With inflation running at a 40-year high, discount grocery chains such as Lidl and Aldi are giving major retailers such as Walmart and Target a run for their money. 
"Certainly Aldi and Lidl are taking market share if you look at value-priced grocers versus full-priced grocers," said R.J. Hottovy, head of analytical research at Placer.ai, which measures retail foot traffic. "It's pretty clear there was a consumer shift that happened about May or June, when a lot of people started trading down." 
The firm found that foot traffic at discount grocery chains was up in June and July, while Walmart, Target, shopping centers, and restaurants all declined. It also found that cross-shopping between Walmart and either Lidl or Aldi has fallen in recent years, as the latter increased their cost advantage. The German-based supermarket chains are known for their bare-bones store designs, lower prices, and limited selection.   
But trading down doesn't just benefit the lowest-priced options. Walmart is also benefiting from middle and higher-income shoppers who are trading down from even more expensive options due to inflation. 

Every Customer a Bargain Hunter 

Walmart CEO Doug McMillon highlighted the trickle-down effect in the company's latest earnings call. "The quality, value, and convenience we offer make Walmart a smart choice, and we're seeing more middle- and higher-income shoppers choose us."
In other words, consumers of all incomes are looking for bargains, and while companies are losing some customers, they're gaining others depending on price point. Walmart's relatively stable prices have helped increase its appeal to higher-income shoppers.
"Walmart made a deliberate decision to hold the line on pricing, while a lot of other grocery stores were out there raising prices with inflation," Hottovy said. "The price increases they did make were below CPI numbers, and I think that was a smart decision. That's one reason they've kept the share they have."
Walmart's grocery division has fared better than other parts of its business. 
"The rising cost for essential items and customers' reprioritization of spending led to significant mix shifts in our business," said John David Rainey, chief financial officer for Walmart, during an earnings call. "Grocery sales mix increased nearly 300 basis points, whereas general merchandise sales mix decreased more than 350 basis points."
The shift tracks with an economy-wide trend of customers prioritizing essentials, such as groceries, over general merchandise, and while the loss of higher-margin items has cut into Walmart's bottom line, its grocery sales remain strong. 

Discount Grocers Go to Manhattan 

That doesn't mean Walmart is in a position to stay competitive with low-cost competitors long-term. Some industry watchers argue that Walmart should be more aggressive to maintain its reputation as the cheapest option on the market. 
"[Walmart's] traditional standpoint was to be cheaper than anybody in the market, but that's just not the case nationally anymore," said John Clear, director at Alvarez & Marsal, a consulting firm in the retail space, and a former director of buying for Lidl. "Aldi and Lidl are cheaper than Walmart on quite a lot of items, and I don't think Walmart has been able to use its size to combat them." 
He added that the discount chains' advantage may grow as they push into new markets. Unlike Walmart, with its large big-box stores, both companies have made strides in setting up shop in major U.S. cities, especially along the East Coast. Lidl, for instance, recently opened three locations in New York City, with a fourth coming to Brooklyn soon. 
"If you were to take the Northeast or the New York City metro as an example, Aldi and Lidl are growing quite a bit in those areas," he said. "Walmart is historically under-indexed in that market, and they're not going to be able to change that very quickly, because they obviously need so much real estate for their stores."
Lidl and Aldi stores, by comparison, have a much smaller physical footprint, which has allowed them to open locations in dense urban areas such as upper Manhattan. 
Walmart, however, is no lightweight in the discount space, and taking some of its market share won't be easy. Rupesh D. Parikh, a research analyst for Oppenheimer and Co., a consulting firm, said that he expects Walmart to hold onto its dominant position, in particular, through its more diverse product mix and strong private-label brands. 
"Going forward, I would expect Lidl and Aldi to take share from Walmart and other grocery players, but in general I expect Walmart to remain the market leader," he said. "I think you're just going to see more of a focus on value."