Aldi USA grows its business at an impressive pace, with double digit figures in recent years. Still, the German hard discounter escapes the radar screens of competitors and unions. Because the US market is huge and Aldi grows organically, step-by-step and only by its own capital.
It started in 1976 in an unusual manner for Aldi: by an acquisition. Buying Benner Tea Company – a local retailer in Iowa with smaller stores – provided Aldi with a foothold in the US market. This grew over the years to Aldi’s current status: a very successful chain of some 1200 discount stores in 31 American states with estimated sales of 6.5 billion euros.
Aldi USA stresses its ability to fund its growth by its own resources. In a press release of June 8, 2012 at the occasion of the opening of a new Aldi discount store in Little Elm, Texas, Aldi dubs itself “…a grocery retailer that has grown without merger or acquisition…”. And the growth continues. So is it said that Aldi eyes expansion to Southern California and neighbouring states like Nevada and Arizona next year. Ambitions that have not been confirmed by Aldi, as like all subsidiaries of the German discounter, also Aldi US is tight lipped. But if the rumours are true, Aldi will become a nationwide retailer in the US with discount stores coast to coast.
Aldi US and Trader Joe’s
Aldi US is a subsidiary of Aldi Süd, which shows in its international expansion a remarkable preference for English speaking countries like Australia, the UK, Ireland and the US. Other countries where the southern of the two Aldi operations is represented are Switzerland, Austria, Hungary and Slovenia.
Still, Aldi Nord is also active in the US. Not with Aldi-branded stores, but with the renown culinary cultretailer Trader Joe’s. It was acquired by the northern Aldi operation back in 1979 as an investment case, without operational interference from the German parent company. Trader Joe’s and Aldi US have no operational connection. Not even in Chicago where both banners rent store space in the same building. Aldi on the ground floor and Trader Joe’s – which sells culinary items at discount prices – on the first floor. “Trader Joe’s has been there for some five years while Aldi has just moved in”, says Neil Stern, senior partner of the retail consultancy McMillan Doolittle. “There is no real synergy or cooperation. This is just a real estate quirk.”
Annual growth rate over 10 per cent
Stern lauds the performance of Aldi US. “They are doing exceptionally well. This is a result of benefitting from a weak US economy in combination with a number of strategic changes Aldi has made. Over the past three to five years they have upgraded their stores which are now brighter and more open. They upgraded their packaging and introduced more lifestyle private label brands like Grandessa – a premium range of food – and healthy products under the Fit & Active label. Also they have begun to market more aggressively.”
Despite its growth, Aldi still holds a relatively moderate position on the huge US grocery retail market. “It ranks 36th in the market, so Aldi is relatively small”, says Bryan Roberts, research director at Kantar Retail. “But Aldi is among the fastest-growing and impactful retailers in the country with an average growth rate of over 10 per cent annually over the past five years. And this pace is showing no signs of deceleration. Aldi is understood to be profitable which it feeds back into robust expansion plans. It is planning to open 80 stores this year and is currently hiring for a 2013 launch into California.”
Small stores, low prices
The economic headwind is an advantage to aldi, Roberts thinks. “Shopper frugality is clearly playing into Aldi’s hands”, ha says. But Aldi is more than just low prices. “Its mix of low prices and high quality is extremely resonant and – as in many European markets – the chain could be expected to retain many shoppers even if the economy improves. It’s currently attracting 20 million shopping trips per month and will build on this progressively.”
For American standards Aldi’s stores are small (with surfaces of 1000 square metres on average) and they comprise a limited assortment of some 1400 sku’s. “A typical US supermarket has double the sku’s of their European counterparts”, says Stern. “So the difference in assortment between Aldi and the US supermarkets is considerable, which has its pro’s and cons. They do win on simplicity and shopping ease. Having a limited selection is not necessarily a customer benefit but it does work to make the shopping process more efficient.”
“Aldi’s small store template is an advantage in terms of availability and tapping into shoppers’ desite for more proximate and conventient shopping trips”, Roberts says. “As in Europe, Aldi’s stringent real estate requirements means that it is fussier – and therefore slower in terms of openings – than rival retailers. But this very particular approach has not let it down so far. So why change?”
Under the unions’ radar
Aldi US’s relatively small units provoke less resistance in local communities. While a retail behemoth like Walmart can count on objections for every new Supercenter it wants to open, Aldi almost never runs into trouble. Customers appreciate proximity of shopping and Aldi’s value. And the unions in the US don’t have so much to complain when it comes to Aldi.
“Despite its non-union stance, Aldi appears to have attracted much less ire than Walmart”, says Roberts. “This might partly have to do with the smaller store footprint which attracts much less hostility. But perhaps it also has to do with Aldi’s excellent record in employee remuneration, retention and development. Pro-union pressure groups have their hands full with bigger targets like Walmart. Aldi might be small enough at the moment to have slipped under the radar. Also, the chain is frequently rated highly in shopper surveys. So consumer perception is obviously not an issue.”
Aldi US being owned by a foreign parent – a Germany-based discounter – is not relevant for consumers, Stern acknowledges. “Aldi has been in the US a long time, so its German origin doesn’t come into play. As a relatively small player without a lot of market share, it also avoids union conflicts. Not having services in the stores, like meat cutting for instance, also helps. Because those are traditionally more union driven jobs.”
Aldi versus Tesco
Aldi succeeds where a world class retailer like Tesco seems to fail. Early july this year at the annual meeting of shareholders, Tesco’s chief executive Philip Clarke preluded on a possible exit from the US market. A feasible scenario, might Tesco not succeed in creating a business case for its West American chain of Fresh & Easy stores. New competition in 2013 from Aldi US in California, might make it even harder for Fresh & Easy to reach its goals.
“Given that Fresh & Easy is evolving still, it’s hard to say whether they are really competition”, Stern says. “Fresh & Easy is positioning itself more upscale and has some traits in common with Trader Joe’s.”
“Aldi steals shoppers from every competitor that it encounters”, Roberts states. “Clearly, due to similarities in the operating model – like sites, store size and assortment – there might be slightly more overlap with Trader Joe’s and Fresh & Easy. But I am sure all three can co-exist quite happily.”
Competition and consistency
Aldi US’ main competition comes from Save-A-Lot, the discount banner of SuperValu, and the dollar stores who are increasingly are adding groceries to their offer. “In terms of general competition, it’s very hard to draw a line: dollar stores, Walmart, warehouse clubs, drugstores and supermarkets all figure in the competitive set”, says Roberts. “Save-A-Lot is similar in many ways: small store footprint, high private label penetration and a predominance of shelf-ready packaging.”
“Lower income shoppers are also frequenting dollar store banners like Family Dollar and Dollar General who have grown very fast”, Stern says. “And of course they shop at Walmart.”
Stern also refers to Save-A-Lot as the concept which is most similar to Aldi. “It has more stores than Aldi”, he adds. “And it’s closer to a soft discounter and has not had the same operational disciplines than that you see at an Aldi. Save-A-Lot is a franchise system, which means faster growth but less consistency.”
Aldi US’ geographical spread
Aldi US is active in 31 states and aims to increase this number. Roughly the discounter operates from Kansas in the west all the way to the east coast. And from northern states like Wisconsin and Rhode Island to Florida and Texas in the south.
In the northeast of the US Aldi wants to roll out its operations to the states of New England and the New York metropolitan area. Also it is expected to roll out its operations further west, to states like Nevada, Arizona and California. Aldi discount stores are mostly located in Illinois (where Aldi has its headquarters), Ohio, Indiana, Missouri and New York.