April 16, 2015
Aldi’s upside seems unlimited
It may specialize in a limited assortment of products, but there are very few limits on Aldi as the company continues an impressive growth path up the ranks of grocery chains in the U.S.
The chain, which primarily sells a variety of its own private labels, is unique in the marketplace. Unlike its cousin, Trader Joe’s, which specializes in creating a festive in-store experience with associates in Hawaiian shirts and brightly colored chalk art signage, Aldi is a plain-Jane operation with products often displayed in open boxes.
Aldi, it has often been said over the years, is one of the few grocers that can open in the shadow of a Walmart Supercenter and expect to thrive. A big part of that success are the comparatively low prices that consumers pay for Aldi’s private labels versus their national brand equivalents.
The nearly 1,400-store chain also succeeds because it excels at keeping costs down. As a recent piece on Forbes.com pointed out, Aldi has comparatively little in the way of overhead. Its locations are typically the size of a large convenience store and it takes very few employees to run them. The only staff are forklift operators who bring in new pallets to the store floor, a couple of cashiers and perhaps another person to keep an eye out for shoplifters. Aldi doesn’t need anyone to make cart runs because customers leave a 25 cents deposit and must return carts to a rack to get their money back.
Aldi has grown to be a top 25 grocery chain in the U.S. and still has plenty of room for growth, with no stores in Rocky Mountain states and west. Even in markets where its presence is felt, Aldi’s small store footprint provides opportunities for further development.
Last year, the company acquired 66 Bottom Dollar stores from Delhaize in southern New Jersey, Pennsylvania and Ohio. Aldi is currently in the process of opening some stores, it has been holding job fairs in New Jersey for staff, and pursuing sales or subleases for others.
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Discussion Questions
What do you think are the key reasons for Aldi’s success? Do you see anything that can slow the chain down?
Poll
Aldi has some key competitive advantages that should continue to propel its growth. First, its assortments are tightly-edited and competitively-priced, and its real estate strategy can travel far from the lower-income neighborhoods where it began to build its name to more affluent shopping areas with plenty of development opportunities for small-footprint stores.
Perhaps the biggest threat on the horizon is Walmart, especially if it decides to speed up the rollout of its own small-format stores. But both stores have an innate advantage over other competitors in terms of a low-cost operating model.
Low-cost operations and convenient locations are the drivers of Aldi’s growth.
An efficient assortment and labor model, a truly no-frills shopping experience and stores closer to home than the big boxes makes for a killer growth engine.
The rest of the industry—even players with low cost and low prices at their core—have been disrupted from below. The discounters will reach a point of saturation, but there’s a lot of runway left. A disciplined approach will keep their growth sustainable.
Aldi’s initial success could be attributed to the Great Recession. Since then, consumers have become addicted to their low prices, quality private label products and easy-to-shop stores. Aldi is here to stay and will continue to grow as wages for most workers remain depressed.
One reason for Aldi’s success has been that the competition cannot compete on Aldi’s level. Aldi is debt-free, often owns and does not rent, and it has the highest sales-per-man-hour of any chain in the country. It has grown slowly and methodically. Acquisitions such as Bottom Dollar, they basically get them for almost free. Site selection is easy, just get as close to Walmart as possible and let Walmart bring the traffic to them. Competitors are often in debt, have unproductive and expensive union labor, grow too fast, must dance for Wall Street and can’t compete on price. The only thing that slows Aldi is its slow methodical growth, which is a good thing.
PRICE is vital, and gone are the days that “mainstream” grocers could rely on the discounters to go to market with shabby stores. So while PRICE is vital for Aldi, packaging the product in a clean, well-organized and convenient store has opened up customer segments once the exclusive domain of the traditionals. My advice to any traditional store is: WATCH OUT!
Aldi has a strong track record of executing to a very high degree on their unique business model. It is likely that if they continue to execute at that level they will capture a greater share of the markets where they compete. But given their limited assortment and value proposition, it is likely that they will appeal disproportionately to a specific subset of the shopper base and will only meet a subset of each shopper’s requirements. Once they’ve maxed out on these two dimensions they will face the same challenges that other retailers face: How to grow without losing their roots, alienating their core shopper base or disrupting their internal operational efficiencies.
I find it shocking that there are still players in this business for whom the terms “big head” and “long tail” are mysteries, even though the DISTINCT management of these two classes of merchandise are the foundation of intelligent retailing to shoppers. I’ve said it before: 100 years ago self-service retailers became merchant warehousemen who do not SELL anything to anyone. They simply run the “warehouse” where their unpaid stock pickers, aka shoppers, “come and get it.”
The big head are those really very few items in the store (warehouse) that large numbers of shoppers want, fewer than 1000 in a 50,000 SKU store. At the opposite end of the distribution will be those 25,000 SKUs that may contribute as little as 5 percent of store sales. Those long-tail items are there primarily because the brands are paying to have them there, as the only rational way to compete in the irrational environment retailers have created. And it is not altogether irrational. See: “The Misguided Bobbing of the Long Tail.“
Indiscriminately stirring the big head into the long tail accounts for why the typical supermarket sells $10 to 30 million annually, while a store with 2000 SKUs is selling $100 million of the same big head items, without the long tail.
Big head stores ALWAYS have a small long tail, and it typically grows longer over the years. Amazon is the ultimate long-tail store, “The Everything Store!” But they are VERY skillful at selling the big head, with the long tail in the background, and efficiently brought to the foreground as the shopper calls for it. See: “Selling Like Amazon… in Bricks & Mortar Stores!” See also: “How to Sell the Few, Among the Many?”
The future of retail belongs to Aldi, Costco and Amazon, except that they all have serious (and obvious) vulnerabilities. Unfortunately, self-service retailers are merchant warehousemen, who will keep doing what they have done (VERY successfully,) for 100 years. (And smartphones are simply a costly diversion!) It reminds me of the Hemingway character who told his friend that he had gone bankrupt, and the friend wanted to know how that had happened. “Slowly at first . . . and then all at once!” 😉
There are many reasons for Aldi’s success. High sales per labor hour, low cost and overhead, limited but effective assortment, and the ability to live in the shadow of big box retailers like Walmart and live off of their traffic and compete on price. They are OK with only capturing part of a shopper’s needs, and with the polarizing of income there is continued opportunity for them to grow, especially in areas of the country they are currently not serving.
Aldi’s success formula include local store (minimum drive time), low prices (mostly private label), and basic items every household requires. When they approach 10,000 stores their expansion will slow. Just look at the number of dollar stores. Excess debt is the reason many fast-expanding chains fail. Aldi is well financially and they manage growth, so until they reach thousands of stores there is no reason to do anything else.
Lower prices, customer friendly clean aisles, and very low or no out-of-stocks might be the reasons for success, but there is always more. The 21st century consumer is reading content information and looking at value comparison charts in their search for commodity worthy substitutions that save on weekly expenditures. Companies in tune with how to advertise in this all new market are relying less on packaging and more on disclosure that demonstrates improvements on quality and quantity. This is no endorsement on whether or not Aldi gets it, but the growth in outlets and sales are strong indicators that they do.
Aldi is a killer competitor for the center aisle business, as I have one less than 4 miles from me. You can not compete on milk, bread, cheap chips, and canned goods, just to mention a few, so as I have stated numerous times, work the perimeter hard, and lean out the under performing SKUs in your grocery section.
Aldi does not have anyone preparing gourmet salads, or a custom butcher shop, or homemade bakery, and that my friends is you weapon for success.
Also I have some outstanding regional wholesalers who provide me with great dairy, deli, bakery and meat deals, plus chips that are discounted every day, which keeps me competitive. Aldi also has—at least in my area—a zero community presence, which we need to keep the consumers aware of what we do.
Let Aldi be who they are, as they will continue to grow for many years. Provide your customers with the stuff they need for their weekend parties like steaks, potato salads, micro brew beers, and gourmet buns, and you will make money.
Verdict: efficiency, which they pass on in low prices (kind of a nostalgic vision of Walmart, I guess).
Prognosis: strong prospects for continued slow growth, but there are eventual limits.
To expand on Tony’s comments, not everyone wants knock-off brands, leaving a deposit for a cart or—let’s be honest here—shopping among those who do.
First of all, Aldi has succeed in part because its direct competitors failed and refused to take it seriously. When I first entered the food business (shortly after Moses came down from the mountain) the conventional “wisdom” was that Aldi would retreat back to Europe at any moment.
I didn’t buy it then.
That “insight” was repeated by gurus for a couple of decades under the assumption that you needed high service, national brands, full lines, meals to go, etc., etc. et alia.
I didn’t buy it then easier.
What I did buy is that it it is always easier to compete when people don’t think you are in the fight—just ask all the supermarket “experts” that assured FMI audiences Walmart could never be successful selling food.
What I also buy is that most “industry observers” live better than the customers they pontificate on. There are a lot of Americans who want good, safe, cheap, consistent food—and their ranks are swelling every day.
Aldi is successful because it keeps its own counsel and understands its customers. It’s a pretty simple formula for success.
I agree with Tony—there is a customer for their stores and they can be successful with what they do, but there is another customer that will always like their groceries bagged, have an assortment other than private label, and want exceptional customer service when shopping. There is room in the market for both. And there are retailers in their competitive landscape that can play in price or are competing with smaller footprint, limited assortment models.
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Aldi has some key competitive advantages that should continue to propel its growth. First, its assortments are tightly-edited and competitively-priced, and its real estate strategy can travel far from the lower-income neighborhoods where it began to build its name to more affluent shopping areas with plenty of development opportunities for small-footprint stores.
Perhaps the biggest threat on the horizon is Walmart, especially if it decides to speed up the rollout of its own small-format stores. But both stores have an innate advantage over other competitors in terms of a low-cost operating model.
Low-cost operations and convenient locations are the drivers of Aldi’s growth.
An efficient assortment and labor model, a truly no-frills shopping experience and stores closer to home than the big boxes makes for a killer growth engine.
The rest of the industry—even players with low cost and low prices at their core—have been disrupted from below. The discounters will reach a point of saturation, but there’s a lot of runway left. A disciplined approach will keep their growth sustainable.
Aldi’s initial success could be attributed to the Great Recession. Since then, consumers have become addicted to their low prices, quality private label products and easy-to-shop stores. Aldi is here to stay and will continue to grow as wages for most workers remain depressed.
One reason for Aldi’s success has been that the competition cannot compete on Aldi’s level. Aldi is debt-free, often owns and does not rent, and it has the highest sales-per-man-hour of any chain in the country. It has grown slowly and methodically. Acquisitions such as Bottom Dollar, they basically get them for almost free. Site selection is easy, just get as close to Walmart as possible and let Walmart bring the traffic to them. Competitors are often in debt, have unproductive and expensive union labor, grow too fast, must dance for Wall Street and can’t compete on price. The only thing that slows Aldi is its slow methodical growth, which is a good thing.
PRICE is vital, and gone are the days that “mainstream” grocers could rely on the discounters to go to market with shabby stores. So while PRICE is vital for Aldi, packaging the product in a clean, well-organized and convenient store has opened up customer segments once the exclusive domain of the traditionals. My advice to any traditional store is: WATCH OUT!
Aldi has a strong track record of executing to a very high degree on their unique business model. It is likely that if they continue to execute at that level they will capture a greater share of the markets where they compete. But given their limited assortment and value proposition, it is likely that they will appeal disproportionately to a specific subset of the shopper base and will only meet a subset of each shopper’s requirements. Once they’ve maxed out on these two dimensions they will face the same challenges that other retailers face: How to grow without losing their roots, alienating their core shopper base or disrupting their internal operational efficiencies.
I find it shocking that there are still players in this business for whom the terms “big head” and “long tail” are mysteries, even though the DISTINCT management of these two classes of merchandise are the foundation of intelligent retailing to shoppers. I’ve said it before: 100 years ago self-service retailers became merchant warehousemen who do not SELL anything to anyone. They simply run the “warehouse” where their unpaid stock pickers, aka shoppers, “come and get it.”
The big head are those really very few items in the store (warehouse) that large numbers of shoppers want, fewer than 1000 in a 50,000 SKU store. At the opposite end of the distribution will be those 25,000 SKUs that may contribute as little as 5 percent of store sales. Those long-tail items are there primarily because the brands are paying to have them there, as the only rational way to compete in the irrational environment retailers have created. And it is not altogether irrational. See: “The Misguided Bobbing of the Long Tail.“
Indiscriminately stirring the big head into the long tail accounts for why the typical supermarket sells $10 to 30 million annually, while a store with 2000 SKUs is selling $100 million of the same big head items, without the long tail.
Big head stores ALWAYS have a small long tail, and it typically grows longer over the years. Amazon is the ultimate long-tail store, “The Everything Store!” But they are VERY skillful at selling the big head, with the long tail in the background, and efficiently brought to the foreground as the shopper calls for it. See: “Selling Like Amazon… in Bricks & Mortar Stores!” See also: “How to Sell the Few, Among the Many?”
The future of retail belongs to Aldi, Costco and Amazon, except that they all have serious (and obvious) vulnerabilities. Unfortunately, self-service retailers are merchant warehousemen, who will keep doing what they have done (VERY successfully,) for 100 years. (And smartphones are simply a costly diversion!) It reminds me of the Hemingway character who told his friend that he had gone bankrupt, and the friend wanted to know how that had happened. “Slowly at first . . . and then all at once!” 😉
There are many reasons for Aldi’s success. High sales per labor hour, low cost and overhead, limited but effective assortment, and the ability to live in the shadow of big box retailers like Walmart and live off of their traffic and compete on price. They are OK with only capturing part of a shopper’s needs, and with the polarizing of income there is continued opportunity for them to grow, especially in areas of the country they are currently not serving.
Aldi’s success formula include local store (minimum drive time), low prices (mostly private label), and basic items every household requires. When they approach 10,000 stores their expansion will slow. Just look at the number of dollar stores. Excess debt is the reason many fast-expanding chains fail. Aldi is well financially and they manage growth, so until they reach thousands of stores there is no reason to do anything else.
Lower prices, customer friendly clean aisles, and very low or no out-of-stocks might be the reasons for success, but there is always more. The 21st century consumer is reading content information and looking at value comparison charts in their search for commodity worthy substitutions that save on weekly expenditures. Companies in tune with how to advertise in this all new market are relying less on packaging and more on disclosure that demonstrates improvements on quality and quantity. This is no endorsement on whether or not Aldi gets it, but the growth in outlets and sales are strong indicators that they do.
Aldi is a killer competitor for the center aisle business, as I have one less than 4 miles from me. You can not compete on milk, bread, cheap chips, and canned goods, just to mention a few, so as I have stated numerous times, work the perimeter hard, and lean out the under performing SKUs in your grocery section.
Aldi does not have anyone preparing gourmet salads, or a custom butcher shop, or homemade bakery, and that my friends is you weapon for success.
Also I have some outstanding regional wholesalers who provide me with great dairy, deli, bakery and meat deals, plus chips that are discounted every day, which keeps me competitive. Aldi also has—at least in my area—a zero community presence, which we need to keep the consumers aware of what we do.
Let Aldi be who they are, as they will continue to grow for many years. Provide your customers with the stuff they need for their weekend parties like steaks, potato salads, micro brew beers, and gourmet buns, and you will make money.
Verdict: efficiency, which they pass on in low prices (kind of a nostalgic vision of Walmart, I guess).
Prognosis: strong prospects for continued slow growth, but there are eventual limits.
To expand on Tony’s comments, not everyone wants knock-off brands, leaving a deposit for a cart or—let’s be honest here—shopping among those who do.
First of all, Aldi has succeed in part because its direct competitors failed and refused to take it seriously. When I first entered the food business (shortly after Moses came down from the mountain) the conventional “wisdom” was that Aldi would retreat back to Europe at any moment.
I didn’t buy it then.
That “insight” was repeated by gurus for a couple of decades under the assumption that you needed high service, national brands, full lines, meals to go, etc., etc. et alia.
I didn’t buy it then easier.
What I did buy is that it it is always easier to compete when people don’t think you are in the fight—just ask all the supermarket “experts” that assured FMI audiences Walmart could never be successful selling food.
What I also buy is that most “industry observers” live better than the customers they pontificate on. There are a lot of Americans who want good, safe, cheap, consistent food—and their ranks are swelling every day.
Aldi is successful because it keeps its own counsel and understands its customers. It’s a pretty simple formula for success.
I agree with Tony—there is a customer for their stores and they can be successful with what they do, but there is another customer that will always like their groceries bagged, have an assortment other than private label, and want exceptional customer service when shopping. There is room in the market for both. And there are retailers in their competitive landscape that can play in price or are competing with smaller footprint, limited assortment models.