“They are fierce and they are good.” – The then-President and CEO of Walmart US, Greg Foran, said this about Aldi, a hard discounter hailing from Germany.
A little bit of history. The original Aldi was founded in 1946 by Karl and Theo Albrecht in Essen, Germany. The name Aldi combines the first two characters of their last name (“Al”) and the first two characters of the word Discount (“Di”). The company was split about 2 decades later into Aldi Nord and Aldi Sud when the founding brothers disagreed over the sale of cigarettes in their stores. Aldi Sud made inroads into the US grocery market first in 1976, keeping the brand name. Aldi Nord followed through the acquisition of Trader Joe’s. Although Aldi isn’t a household name like Costco, Walmart or Target in the US, the chain has been in the US, actually, for quite some time with the first store opened in Iowa in 1976.
How has Aldi been doing in the US?
By the latest estimate, Aldi has about 2,000 stores in the US. In 2017, the chain announced a $5.3 billion expansion plan that is focused on remodeling existing stores and opening new ones. Aldi expects to have 2,500 stores in the US by 2022, making it the 3rd largest grocery chain only behind Kroger and Walmart.
Aldi was reported to have a tad over 2% of market share in the US grocery segment in 2018. Morgan Stanley estimated that in 2019, Aldi’s YoY growth surpassed that of Kroger, Target, Whole Foods, Publix and only trailed behind that of Walmart. Supermarket News said that the German-native discounter recorded about $18.4 billion in revenue in 2018, up from $16.8 a year prior. Since the company is privately held and does not have to report its financial data, these figures cannot be confirmed for 100% accuracy. In an interview in 2018, the CEO of Aldi revealed that the company’s US sales doubled in the previous 5 years leading to 2018 and added that “our same-store sales over the past several years has been much more than the industry has realized.”
In the same interview, the CEO, Jason Hart, said that in 2017, 40 million households shopped at their stores every month with 7 new million households added to the customer base. Aldi expects the figure to grow to 100 million customers every month by the end of 2022.
Apparently, shoppers love Aldi. According to the study by Bain & Company in 2018, a known consulting firm, Aldi leads all discounters in Net Promoter Score, which is a metric for customer advocacy, and is a top 3 in the grocery segment overall. A high Net Promoter Score is important as promoters are much more loyal and spend more. Per Bain, “promoters in general spend much more—$111 vs. $39 on average per month—and give retailers a higher “share of wallet”—28% for promoters vs. 11% for detractors”. A study by Morgan Stanley revealed that in 2018, 19% of shoppers who switched retailers began shopping at Aldi, second only to Walmart. Walmart got 30% of switchers, but the figure was flat from a year prior while Aldi’s number increased.
Given what we have seen so far, Aldi has done quite well for themselves in the cut-throat grocery market. What is their secret sauce?
What makes Aldi competitive?
Aldi is known for its thrifty culture and approach. The company works aggressively in cutting costs and passing on savings to shoppers as much as possible. On average, an Aldi store’s size is about 12,000 square feet, compared to Walmart’s 178,000 and Costco’s 145,000 square feet. The smaller size helps drive down either leasing expense (if the land is leased) or depreciation (if the land is owned), as well as energy costs. Regarding SKUs, an Aldi store, on average, carries 1,400 items compared to 40,000 items by a traditional supermarket. The much smaller store size and more limited item selection lead to fewer staff required. An Aldi store usually has only 3-5 employees, a significantly smaller number compared to how many employees are present at a store like Walmart or Costco. The limited item selection enables Aldi to focus on its offerings and negotiate favorable deals with suppliers to keep costs and prices low. Another benefit is that a limited assortment doesn’t require complex marketing promotions, meaning that there will be no cost on marketing materials and labor.
The way Aldi operates its stores also contributes to cost savings and lower prices. Walking into an Aldi store, you won’t notice many decorations. It looks like an ordinary, no-fancy store and it’s by design to keep costs low. At Aldi stores, there is no free bag. Customers are encouraged to bring their own bags. Carts can only be used with a quarter coin. Customers retrieve the quarter upon returning a cart. This policy has long been part of Aldi’s signature operations. Additionally, customers have to bag their own groceries. A cashier will scan items and put them in a cart, but shoppers will have to take it from there. It speeds up the checkout process, increases efficiency and reduces the need for additional staff. As far as I know, there is no self-checkout.
The book Retail Disruptors mentioned the thrifty approach codified into what is known as Aldi’s “Doing Without Checklist”. The checklist consists of rules such as “no external market research, no customer surveys, no budget forecasts, no public appearances, no publicity, no PR departments, no sumptuous business offices, no company cars, no gifts accepted or invitations for dinners from vendors.” If you are not familiar with Aldi, perhaps this may be the reason why.
For example, each product has a bar code on each side of its package so cashiers can scan items quickly. The company recently took two years to develop a new milk bottle and transporting system that swapped out metal for polystyrene crates, allowing it to get more milk on a single truck because it weighs less, which saves on transport costs.Source: Inquirer
About 90% of Aldi’s items are private labels. This private label centric approach allows Aldi total control over its selection and reduces the cost as well as complexity that comes with national brands. Private labels used to be unpopular among shoppers due to their cheap image. However, consumer preferences have changed. Astute shoppers, especially millennials, now have a much more favorable view on private labels because they are cheap and provide best value for money. According to Bain, 85% of American shoppers are open to buying private labels.
All together, Aldi’s culture and operational philosophy lead to lower prices and value for money for shoppers, especially in fresh groceries and staples. I switched to Aldi from Walmart a few months ago. My shopping habit is pretty consistent as I only need a few vegetables, some nuts milk and fruits, all of which can be found for a cheap price at Aldi. For instance, I have bought a lot of fresh grapes for 79 cents per pound for the past 4 weeks, a price much lower that what other grocers can offer. A bottle of soy or almond milk costs only around $2.4 at Aldi.
Of course, Aldi isn’t for everyone. There are a lot of things unavailable at Aldi and so are other convenient add-ons. If you want to buy a TV or an appliance or want a self-checkout, chances are that you won’t find either at Aldi. However, if you only want to buy fresh produces and staple food consistently at cheap prices without having to deal with complexity that comes with various choices, then Aldi is for you. Also, not many people enjoy spending a lot of time at a store. Personally, I can go in and out of an Aldi in about 5 minutes, if in-store traffic is light. I know what I want to buy and the store’s 5-aisle layout makes it super easy to navigate. In fact, Aldi seems to resonate well with high earners. Aldi’s new stores are in zip codes that have more than $65,800 household income on average, about $4,500 above the national average.
Grocers in the US certainly noticed the German brand’s presence. Since 2017, Walmart has closed the price gap to Aldi. Retailers also invested heavily in eCommerce and delivery options such as pickup or to-door delivery. Aldi responded by:
- Increasing its fresh food offerings by 40% in 2018 and adding new vegan and vegetarian options
- Launching a nationwide marketing campaign, something that is unusual for the discounter
- Introducing a partnership with Instacart for pickup and delivery
The company has performed well so far in the US. It’s expanding and has its own legion of fans, including myself. However, that’s not a guarantee for future success. The grocery market is notoriously low-margin and littered with aggressive competitors who have vast resources at their disposal. Also, changing customer preferences can go against Aldi. Case in point: Covid-19 has driven consumers to shop online more, even for groceries. If Aldi is forced to steer away from its bare-bone approach, it will eat away the discounter margin, but Aldi may not have a choice. There are several ways that Aldi can unlock growth that I can think of:
- Expanding geographically to new market, especially into West Coast
- Adding more convenient services
- Expanding its item selection. Since it doesn’t carry too many items, there is a lot of opportunity here
- Going after more affluent customers who value what Aldi has to offer
I am excited to see what the future holds for Aldi. I don’t know how it will go for the discounter. Given my personal experience as a shopper and the company’s performance after being in the US since 1976, I think it earns a bit of our confidence.