It’s easy to view Aldi as a lesser competitor when compared with some of food retailing’s most highly regarded operators. Its stores are small, the assortment is limited, merchandising is utilitarian, and service departments such as deli, bakery and prepared foods aren’t present to wow shoppers. Those elements of store experience are what typically distinguish some of the industry’s most popular operators.
While Aldi’s stores will never be confused for Wegmans, H-E-B, Publix, Meijer or Hy-Vee locations, they’re special places in their own right. It’s a different brand of special, though, and something of an acquired taste for shoppers. Aldi stores have a typical sales floor of just 12,000 square feet and offer roughly 1,400 products, more than 90% of which are store brands. There are five wide aisles in a typical layout, and products are merchandised in cut-case displays designed to go from the back room to the sales floor with minimal handling. A large section in the interior of the store is dedicated to “Aldi Finds,” an assortment of opportunistically purchased goods lending a treasure-hunt feel to the store and sparking impulse purchases. Cashiers sit on stools at checkout, and customers bag their own groceries. And then there’s the process of inserting a quarter into the handle of a cart to use it in the store. Most shoppers return their carts to the store entrance to get their quarters back.
The approach isn’t for everyone, but it is for a huge number of American shoppers who’ve become converts to the Aldi way and made the company worthy of the distinction of America’s fastest-growing grocer. With the planned addition of 70 stores by year’s end, Aldi will have added 623 stores during the past five years, and it’s poised to accelerate growth following two recent announcements.
The first of those will see Aldi continue the westward expansion it began in 2016 with its entry into Southern California and the planned openings of its first locations in the Phoenix market later this year. Then, in 2021, the opening of a distribution center in southern Alabama will facilitate expansion into new markets along the Gulf Coast. As it does so, Aldi rigidly adheres to a supply-chain-driven approach to operations and a minimalist approach to merchandising that enable it to charge rock-bottom prices. Customers appreciate the business model, but its elegant simplicity often isn’t fully appreciated by competitors and industry analysts. It doesn’t help that Aldi tends to be less vocal than other retailers about communicating the finer points of its business model, which Progressive Grocer estimates generated 2019 annual sales of more than $15 billion.
“For us, we’re less focused on self-promotion and more focused on serving our customers. Today’s Aldi appeals to a wide range of demographics — we’ve seen success in all markets, from rural areas to big cities,” says Jason Hart, CEO of Batavia, Ill.-based Aldi USA. “Our loyal shoppers serve as our ambassadors to help spread the great news there is to share about Aldi — from our amazing lineup of products to the incredible savings they can find at our stores. The Aldi business model is intentionally different by design, and everything we do is in order to offer our shoppers the lowest prices possible, every day. Whether it’s our purposeful store design, our vast selection of private label products or how we merchandise our goods, our primary goal is to create savings and pass them along, which allows us to provide the items shoppers want at unbeatable prices, no matter what.”
Aldi has come a long way in recent years, thanks to multibillion-dollar investments in remodeling efforts and enhanced presentation of key perimeter departments. The operationally efficient merchandise strategy is still evident throughout Aldi’s new stores, whether it’s cut-case displays on warehouse-style shelving or pallet presentations in high-velocity categories, but stores have been prettied up with colorful lifestyle signage on outer walls, coupled with end cap signs that educate shoppers about key elements of the Aldi value proposition.
“We’re always evolving our brand, our stores and our product selection to appeal to more customers,” Hart says. “As you know, a few years ago, we announced a 40% increase of our fresh food selection, with a focus on new produce, meat and organic options, as well as easy-to-prepare foods. We’re also in the middle of a more than $5 billion nationwide initiative to modernize existing stores and open new locations so that we can bring the Aldi experience to even more people.”
For example, the company has rolled out online grocery services at nearly all stores and is intent on growing its e-commerce offerings, according to Hart. Aldi recently extended curbside pickup to 600 stores and is on track to reach 700 locations by year’s end, Hart says. In addition, grocery delivery is already available in more than 10,000 ZIP codes.
Aldi doesn’t give much away when it comes to specifics about its future efforts, and so it is with the company’s digital efforts. Asked whether Aldi’s plan is to offer pickup at most of its locations, Hart replies, “We’re continuously exploring new ways to bring convenience, quality and value to even more communities with online grocery offerings.”
Coast to Coast
While the opening of Aldi’s 2,000th store was a notable accomplishment in July, it was also a milestone that the company had expected to achieve 18 months earlier. The 2,000-location goal had been set in December 2013, when Aldi had just 1,269 stores and disclosed plans to open 650 new locations by the end of 2018.
When Aldi ended 2016 with only 1,608 stores, the 2,000 target seemed unlikely to be attained. Even so, in early 2017, when a $1.6 billion remodeling and store-expansion program involving 1,300 locations was announced, Aldi maintained its target of nearly 2,000 locations by the end of 2018.
Aldi (and Others) Face Lidl’s East Coast Encroachment
Armed with an underused distribution system and fresh academic research that documents its favorable impact on food prices, Lidl is poised to accelerate U.S. expansion and challenge its fellow German deep discounter, Aldi.
Lidl has been quite deliberate about its U.S. growth strategy, but that could soon change. The global operator of more than 11,000 stores across 32 countries opened its U.S. headquarters near Washington, D.C., in 2015, and debuted its first U.S. stores in Virginia, North Carolina and South Carolina in 2017. It named Johannes Fieber CEO in early 2018 and late that year acquired 27 Best Market stores in New York and New Jersey. Since that time, the first batch of remodeled Best Market locations has opened, and in May, Lidl attained a milestone when it opened its 100th U.S. location, near Atlanta. While 100 locations is a notable achievement, Lidl’s more significant activity to date has involved the development of a supply-chain infrastructure that is currently underused. The company’s three existing distribution centers, in Fredericksburg, Va.; Mebane, N.C.; and Perryville, Md., encompass roughly 2.5 million square feet. A fourth location, to be built in Covington, Ga., will be Lidl’s largest facility, at 925,000 square feet.
Any one of these facilities would be able to meet the replenishment needs of between 300 and 400 stores, based on the experience of other food retailers that operate stores of similar size and sales volumes. With each of its DCs requiring an investment in the neighborhood of $100 million, Lidl will eventually need to ramp up store expansion to generate a return on its supply-chain investment.
As it does so, the retailer, whose business model bears many similarities to that of Aldi, has a good story to tell communities that it targets for expansion. That’s because Lidl commissioned the University of North Carolina Kenan-Flagler Business School to conduct a study that found its entrance into the Long Island, N.Y., market caused competitors to lower prices significantly. The study, led by Katrijn Gielens, a professor of marketing at the business school, examined prices of 47 store-brand products prior to the COVID-19 outbreak and determined that Lidl’s arrival prompted competitors to reduce their prices by as much as 15%. The study noted that Lidl’s prices were about 45% lower than Trader Joe’s and more than 30% lower than other national retailers on Long Island. Gielens analyzed the prices at retailers such as Aldi, BJ’s Wholesale Club, Costco, King Kullen, Stop & Shop, Target, Trader Joe’s, and Walmart during 27 store visits between April 2019 and March 2020.
“Given that U.S. households are facing the fastest-rising rise in food prices in a generation and a looming recession, understanding how supermarket competition can keep grocery prices at bay is more important than ever,” she notes. “Lidl’s competitive price-cutting effect is continuing to pressure other retailers to drop their prices. The data shows the effect is greater than Walmart’s entry in a new market reported by previous academic studies.”
The recent findings are similar to the results of a prior study Gielens conducted, which showed that Lidl put significant pressure on top retailers to reduce their prices soon after the retailers first opened stores in the United States.
That fact that a study commissioned by Lidl produced results beneficial to the retailer doesn’t change the fact that Gielen’s work showed some meaningful price gaps. For example, Lidl’s food prices were about 45% lower than Trader Joe’s, 39.6% lower than King Kullen, 33.8% lower than Stop & Shop, 18.5% lower than Target, and 10% lower than BJ’s. However, Aldi, Costco and Walmart offered comparable prices.
Lidl seized on the findings to tout its entry into a market as the “Lidl Effect,” and the research highlights the fact that that Lidl’s impact was greater than that of Walmart when it entered a market. The recent study found that Aldi cut its prices by 15% and Walmart by 9% after Lidl’s entry; Stop & Shop and King Kullen dropped their prices by an average of 5.3% to 3.8%, respectively; Costco responded to Lidl’s entry by slashing prices by 8.3%; and Target and Trader Joe’s each lowered their prices by 4%.
By mid-2017, when it was trending well short of its goal, the company increased its store count goal to 2,500 units and extended the timeline to achieve it to the end of 2022. It now appears that Aldi is also unlikely to achieve this revised goal, barring a dramatic acceleration of store expansion in 2021 and 2022.
With the July announcement of 70 new stores opening in the back half of 2020, Aldi is on track to end the year with 2,070 stores, which means it would need to add 430 locations over the next two years, a feat that seems unlikely, given that the most stores that Aldi has opened in one year over the past decade was 161 units in 2016, the same year that the company entered Southern California with roughly 45 stores.
Asked about the 2,500-store goal and whether it will be achieved, Hart says that he’s extremely proud to be part of one of the fastest-growing retailers in the United States.
“The Aldi business has evolved since we set forth our first growth milestone in 2017, and so have our goals,” Hart notes. “We’re growing by more than just store count — we’re expanding into new areas of the country, broadening our product range and scaling our Curbside Grocery Pickup operations, to name a few examples. While we’re growing on all these levels and the specific number of stores we’re targeting may shift, Aldi is pleased to still be on pace to become the third-largest U.S. grocery retailer by store count by 2022.”
Earlier this year, Aldi surpassed Ahold Delhaize USA’s 2019 store count of 1,973 locations, and unless Albertsons embarks on a more aggressive store-opening program, it will be overtaken next. Albertsons ended 2019 with 2,252 units, and its primary focus is on improving the performance of existing stores, rather than opening new ones. Based on its limited expansion, Aldi should overtake Albertsons’ store count at some point in late 2021 or early 2022. That will leave Kroger and Walmart as the only grocers that are larger, operating 2,757 and 4,756 units, respectively, at the end of 2019.
As Aldi comes closer to 2,500 locations, don’t be surprised to see the company unveil a new long-term growth target, if for no other reason than to convey to employees that Aldi is an employer that offers growth potential. The company already references a coast-to-coast expansion goal, and there are numerous markets where it doesn’t yet have a presence or remains underpenetrated when compared with the operations of others.
For example, Aldi entered Southern California four years ago, and it has grown its store base there to 78 locations. By comparison, Kroger operates more than 300 Ralphs and Food 4 Less stores, which tend to be larger than Aldi locations.
Florida is another good example of an existing market that would appear to offer more growth potential. The state currently has the second-highest concentration of Aldi locations, with 151 stores, but that’s roughly the same number of stores that Aldi operates in the greater Chicagoland area, one of the company’s more established markets. If Aldi were to pursue a similar penetration rate in the Sunshine State, it could come closer to rivaling the 813 stores operated there by Publix.
The future is guaranteed to no retailer, something Hart knows well as a 27-year veteran of an organization where expense control and consistent execution of a proven operating model remain top priorities.
“Our primary goal is to offer shoppers the lowest prices, no matter what,” he affirms. “We look at every part of the business in order to create savings that we can pass on to our customers, and our unique model — from close supplier relationships to our in-store operations — is focused on simplicity and efficiency in order to deliver on that goal. Everything we do at Aldi is to provide our customers with the products they want at prices they love, all in an experience they enjoy.”
Value and Sustainability
The approach is working, presumably from a financial standpoint, or Aldi wouldn’t continue to invest capital in store expansion, but also from an industry recognition standpoint. Aldi regularly receives accolades from external groups and ranks high on attributes that are central to its value proposition.
For example, Aldi was identified as the top-ranked company in the value segment of a national poll conducted by Market Force Information. It was the 10th consecutive year that Aldi has received that distinction. Aldi is also the top-ranked company for price in dunnhumby’s annual Retail Preference Index. Additionally, the retailer has received recognition for its efforts in sustainability.
Aldi has a broad slate of initiatives in place regarding sustainability, and is committed to making 100% of its private label packaging, including plastic packaging, reusable, recyclable or compostable by 2025. According to Hart, the company is well on its way to meeting that goal, but he stops short of quantifying the degree of progress.
“We’re also committed to increasing energy efficiency, decreasing our carbon footprint and improving our green building standards across all our stores and operations,” Hart continues. “We’re in this for the long haul, and we know fostering sustainability is not an overnight task. We’re partnering with our suppliers and buyers to honor this commitment, and are proud of the progress we’ve made thus far.”
That progress ties in with the company’s overall business model, and is consistent with an approach to reduce costs by minimizing waste and passing savings along to shoppers. That formula, consistently executed over time, continues to serve Aldi well.