Express Lane: Inside Aldi's push to dominate discount retailing in the US
The hard discounter is softening its image through remodels while aggressively building stores in competitive regions across the country.
Editor’s Note: This is the latest in our series of profiles examining individual retailers, including the challenges and opportunities they face in an increasingly changing marketplace. The focus of this story is Aldi, a hard discounter with deep roots in the U.S. that’s spending more than $5 billion to build new stores and remodel existing locations.
Just three days before German discount chain Lidl was set to open its first 10 U.S. stores, a competitor was already taking aim: Fellow discounter Aldi announced it would spend more than $3 billion during the next five years to add around 900 new stores to its existing base of 1,600 locations. At the same time, it would continue remodeling most of its existing stores, bringing its total investment to more than $5 billion.
The message to Lidl, not to mention the timing, was clear: You may be the exciting newcomer, but we are the incumbent, and we intend to dominate hard-discount retailing in the U.S.
For more than four decades, Aldi has been gradually — stealthily, some analysts say — building up its store base, improving its price positioning and fine-tuning its private label assortment. Now, with the winds of consumer preferences blowing in its favor, the chain that opened its first U.S. store in a sleepy Iowa town back in 1976 is ready to pounce.
"Aldi wants to be the company to bring hard discount grocery shopping into the mainstream," Tim Barret, senior research analyst with Euromonitor, told Food Dive.
But can Aldi become a dominant force by updating and building so many stores in such an over-saturated grocery market?
Growing under the radar
Despite recent developments, Aldi’s true advantage lies in decades of quiet, savvy growth in the U.S. Back in the mid-1970s, the company, which had grown from a single store in a small German mining town to more than 200 stores across the country, bought a 24-store Iowa grocer called Benner Tea and introduced American consumers to a concept that was ahead of its time: store brand products.
According to longtime grocery consultant Bill Bishop, now chief architect with consulting firm Brick Meets Click, the rest of the industry wrote off the concept. But the consumer response was overwhelming. By the time the stores reached suburban Chicago, just nine months after first opening in Iowa, established grocers began to panic.
“Aldi’s prices were, as they are today, 20% to 25% lower than grocery, and of good quality,” said Bishop. “It scared the heck out of everybody.”
But Aldi's new-found success was short-lived as its competitors were quick to emulate its success. Chain stores built limited assortment markets within their stores, stocking them with cheaply made essentials such as soap, cereal and soda. This was the dawn of generics, as they came to be called. The items generally were of inferior quality to national brands, came in unattractive packaging and weren’t heavily promoted. Still, they were cheap and the public loved them.
The rise of generics blunted Aldi’s momentum in two ways. It made inexpensive, retailer-made products more widely available and, most importantly, it caused shoppers to lump Aldi’s higher-quality products in with the generic items lining other retailers' shelves.
“Aldi was completely flummoxed, because they couldn’t believe that American shoppers were shunning their offers, which were generally speaking comparable or superior to national brands in favor of these cheap, imitation generics,” Bishop said. “But that’s what the market did. Aldi was bloodied very badly by that competition.”
Encouraged by the strong demand, supermarkets responded by building their own Aldi-like stores. The attempts generally failed, with most of the locations quickly going out of business.
Aldi, meanwhile, continued to grow. Instead of affluent consumers and prime real estate, it targeted mostly fixed-income consumers with stores located on the edge of population centers. Its small-format, low-overhead model allowed the company to steadily build stores. For years, the company flew under the radar, quietly amassing more than a 1,000 stores in communities throughout the Midwest, South and Eastern U.S.
Targeting new shoppers
Nowadays, consumer preferences have caught up to Aldi’s small, private label-focused stores, helping the company justify its deep investment in expansion and store updates. Private brands account for 17% of total grocery sales, according to the Private Label Manufacturers Association, while national brands have lost favor with many consumers.
At the same time, consumers are shopping multiple stores to fill their needs, and increasingly looking to make short, get-in-get-out trips. According to market research firm Nielsen, two-thirds of consumers favor these so-called quick trips over weekly stock-up stops, which favor small-format stores over traditional 50,000-square-foot outlets. Aldi stores, by comparison, average 12,000 square feet.
“We’ve had a lot of price pressure in the U.S. over the past couple years, even before Aldi and Lidl began making their push. It’s all pushing people towards lower prices.”
Senior research analyst, Euromonitor
Price competition, coupled with post-recessionary habits, according to analysts, have made shoppers more focused on cost than they’ve been in the past.
“We’ve had a lot of price pressure in the U.S. over the past couple years, even before Aldi and Lidl began making their push,” said Barrett. “It’s all pushing people towards lower prices.”
Aldi plans to capitalize on these favorable conditions by remodeling its existing stores to more closely resemble the supermarket experience shoppers are used to and by building more locations in promising markets such as Southern California, Texas, Florida and the Mid-Atlantic. During the next four years, the company hopes to more than double the number of daily shoppers served by its stores, from 40 million to 100 million.
"Our goal is to deliver on our customers’ desire for a modern and convenient shopping experience with a focus
on fresh items, including more robust produce, dairy and bakery sections," Aldi spokeswoman Liz Ruggles told Food Dive in an email.
Aldi’s store remodels also include widening aisles, improving signage and adding more natural lighting.
Neil Stern, senior partner at retail consulting firm McMillanDoolittle, has studied the updated stores and estimated Aldi has added 3,000 additional square feet to accommodate its enhanced fresh assortment. The discounter is also using the space to merchandise wine and beer — often the target of grab-and-go trips.
“The overall feel is more open and spacious,” Stern told Food Dive.
Stewart Samuel, program director with IGD Canada, noted the remodels take their cues from updates Aldi has made to its European stores over the years, which have steadily drawn shoppers away from mainstream grocers. Samuel also noted Aldi in the U.S. has relocated many of its stores to take advantage of customer traffic.
The goal of the remodels, Samuel said, is to draw more affluent customers while still maintaining its focus on low prices and efficiency.
“They’re looking to soften that hard-discounter image,” Samuel told Food Dive. “But what I find really interesting is that despite these improvements to the look and feel of the store, they’ve stayed very true to the hard discount model in terms of efficiency.”
Aldi officials said the remodels are intended to drive traffic across consumer demographics in order to support the hard-discount model.
"The remodels are aimed at increasing our volumes which means more purchasing power that will help us lower prices further," Scott Patton, Aldi's vice president of corporate buying, told Reuters.
At the same time that it’s been rolling out store updates, Aldi has overhauled its private label selection to focus on prominent trends and high-value customers. In 2014, Aldi came out with a liveGFree line of gluten-free products, and followed that up with a baby line called Little Journey.
The discounter also has expanded its premium line of products, which earn a higher margin and allow the chain to aggressively discount its mainstream items.
“They also had what we’d call clean labels before most other retailers,” said Bishop. “Not only do they innovate specifically, but they stay on trend, and that’s a major competitive advantage for them.”
Despite what many industry analysts call an over-stored U.S. grocery market, Aldi wants to grow its footprint by more than 200 locations per year during the next several years. Its reasoning? Not only can it build stores cheaply and quickly, but it can steal consumers away from many slow-growing conventional supermarkets.
“Not only do they innovate specifically, but they stay on trend, and that’s a major competitive advantage for them.”
Chief architect, Brick Meets Click
Aldi’s biggest opportunity may be in California, where the company currently has a 40-store foothold and is looking to build additional outlets, including in the southern part of the Golden State which already is inundated with locations. There, Aldi is going toe-to-toe with legacy retailers such as Ralphs and Vons, as well as specialty retailers such as Gelson's.
“[Southern California] is low-hanging fruit for them since they’re the only hard discounter in that market and Lidl isn’t there yet,” said Barrett. “They’re going there and pushing the gas a bit more than they usually do in order to get ahead of everybody else.”
Early reports indicate a positive reception from shoppers. But industry experts point out that another small, private-label heavy retailer — Tesco-owned Fresh & Easy — failed to crack the market. Sources cautioned as Aldi grows, it could bump up against another SoCal favorite that’s also owned by the Albrecht family: Trader Joe’s.
Stern said Aldi is a stronger operator than Fresh & Easy, whose numerous operational and store-level problems caused it to exit the U.S. after just six years.
“Aldi is more disciplined and the stores, which are representative of the new format, have been well received,” he said.
Getting ahead of Lidl seems to be a motivating factor behind Aldi’s breakneck expansion.
In Texas, the discounter is building stores in the booming Dallas and Houston markets, while in Florida it has expanded into cities including Tampa Bay, Orlando and Miami. The company also is growing its footprint and remodeling stores throughout the Mid-Atlantic, where it faces off against Lidl as well as other newcomers and legacy players eager to capitalize on the area’s consumer density and growing income levels.
Recent news that Aldi has reached a tentative agreement to build a regional office and distribution center outside Phoenix underscores the discounter’s drive to forge its way into new markets.
“I think what we see is Aldi moving as quickly as possible to cover the nation and build a strong footprint so they are the incumbent with a modern hard discount offer,” said Bishop, who noted that Aldi also has increased its TV advertising and marketing in regions where it's building and updating stores.
Hard to discount
Despite its growth initiative, it will likely produce modest market share gains for Aldi, according to sources. IGD’s Samuel pointed out that the discounter is still a relatively small player in states like Florida and California, and that it needs a lot of stores to really make an impact. He also noted that given its small format and limited assortment, most consumers won’t shop exclusively at its stores.
But Aldi is poised to steal shoppers and trips from all types of food retailers, sources note. Stern estimates that by 2022, Aldi’s 2,500 stores will produce $30 billion in annual sales, making it a top 10 grocer.
“If Aldi completes both the remodels and their expanded growth, they impact everyone,” he said.
Conventional grocers, as well as specialty operators, could see an impact from Aldi’s low prices and growing fresh assortment. But the discounter appears to have its sight set on one retailer, in particular: Walmart.
In numerous spots, Aldi has built stores adjacent to or right across the street from Walmart locations. In May, CEO Jason Hart revealed that internal research had put its prices at 21% below those of Walmart and other low-price competitors. The Bentonville-based retailer, whose Asda banner in England has lost considerable share to discount competitors, has taken steps to fortify itself. These include pressuring suppliers to bring down their prices, updating its stores to increase sales velocity and growing its click-and-collect online shopping platform.
“If Aldi completes both the remodels and their expanded growth, they impact everyone.”
Senior partner, McMillanDoolittle
Many observers have noted that the price war Walmart is locked in with discounters Aldi and Lidl is exerting pricing pressure throughout the industry. Similarly, sources argue that while there’s been a lot of focus on Aldi competing with Lidl, the real story is the combined impact that both discounters will ultimately have on the marketplace.
“The battle is often seen as Aldi versus Lidl, when in reality it’s Aldi and Lidl versus everyone else,” said Samuel.
Despite its many advantages as an industry disruptor, Aldi faces numerous headwinds. According to Barrett, retailers across the board are investing in price drops and improving their store experiences. The chain also may struggle long-term against Walmart, which offers many of the national brands along with a fuller shopping experience that many Americans are used to. Others question the newly remodeled stores’ ability to draw new customers en masse.
Still, if Aldi knows anything, it’s how to play the long game.
“They're trying to steal share wherever they can, and let consumers everywhere know that Aldi is the place to shop,” said Barrett.
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