, while the nearby Walmart has a dozen. Only about 10 percent of the products at the stores are recognizable national brands.

Lidl has 10,000 stores across Europe and Aldi Sud operates another 3,500. Growth can be slow—it took about a  decade after entering the U.K. for Aldi Sud and Lidl to control about 5 percent of sales by the early 2000s—but the discounters have proven to be threat to rivals’ profits, even with small market share. Wal-Mart and Kroger, the two largest grocers in the U.S., have the scale to fight the price war, but other chains could be in trouble.

“The smaller chains are going to struggle to meet the price competition, said Mickey Vu, a partner in the retail practice at Bain & Co. “Losing 3 percent of sales could put these guys out of business.”
 
Discounters currently account for about 4 percent of the U.S. grocery market, according to Dunnhumby, and that number could hit 11 percent in the next 10 years. Any growth in discount groceries will have come from somewhere, and bankruptcies and consolidation among weaker chains could result. “That’s the pressure point,” said Roger Davidson, an industry consultant. “The chains that can’t differentiate aren’t going to be around.”

While the American grocery store has mostly been immune to the online shopping that has led to store closures in other parts of the retail industry, supermarkets have taken steps to appeal to cost-conscious shoppers. Kroger, Costco Wholesale Corp., Wegmans Food Markets Inc., Publix, and even Wal-Mart have improved the quality of their store brands in a bid to build loyalty with shoppers. Trader Joe’s has long been popular among younger, budget-conscious shoppers for its private-label products. Products that don't carry name brands, once perceived as cheap and low quality, now attract  deal-hungry shoppers across the income spectrum.

This means that Lidl’s arrival comes as Americans are already shifting toward private-label products. The new Lidl stores are bright and clean, with large glass windows that let natural light flow into the stores. The shelves are placed at a lower height than at a conventional store, giving the stores a less cramped feeling. The shelves are also easier for workers to stock, helping keep labor costs down. The products are slapped onto the shelves in boxes, a further cost-saving strategy. There’s organic baby arugula, an assortment of fruit and vegetables, meat and some household cleaning items.

Lidl is currently benefiting from the curiosity of local shoppers who want to see what the new stores are all about. Last week, the stores were busy throughout the day, with few open parking spaces. Television advertisements had generated curiosity. The question now is whether customers will stop to do a full shop or simply pop in to grab a few things—what’s known in the industry a “fill-in” trip.

Woodrow Haney, a 72-year-old retired brewery worker, was making his third trip to the new Lidl store in Winston-Salem. He grabbed three bags of veggie chips and a cooler bag from an area where Lidl stocks random household items. He said he’d probably keep shopping mostly at Harris Teeter, favoring their selection of wine and cheese.

“The prices on the wine weren’t bad,” Haney said, “but I didn’t recognize the brands.”

Lidl has plans to expand rapidly in the U.S., and analysts believe that their deals will resonate with customers in the markets they enter. But there were signs during a recent visit that the company is still ironing out its U.S. operations. The stores in Winston-Salem and Spartanburg were struggling with meat refrigerators that weren’t working.

Mike Angell, a 59-year-old retired municipal worker, typically shops at Walmart but visited a Lidl store out of curiosity. The newcomer is planning to open a location near Angell's house on the coast, and he figured he would check out the prices. He left empty-handed. Angell was asked to leave the Winston-Salem after an employee noticed the silver handgun on his hip. He said the company should have posted a sign on the door telling people not to carry guns there.

“This is the State of North Carolina,” he said. “I won’t be coming back.”