Is the Sky the Limit for Aldi?
Aldi has acknowledged plans to open stores in California, the home of its wildly successful cousin, Trader Joe’s.
The confirmation came from a report in the Des Moines Register while the Los Angeles Times reported in late June that the limited-assortment grocer was opening a regional headquarters and distribution center in Moreno Valley to expand into California and the Southwest.
The German supermarket giant, which opened its first door in the U.S. in 1976, operates more than 1,200 stores in 32 states in the U.S., largely in the Midwest and Northeast. In 2009, Aldi announced it was ramping up its expansion to 75 stores annually. It entered Houston earlier this year and just opened its first store in Brooklyn, NY.
The expansion was designed to capitalize on increasingly cost-conscious shoppers as well as the success the chain is finding upgrading its offerings, including adding more fresh foods, that have increased its appeal to a wider audience. In May, Aldi introduced Specialty Selected, a high-end line of German coffees, gourmet pastas, and premium packaged meats and cheeses.
"Aldi used to be viewed as a stock-up store where you’d buy a lot of canned goods that were mostly brands you didn’t recognize," Matt Lilla, division VP in Aldi’s Faribault, MI., office, told the Des Moines Register. "It’s changed a lot."
In entering new markets, Aldi often gets compared to Trader Joe’s. Aldi’s stores are also small, about 10,000 to 17,000 square feet. They carry about 1,400 items, versus traditional grocers that can carry up to 20- to 30,000 items and superstores with over 100,000 items. About 95 percent of its merchandise is private label. Both chains are also owned by Germany’s Albrecht family, although operated independently.
The big difference is price, with Aldi promising to save shoppers "up to 50 percent on their grocery bills."
David Livingston, principal at DJL Research and a RetailWire BrainTrust panelist, speaking to the Register, estimated that Aldi shoppers on average save 15 percent to 20 percent more on groceries over Walmart and about 25 percent over Hy-Vee.
The store’s look, often described as "bare-bones" and "no-frills," also keeps costs down. Other cost-saving quirks include incentivizing shoppers to bring their own shopping bags and return cards, not accepting credit cards, and its open carton displays.
"If you took a Trader Joe’s and made it more for Walmart customers, that’s what Aldi is, like a dollar store for food," BB&T Capital Markets analyst Andrew Wolf told the LA Times.
The opening of smaller stores by Walmart and Target promise more competition but Aldi’s future stores will increasingly move it closer to traditional grocers and even Trader Joe’s locations.
"Twenty years ago, Aldi’s target areas were lower-income neighborhoods," Aldi’s Mr. Lilla told the Register. "At this point, there is no specific income target."
- No-frills foodstore Aldi is expanding – Des Moines Register
- Discount grocer Aldi USA poised for move into Inland Empire – Los Angeles Times (tiered sub.)
- How Two German-Owned Sister Supermarket Brands Became Hot Trendsetters in the U.S. – Time
- ALDI Redefines Gourmet with New Premium Brand, ‘Specially Selected’
National Grocer Introduces Hand-Selected Product Line Available Exclusively at ALDI – Aldi - Aldi Looks to U.S. for Growth – The Wall Street Journal (sub. required)
- Where Wal-Mart Failed, Aldi Succeeds – The New York Times (tiered sub.)
- Select Assortment Discount Grocer ALDI Opens First Houston Stores – Aldi
- Select Assortment Discount Grocer ALDI Opens Eleventh Houston Store June 13 Grocer Introduces Shoppers to Big Savings and Better Quality – Aldi
Discussion Questions
What do you think of the national rollout potential for Aldi? Do you agree there is “no specific income target” for the chain? What are its relative strengths and weaknesses vs. its competitors?
I’d love to see some data on this, because if you come to Atlanta (or as we like to say, y’all come down now, ya hear) you will definitely see a target for Aldi, and it’s not a very attractive one. And comparing Aldi to Trader Joe’s may be like comparing JCP to Nordstroms—yeah, the stores may be the same size and they may even be in the same mall, but that’s where the comparison ends.
I’m going to give Aldi a thumbs up.
One side-effect of the recession is that saving money is now cool (see recent stories about cable customers cutting their subscriptions.) A niche grocer like Aldi can attract shoppers of all incomes who appreciate the concept of $.70-cent tuna and inexpensive apples. Customers who suffer sticker shock at their usual grocer can reduce the sting a little by visiting Aldi a few times a year. They’re a company to watch.
It’s generally true that a customer gets what they pay for … saving money or discovering uniqueness. And both Trader Joe’s and Aldi strive to accomplish their specific goals primarily with private labels, the main business model of German food retailers.
Trader Joe’s is today’s unique retailer offering a different assortment of goods in a fun and friendly environment. They compliment that with helpful “team members” and fast courteous checkout service. Uniqueness wins there.
Aldi has the lowest prices on “nothing new” merchandise in spartan surroundings. And Aldi may not be able to draw enough unique-seeking shoppers into in bare-bones environment. Money wins there.
Both retailers serve the wishes of large, growing and different sectors of customers. Both retailers will continue to grow in our uncertain trending economy.
Aldi’s weaknesses are its strengths—private label, small stores, limited hours, limited perishables, etc. Eventually I do see a national rollout of Aldi, however, Aldi expands with their cash and not the cash of lenders, so it will be a slow and methodical process—as it has been for the past 40 years.
Aldi is a favorite among frugal, high-income shoppers. No one can top their sales per man hour. I saw one region was averaging over $485 per labor hour. They pay their people well, however, its hard work. Seems most store level employees are finished by age 50. Shrink rates are low—I usually see about 0.3%. Site analysis is easy—just go across from Walmart.
Trader Joe’s really needs a larger trade area with a big draw and prefers to be among households over six figures. Aldi can pretty much just go where there is a Walmart, therefore small markets are not a problem. Usually we see Aldi stores averaging in the $155k to $160k per week. Trader Joe’s are routinely $500k per week or more.
Aldi is bringing the European grocery model to the US and I believe the timing is perfect. Why? The stores are small so they can be built in locations that are extremely convenient to shoppers. No more long drives to a Walmart Oasis. Now shoppers can rely on a small, convenient local format. This model attracts all income levels.
Aldi understands the value and importance of Private Label. Just look at Trader’s Joe’s. As consumers learn to trust the Aldi brand, it will only strengthen their competitive advantage against smaller Walmart and Target stores.
The one weakness they will need to overcome is building a reputation around “Fresh.”
The potential for Aldi and Trader Joe’s is huge in the US.
More power to the Aldi team. The Aldi operation IS attracting a new style of shopper—I have seen it with my own eyeballs, from friends to family members that are repeat Aldi shoppers. In addition, with Aldi’s well-controlled inventory mix and being owned by the very smart Albrecht family, they have the flexibility to tune into the markets that they select. All they need to do is shift into new turf, get the word out on the social networks and they will take marketshare from the likes of Joe’s and others.
Watch out Atlanta—Aldi says “Hey y’all” real well.
Tom…y’all have a nice day and go shoppin,’ eh?
The lack of Trader Joe’s around the country has always baffled me. Must be logistics or a philosophy of slow and careful growth, like the Container Store. If they could handle it, there could be 1,000 Trader Joe’s tomorrow and all they’d have is larger revs and profits. It’s such an amazing concept, seems like an injustice to keep it so small. A retail injustice!
Aldi—complete opposite end of the C-store customer spectrum. But they too could have a thousand stores tomorrow (different RE of course). They’re doing what Walmart attempted to do in PHX a few years back, only spot on to the customer.
Kudos to both; great companies, fantastic ways to address the ‘C-store of the future’.
The best description came at the end of Tom’s column, Aldi’s is “like a dollar store for food.” I asked my resident expert, my wife. She agrees with the description of both Trader Joe’s and Aldi. Given a choice, which we do not have in South Florida (until next year), she would select Trader Joe’s over Aldi’s every day. Then I asked her to choose between Trader Joe’s and Publix. No issue here, it is Publix without question.
The typical household in America buys only 300-400 different items in an entire year, and only half of those, 150-200, on a regular basis. Thus, a store like Stew Leonard’s can sell $100 million per year, with only 2,000 SKUs. 2,000 provides the shopper 5 choices for everything they ordinarily buy—ten for the regular purchases!
Aldi in Europe used to offer 400 items in their small stores – I’m not sure about the US. But they did double the SKU count a few years ago. (Illustrating that Big Head stores, always grow a long tail – even if it is shorter than tens of thousands.
That’s because the long tail is very ATTRACTIVE to shoppers even though they rarely buy from it. And retailers “let” manufacturers pay them to stock the long tail, a win-win-win for shoppers, retailers and their suppliers.
Only problem is, that retailers then bury the Big Head of what shoppers really want to buy in the sea of merchandise that is the Long Tail. Properly balancing the two is nearly never done because the money from the brands—in terms of “free” profits, FAR outweighs margins on sales to shoppers.
This is why I point out regularly that suppliers are the true customers of most stores—paying for access to the shelves, promotional fees, etc., etc. The shoppers are a utility that is hopefully attracted mostly by paying them to buy this or that—again using the suppliers money to do it!
There is nothing misguided or nefarious about this business model, except that the world is largely ignorant of the truth about it—including many in the major brand suppliers.
Aldi, like Stew Leonard’s, makes most of their money in the OLD fashioned way: margin on sales to shoppers.
Of course Aldi MAY be a super success with an expanding chain of stores that they have run for many years in the Chicago market. The single biggest problem is that it is a lot harder to stock what the shopper wants and needs with only 800 items (I’m guessing what they will start with, based on European operations.)
It doesn’t take nearly as much brains to do it with 40,000 SKUs, although given the one million items typically available in area supplier warehouses, its a challenge even for the Long Tail stores. See: “The Dinner Party in the Pantry
(Category Management vis- -vis Item Management.)” And also, “The Misguided Bobbing of the Long Tail.”
With all due respect to Herr Lilla, it sounds like they haven’t changed very much at all… and since their model seems to work for them, why would they want to?
I welcome them to California—home to meddlesome regulations and much soon-to-be-available real estate (Thank you Tesco)—but would remind them that we already have no frills stores out here. In fact, I think (collective) overexpansion is the biggest weakness for all discounters. Last week it was Winco, this week Aldi, next week someone else…how may places does America need to buy a Brand X can of corn?
When Aldi approaches 6,000 stores this may be an issue. Until then, they are on a solid roll. With the exception of a few cities or areas that have very high income, they are not limited. Lower and middle income groups will shop the stores. We have seen some down shopping by higher income groups especially for Private Label. All retailers have a income target, it’s just that some have a wider range than others.