By Kevin Coupe
On the surface, Aldi’s potential as a competitive threat to convenience retailing would appear to be limited.
That is, if you’re looking at a single store — usually in a nondescript shopping center. You’ll see worn floors, just a few aisles, shabby fixtures, cut cases, picked-over produce, limited SKUs, and out-of-stocks. Customers have to rent grocery carts for 25 cents apiece. There’s little advertising and hours are limited to peak shopping times. Just a few employees work the front end, where shoppers have to bring their own bags and personal checks because credit cards are not welcome.
However, if you look at the company’s Web site, you see something vastly different. You see a global company doing roughly $50 billion a year in sales, with more than 8,500 stores in Australia, Austria, Belgium, Denmark, France, Germany (its home market, where it has a 40 percent market share), Great Britain, Greece, Hungary, Ireland, Luxembourg, the Netherlands, Poland, Portugal, Slovenia, Spain, Switzerland and the United States.
You also see a company that has reported a 21 percent increase in sales in the U.K. alone during the past year — forcing market leader Tesco to begin identifying itself in advertising and on its Web site as a “discounter” even as its market share begins to slip and Aldi’s begins to grow. Aldi management now projects that it could eventually have 3,000 stores in the U.K., which can’t make Tesco happy. (To be fair, Tesco has a 31 percent market share and Aldi has three percent, so there is a lot of distance between them, but the most recent numbers show them heading in opposite directions.)
As for the company’s U.S. operations, the approximately 1,000 stores “can make between $200,000 and $400,000 a week in sales,” said Burt Flickinger, managing director of Connecticut-based Reach Consulting. “They are absolute money machines.”
Rarely has so much been done with so little.
There is, of course, one other important characteristic of every Aldi store: low prices. The company, which doesn’t say much on the record, does say that its private-label products — which dominate the selection — are between 16 and 24 percent cheaper than discounters and big box stores, and 40 percent cheaper than traditional supermarkets.
How much less expensive than convenience stores? Well, that’s something that Aldi doesn’t really address, if only because convenience — at least in the single-serve, immediate consumption definition of the word — isn’t a big focus for the discounter. Aldi’s milk only comes in gallons, its ice cream is sold by the tub, and you need a pretty good sized cabinet or refrigerator at home to keep the kinds of products that Aldi sells. That’s hardly the traditional definition of convenience. “That’s just not their mission,” said John Rand, director of retail insight at Management Ventures Inc.
That could change, of course. It is fair to suggest that in the current economic climate — in which the economy in general and the stock market in particular seem to resemble a roller coaster as much as anything — the definition of convenience could change or, at least, the degree to which it is prioritized by cash-strapped shoppers.
“For a while, some people were actually ashamed to be seen shopping at Aldi, like it was a porn theater or something,” said Len Lewis, author of The Trader Joe’s Adventure, which looks at Aldi’s up-market sibling that it acquired in 1979.
Today, people seem much less embarrassed. “The economy won’t change Aldi’s behavior at all,” said Rand. “It will change who finds Aldi interesting.”
Flickinger describes the Aldi expansion model as “prescient,” noting that the company historically has taken advantage of a series of economic downturns to build its presence in the states. The current U.S. economic problems may just be the biggest, best example of Aldi insight into the U.S. market — and they’ve had a fair amount of luck. And because the company has virtually no debt — self-financing all of its expansion initiatives — it’s in a better competitive position at a time when other chains may be checking their balance sheets and credit ratings.
“Being self-capitalized is an enormous advantage in the current crisis,” Rand said. “While it isn’t likely to make [Aldi] go much faster in their expansion plans, they will get more for their money” — which will have the effect of accelerating their efforts. “They were already getting aggressive before all this stuff happened. Now they are really reaching a takeoff point, where they can open 100 stores in a short period of time.”
Aldi first came to the United States at a propitious time, taking advantage of the 1970s recession to offer limited assortment and cheap groceries. At the time, “retail bankruptcies made cheap land available. Then they had another breakout in the late eighties and mid-nineties,” according to Flickinger, when another recession was pinching consumer pocketbooks.
Aldi also took advantage of the 2001 recession to build a distribution network that could serve an even broader expansion. “It was the George Patton model,” Flickinger said, “in which they wanted to build the supply chain first before they could win the war.”
Aldi built its first distribution center in Chicago in the mid-1970s. Its newest distribution center is in Florida — a $40 million, 500,000-square-foot facility in Haines City, in the central part of the state. The retailer also has dozens of stores planned for Florida — which increases the pressure on discounters Walmart and Costco, as well as traditional retailers Publix, Winn-Dixie and Sweetbay. All of them are scrambling to figure out how to combat Aldi’s extremely compelling value-driven message delivered to a state hard-hit by the current economic malaise.
According to Flickinger, one of the reasons that Aldi can compete effectively — even against Walmart — is because it has lower operating costs. “Walmart has a labor factor of 12.5 to 16.5 percent, depending on the format,” he said, “but Aldi’s labor factor is between 5.5 and 7.5 percent.”
“Aldi is applying a model that is not dissimilar to Walmart, but in a vest pocket size,” said Rand. “They live up to their own standards, and they are never going to screw you on price.”
Flickinger also said that one of Aldi’s great advantages is that it often pays its store managers as much as 50 percent more than its competitors. “These people graduate from the best schools, and then they become assistant managers and get as much as $70,000 a year and great profit participation.”
The company reportedly also offers healthcare insurance to employees who work 20 hours or more a week — something much publicized when offered by upscale companies like Starbucks, but isn’t often reported when offered by more downscale retailers such as Aldi.
The lesson is this: While Aldi is highly disciplined about the “cheap is everything” façade it creates for consumer consumption, it is smart enough to know that it actually is execution that is everything — and the retailer is willing to compensate its people handsomely to make sure that implementation is on time and on target.
“They really cultivate the image of grubbiness,” Lewis said. “For example, they pay enormous amounts of money to put in floors that look grubby, but actually are very expensive.”
Lewis, who wrote the book on Trader Joe’s, describes Aldi as “an enigma wrapped in a riddle. It is the third largest corporate entity in Europe, yet its close-to-the-vest attitude makes the CIA look like an open house.” Aldi is owned by two brothers, Theo and Karl Albrecht, who are notoriously press-shy, which apparently dates back to the time that Theo was kidnapped for 17 days in 1971. The company is split into two separate businesses — Aldi Nord and Aldi Sud — and it is Aldi Sud that operates in the United States.
According to Lewis, the Albrechts attribute some basic values to their success: asceticism, simplicity, extreme cost-consciousness, secrecy, fairness, focus and predictability. “They’ve really been focusing on secondary, tertiary markets for the past 20 years,” Lewis said. “Now, they’ve really started to come out of the closet.”
In Europe, Aldi has begun to make small and subtle changes in its marketing approach, according to Lewis. Not to the extent that low prices have become less of a priority, but rather in the breadth of products that the company’s stores carry. So-called “in and out” merchandise ranging from upscale perfumes to wines to even computers can be seen in some stores, and Lewis predicts that the same kinds of tests will be seen in appropriate markets in the United States.
In fact, some new kinds of merchandise can already be found in U.S. stores with products like buffet servers and warming trays, file cabinets, pressure cookers and even an inexpensive computer on display. (Although “on display” may be a generous way to put it, since these items are simply left on pallets for customers to find, except for the small and rudimentary sign identifying them as special purchases.)
The Albrechts won’t put the stores’ essential value proposition at risk, Lewis said, but they will appeal to people’s desire to do a little treasure hunting when walking through an Aldi store.
After conversations with industry experts, the general sense is that convenience stores and Aldi tend to occupy very different spaces in the shopping continuum. Other small-store formats, such as Trader Joe’s, Tesco’s Fresh & Easy format and Walmart’s new Marketside small-store concept, are potentially more potent threats because they emphasize convenience as a competitive priority. This is not the case with Aldi.
However, there could be exceptions.
One scenario, as mentioned before, is that the economy takes such a nosedive that people simply change the way they define convenience.
Another has to do with real estate. As Rand of Management Ventures puts it, “Aldi is positioned where a lot of c-stores want to go,” and that could create obstacles in locations where convenience chains would like to expand. This is seen as a very real possibility, since Aldi is perceived to be in an expansionist phase now.
A third scenario has more to do with how convenience stores operate. If convenience stores decide to flirt with the limited assortment grocery model that Aldi has used so successfully over the past few decades, they should expect to have their clocks cleaned. Convenience stores, Rand noted, should not think about trying to compete with Aldi, but rather how to identify and exploit their own specific and unique differential advantages.
The final fourth scenario where convenience stores could find themselves competing with Aldi is in underserved urban markets, where Lewis believes Aldi could find a highly receptive customer base — coming in with a comparatively inexpensive operating model and a strong value proposition that could have real and lasting appeal for local shoppers. “That could really hurt c-stores,” he said, especially those retailers used to having those customers all to themselves.
There’s a great line from Lewis’s book: “Aldi would probably prefer being viewed as the small, grubby underbelly of the food industry that competitors thought it to be, flying under the competitive radar and snatching away market share before a competitor knew what hit it.” But those days are gone forever, in part because Aldi is simply too big to be ignored anymore and in part because current economic circumstances have created a new competitive cauldron within which food retailers must operate.
The simple fact is that Aldi’s potential as a competitive threat is limited. Limited to people who put savings first, not convenience. Not retailing bells and whistles. Not product innovation. Just savings.
But while that may have limited market appeal, the real question is how limited — especially at a time when cheap groceries seem more and more attractive to an ever-expanding group of shoppers.
Kevin Coupe is the founder and “content guy” of MorningNewsBeat.com, the daily online information service that offers “news in context and analysis with attitude.” He can be reached at kc@morningnewsbeat.com.