How Aldi, a brutally effective grocery chain, beats Walmart at a low price

Running a supermarket in America has never been so difficult.

The profits are slim. Online shopping and home delivery are changing the way people buy their food. Dollar stores and pharmacies sell more groceries. The pressures are so strong that regional chains such as Southeastern Grocers, the owner of Winn-Dixie and Bi-Lo, declare themselves bankrupt. Large corporations are increasingly controlling the sector, which has long been functioning as a dispersed network of small local grocers. And even Walmart – the biggest player of all – is facing a new competition from Amazon, which bought Whole Foods in 2017 for nearly $ 14 billion.

But when Walmart's US president Greg Foran invokes such words as "fierce," "good," and "smart," he speaks almost admiringly of one of his competitors, not referring to Amazon. It does not talk about big chains like Kroger or Albertsons, dollar stores like Dollar General or online entrants like FreshDirect and Instacart.

Foran describes Aldi, the sneaky discount chain in Germany that is aggressively developing in the United States and is redefining the grocery industry along the way.

New customers may initially be surprised by Aldi's shopping experience, which expects its customers to experience a number of minor inconveniences that are not typical of other US grocery stores. Customers need a quarter to rent a basket. Plastic and paper bags are available for a fee. And at checkout, the cashiers dispatch the customers, expecting them to bring their own shopping to a separate place, away from the cashier.

But Aldi has built a cult following. When entering a new city, it is not uncommon for hundreds of people to show up at the inauguration. All the appeal lies in the unbeatable prices, which are so cheap that Aldi often beats Walmart to its own cheap game.

"I'm ready to do the extra work because the prices are incredible," said Diane Youngpeter, who runs a fan blog about grocer Aldi Nerd and a Facebook group on Aldi with 50,000 members. "There are a lot of Aldi nerds on the market," she said. I did not know we were so many. "

Aldi has more than 1,800 stores in 35 states and focuses on growth in the Midwest, Mid-Atlantic, Florida and California. It is on its way to becoming the third largest supermarket chain in the United States after Walmart and Kroger, with 2,500 stores by the end of the year 2022. Its closest competitor, Lidl, another German grocer with a similar low-cost business model, is looking to expand in the United States, too.

In the midst of their aggressive growth, the two discount chains have forced the rest of the grocery industry to make big changes to keep their customers. Aldi even encroached on Walmart territory, literally. As if she had launched a challenge, Aldi opened a store in October in Bentonville, Arkansas, one kilometer from Walmart's head office.

"I never underestimate them," Foran said at an industry conference in March. "I have been competing with Aldi for over 20 years. They are ferocious and they are good. "

But as competitors defend themselves, can the company keep its advantage at a low cost? Can he stick to what he calls the "Aldi way?"

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The Aldi way: how the chain beats Walmart on the price

The way Aldi keeps its prices so low has no secrets for anyone: the company simplifies its shopping experience with unfailing efficiency and with extreme brutality.

"They are able to minimize their costs without compromising quality," said Katrijn Gielens, a marketing professor at the Kenan-Flagler Business School of the UNC.

Aldi is a private company and, through a spokesperson, the company has refused to make its managers available for interviews. But Gielens estimates that its operating costs are about half of those of traditional retailers. The company also has a lower profit margin than its competitors, she said.

From the customer's point of view, the distinct experience begins with the shopping baskets that Aldi keeps under lock and key.

Deposit of 25 cents

Aldi locks its caddies to save on labor costs. Customers deposit a quarter, which they recover when they return the carts.

Rather than employing a team of runners to retrieve the carts from the parking lot all day long, Aldi expects his customers to bring the carts back to the store after each shopping outing. This forces this behavior by charging customers a quarter caution that they recover when they return their carts.

This is not a new idea. Several American grocers tried it in the 1980s and 1990s, but gave up this practice after bothering customers who were expecting more and more services from their grocery stores. Aldi, who opened his first American store in Iowa in 1976, remains true to this model, insisting that the deposit system is at the heart of its low price strategy. The most ardent fans of the store even celebrate it, announcing when Aldi offers from time to time "quarter guard" keychains. Some fans have even knitted their own versions. A search on Etsy for "Aldi quarter keeper" gives more than 500 results.

"I never underestimate them. I have been competing with Aldi for more than 20 years. They are ferocious and they are good. "

The quirks do not stop there.

When customers enter the stores, they will notice that they hardly resemble traditional supermarkets in the United States. With its five or six very wide aisles, Aldi stores only about 1,400 items, compared to about 40,000 in traditional supermarkets and over 100,000 in Walmart supercentres.

For busy buyers like Youngpeter, Aldi's simple layouts and limited selection save time. "I am a busy mother. I do not have time to navigate a huge grocery store with kids begging to go out and go home, "she said. "I can go in and out of an Aldi in no time. I am not sifting 50 varieties of salsa. "

And good luck trying to find famous brands. More than 90% of the brands sold by Aldi are its own brands, such as Simply Nature organic products, Millville cereals, Burman ketchup and specially selected bread. (If it sounds like Trader Joe, it's not a coincidence – the two companies share a common story.)

The packaging of these items sometimes looks so much like branded alternatives that customers find themselves face to face. Crunchy honey and Aldi Oatmeal Oats, for example, are delivered in a box that contains about the same shades of orange, yellow, and brown as General Mills Honey and Walnut Cheerios, as well as a similar typeface. Aldi sells Tandil laundry detergent in an orange plastic jar with blue and yellow Tide-like graphics. The Millville Toaster Tarts, an Aldi brand name, looks amazingly like Pop-Tarts – but a pack of 12 Millville version costs $ 1.85, while a pack of 12 Pop-Tarts costs $ 2.75 .

"I'm like," these corn flakes are as good, if not better, than those who have a chicken on the box! These are exactly the same, "said Allison Robicelli, a Baltimore food writer, who describes herself as an Aldi loyalist.

While this may not be obvious at first glance, Aldi also uses several key design details that maximize efficiency at the time of payment. On many of its products, barcodes are very large or printed on multiple sides to speed up the scanning process. Once the races started, there is no place to linger. The cashier deposits the items directly into the basket below. Aldi does not waste time making groceries. Customers must pack their baskets to shop in a separate section at the front. Since stores do not offer free bags, customers often look for empty boxes in the store.

"These lines fly. You do not expect people to pack their bags. They do not mess around there, "Robicelli said. "Once you see that kind of efficiency, it makes it really boring and tedious to go to other supermarkets."

Fast cashiers

Another tip: cashiers do not shop. Instead, they deposit items directly into customers' trolleys.

Aldi has other tactics to reduce real estate costs and manpower. Size is a factor. A Walmart supercentre has an average size of approximately 178,000 square feet. Costco's warehouses average approximately 145,000 square feet. Aldi's small warehouse stores, however, only take a fraction of this space, averaging 12,000 square feet.

1400 AGAINST 40,000

Aldi stores only about 1,400 items, compared with 40,000 in traditional supermarkets.

And unlike other stores, where the division of labor is clear – runners retrieve baskets, cashiers call customers and employees store shelves – Aldi employees are trained in a versatile way to perform each function. Their tasks are also simplified. Aldi presents the products in their original cardboard packaging boxes, rather than stacking them individually, to allow employees to no longer have to store shelves. Most stores do not publish their phone numbers publicly because Aldi does not want employees to spend time answering calls.

The result: a single Aldi may have only three to five employees in the store at a time, and only 15 to 20 on the entire payroll. The company claims to pay its workers above the industry average, while saving on the total cost of labor simply by having fewer staff.

All these cost savings add up and are passed on to customers. Aldi says its prices are up to 50% cheaper than traditional supermarkets, and an independent analysis conducted by Wolfe Research shows that its prices are about 15% cheaper than those of Walmart in markets like Houston and Chicago.

"They lowered prices smartly," said Foran de Walmart. Last year, he noted that during his visit to Aldi, a gallon of milk and a dozen eggs each cost 99 cents. Foran said he and his team could not risk losing on these popular items.

Despite the sleek shopping experience, Aldi gets higher results in customer satisfaction surveys and benefits much more from word of mouth marketing than Walmart and other supermarkets. According to Bain & Company, it has one of the highest Net Promoter scores – a key measure of the likelihood that customers recommend the brand to their friends and family – in the grocery industry.

Kombucha cheap on shelves, BMW in car parks

After the first entry of ALDI in the United States, it took two decades for the company to expand to 500 stores.

Today, in its phase of rapid growth, Aldi is about to open more than 130 new stores this year alone.

The Great Recession and its slow recovery have allowed the discount grocer to gain popularity among budget-conscious buyers in the United States. Aldi's latest expansion builds on this momentum. "In the last 10 years, they have really flourished in the United States," said Mikey Vu, a partner at Bain. "The instability of the economy is worrying.People worry.They pay much more attention on their grocery shopping than ever before."

85%85% of US buyers say they are ready to try on store brands.

Source: Bain & Company survey

Of course, Aldi is not the only growing discount store. TJMaxx, Ross and Burlington all open new doors and their low prices have weighed on department stores. Ollie's Bargain Outlet and Five Under are growing rapidly. Dollar General has opened thousands of stores in recent years.

For Aldi, part of its success lies in its appeal not only to low- and middle-income buyers, but also to the wealthiest. According to Bain, Aldi's main customer tends to earn more money and have a slightly higher level of education than all grocers. During a recent Aldi trip to Hackensack, NJ, luxury vehicles, including a $ 50,000 Jaguar and an $ 80,000 Tesla Model X, dotted the small parking lot alongside Toyotas. , Ford and Hondas. Foran de Walmart is surprised that when he visited an Aldi in Australia, BMW and Mercedes were also in the parking lot.

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"People like to save money in staples. And that would apply to every person in this room, "he told an audience of investors and retail managers at a Boston Four Seasons hotel. "You feel good if you can save $ 10 on your grocery bill because you will feel better when you go out for dinner on Saturday night and you spend $ 200 at the restaurant."

In recent years, Aldi has intensified its efforts to attract high-income buyers by offering more fresh organic products as well as imported products such as Irish cheese, French buns and Italian pasta. The stores now offer private versions of kombucha, cold-pressed fruit juices, a gluten-free product range and peanut butter powder.

"It used to be the white-label counterfeit element that you were a little embarrassed to buy, but it was cheap. Now, people no longer care about big brands like before. This is part of the Aldi game book. "

Aldi is investing $ 1.9 billion to redevelop 1,300 stores with natural light and fresh produce, diaries and meat sections. Since 2017, his new stores are concentrated in more populated suburbs and the upper middle class, according to Bain. The new Aldi stores are in postal codes with an average household income of $ 65,822, about $ 4,500 more than the national average. "They are clearly trying to tackle a more upscale customer," Vu said.

Aldi's appeal lies not just in a cheaper grocery bill, but in the way Aldi smartly markets its discounts, said UNC's Gielens. Bargain hunters at all levels of income end up feeling like they are outperforming supermarkets and premium brands at higher prices when they see their grocery recipes. In wanting to be "the smart buying alternative", Aldi wants to "get the message out that grocery stores and traditional brands are simply scamming consumers," she said.

Aldi hammers this message on his posters in the stores. "The same is always better when it costs less." "New business every week. Find them here. Do you boast like crazy? Aldi encourages customers to abandon their grocery stores: "Change and save".

Americans listen. According to a survey by Morgan Stanley, 19% of buyers who have changed stores have started buying from Aldi. It was only second after Walmart.

More barcodes

On many products, barcodes are either very large or printed on multiple sides to speed up the scanning process at the checkout.

Aldi's confidence in private labels also enables him to win the Millennials, increasingly agnostic about brands and attracted by lower prices and convenience, according to Bain Data. Nielsen's data shows that private label products have been reborn in recent years and are now growing faster in supermarkets than the top 20 national brands.

Stores like Trader Joe's and Costco have built empires selling their own brands. Costco's Kirkland Signature, for example, raised nearly $ 40 billion last year, an 11% increase over 2017. Kirkland sales beat Campbell Soup, Kellogg and Hershey last year. Retail brands are challenging these heavyweights in consumer goods, which spend billions to market their products.

"Previously, it was the product imitating the white mark that you were a little embarrassed to buy, but it was cheap," Vu said about store brands. Surveys of Bain customers show that 85% of US buyers say they are willing to try private label products. "People do not care about big brands like before," he said. "This is part of Aldi's game book."

It all started with a thrifty family

Aldi's obsession with frugality comes from his first owners, the Theo brothers and Karl Albrecht, who took over the family grocery store in Essen, Germany, after the Second World War. By necessity, the first stores had initially only a few items in stock, but the two brothers were considering expanding their selection as their business grew. Over time, however, they realized that they could sell a limited number of commodities. "If we did not want to offer our customers a wide range of products, we had to at least give them another advantage. From that moment on, we sold our products for a significantly lower price, "Karl said in 1953, according to a book by former Aldi director, Dieter Brandes.

Theo insisted so much on keeping costs to a minimum that he was famous for taking double-sided notes on a piece of paper and turning off the lights of the stores during the day. The brothers deliberately kept the aesthetics of the stores to a minimum. "There are no decorations in the shops," said Karl in 1953. "All our promotional efforts are put at discount prices."

In 1961, the brothers split in two, following a dispute over the advisability of selling cigarettes in the stores. Karl took the south of Germany and Theo headed north. To date, Aldi Süd and Aldi Nord remain separate companies, with the demarcation line between the two in Germany known as "Aldi Equator".

Aldi Süd is the growing company in the United States and throughout Europe. Aldi Nord is also present in the United States through Trader Joe's, which it acquired in 1979, but its growth is less ambitious than that of its parent company. Trader Joe's had 484 stores in the United States by the end of 2018.

The Albrecht brothers have both died in the past decade. According to Deloitte, the two chains operate in 18 countries and generated combined sales estimated at $ 98 billion last year. These revenues make Aldi companies not only one of the largest grocers, but also the eighth largest retailer in the world. The two combined Aldis are now larger than CVS or Tesco, and at a few lower rungs from Amazon, Home Depot and Walgreens Boots Alliance.

Competitors react

Aldi Süd's rapid growth in the United States resembles its international expansion, particularly in Ireland, Hungary, Switzerland, Australia and even China. The company has also experienced rapid growth in the UK, where many local grocers have ignored Aldi until it is too late.

But as Aldi evolves in the United States, the question of whether it can maintain its low cost advantage raises real concerns. US competitors learned to react more quickly when Aldi lowered prices, which could dampen its impact.

"They took Aldi as a much more credible threat," Vu said.

Walmart has narrowed its price gap with Aldi since July 2017, according to a study by Scott Mushkin, an analyst at Wolfe Research, which has recorded the prices of 40 top-selling items at Houston Walmart and Aldi stores in one. facing each other. Walmart has also narrowed the gap with Aldi in Chicago area stores.

To counter the movements of Walmart and other grocers, Aldi began to compromise his stripped-down approach. In September, he launched a national advertising campaign, including TV commercials, to spread the message that he was selling high quality products. Aldi 's is also recently committed to cutting plastic and switching to a 100% durable packaging by 2025, which is not a trivial matter. Aldi increased its fresh food offering by 40% in 2018 by expanding its product selection and adding new vegan and vegan options. And he began to offer more alternative milks, including soy and almonds.

These changes are expensive and could eat away at Aldi's margins. "The model only works if they are actually the cheapest," said Simon Johnstone, an analyst at Kantar.

Customers have also begun to notice some branded products, such as Coca-Cola, Tide and Old Spice deodorant. "Honestly, I do not like when they import national brands. I like the sacredness of Aldi, "said Robicelli, adding that she feared that prices would go up.

At the same time, Aldi faces increased competition from its closest rival, Lidl. Lidl cut the ribbon of its first stores in the United States in Virginia, North Carolina and South Carolina in 2017 and has recently opened three stores outside of Atlanta. It is also developing in high income communities. Today, Lidl operates more than 60 stores in the country.

Aldi is closely monitoring the growth of Lidl. In a federal lawsuit filed in March, Aldi claimed that two of its former employees in the United States illegally shared confidential information about its sales, future stores and real estate strategy with Lidl.

A spokesman for Lidl said the company "believes in fair competition and that the allegations contained in this lawsuit do not conform to our commercial practices and values." We look at the claims, which we take seriously. ".

Aldi's sustainable impact: Lower prices and fewer grocery stores

Although huge competitors can reduce their prices to compete with Aldi, regional supermarkets are increasingly affected by the grocery price war.

Tops Markets and Southeastern Grocers, the owner of Winn-Dixie and Bi-Lo, have recently filed for bankruptcy. Save-A-Lot, the second-largest discount grocery chain in the US after Aldi, is heavily indebted and can no longer afford to keep lowering prices without sacrificing profits.

"Aldi and Lidl will be a major breakthrough in the United States, threatening small regional supermarket chains and forcing major players to cut prices," Fitch Solutions said in a March research report.

Analysts predict further bankruptcies are on the way for US grocery stores. "The United States has a much larger slice of second and third tier food retailers," said Vu de Bain. "These are the ones who are dying."

With the disappearance of small grocery stores, it is probably possible for Walmart and Aldi to pick up the pieces, Vu added. Pendant ce temps, Aldi continuera à mener la guerre des prix, en mettant également la pression sur les plus gros acteurs.

"Ils réussissent incroyablement", a-t-il déclaré. "Nous n&#39;avons pas vu de perturbateur dans les magasins d&#39;alimentation comme celui-ci depuis longtemps."