Aldi: The Little Store That Could

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When it opened its first American store in March of 1976, both shoppers and the grocery industry, in general, must have been a bit befuddled by this unknown import from Germany called Aldi. Consumers who ventured into the store in the local Kmart-anchored strip center in Iowa City, IA had to be confused by the odd assortment of private label brands and severely restricted offering of just 450 items. Where was the Hellmann’s, where were the Oreos?

The truth of the matter is that Aldi is really the first new format to come along in the grocery sector since Clarence Saunders created the self-service supermarket in 1916 at his Piggly Wiggly stores.

Competing supermarkets were also trying to figure out how this store at around 20,000-square-feet could possibly compete with their own massive stores, with aisle after aisle of national brands and 42 kinds of pickles. And you had to pay for your bag? This will never work, they thought, another European retailer that just doesn’t get the American consumer.

The 400 Club

Take the express checkout line and 47 years later, Aldi is now the third largest grocery chain in the country, a goal that it is blowing through even faster than projected with its announcement this month that it is buying 400 Winn-Dixie and Harveys stores, primarily in the Southeast, including almost 300 in fast-growing Florida. And that’s on top of the 120 or so stores Aldi is already opening organically this year.

When the retail dust settles, it’s estimated that Aldi will have well north of 2400 locations operating in about 38 states with only the western portion of the country still to get their first stores. Not all of these Winn-Dixie and Harveys locations will become Aldi’s, the company is only saying a “significant” number will be switched over. One has to assume the remaining locations will be sold off, shut down or otherwise repurposed into some other uses. In fact, the smaller footprint of Aldi suggests it will have leftover real estate on those conversions that will represent a sub-leasing opportunity for the company.

The Grocery Games

However, if many of these 400 additions end up as Aldi’s, they will most certainly be adding to its current annual revenue of about $121 billion. That puts it well ahead of once-larger competitors like Albertsons ($78 billion), Ahold Delhaize ($58 billion) – it operates under several names including Food Lion and Stop & Shop – and Publix ($55 billion).

Only Walmart, with $228 billion (representing about 58 percent of its overall U.S. sales) and Kroger, which operates under multiple nameplates besides its own including Ralphs and Fred Meyer, with $148 billion, are larger than Aldi. Aldi’s store count now surpasses Ahold for third place and this acquisition will put it within striking distance of Kroger’s 2800 locations.

Kroger of course is not exactly sitting still and watching all of this unfold idly. Earlier this year it announced a deal to take over Albertsons which, even with divesting as many as 400 stores, would put it within a few boxes of cereal of Walmart. That deal, still being looked into by federal antitrust authorities, would close next year if approved.

That would push Aldi back in the grocery hierarchy but in a way, it’s not just looking at big supermarkets as its only competitors. Its compact footprint means it can go into smaller strip center locations, its private label strategy allows it to control its assortments far better than big stores dependent on massive CPG suppliers, and its pricing often makes conventional grocers look like luxury stores. As such, Aldi competes as much with dollar stores, super drug and pharmacy chains that are increasingly moving into grocery — and even convenience stores that price much of their assortments for a non-discerning shopper willing to pay for that convenience.

The First Since Piggly Wiggly 

The truth of the matter is that Aldi is really the first new format to come along in the grocery sector since Clarence Saunders created the self-service supermarket in 1916 at his Piggly Wiggly stores. Everything since has just been a variation on the same theme.

Some might call it a shrunken-down version of the warehouse club format and others a Walmart taken down to its bare bones.

Aldi stores certainly have elements of both, but that misses the point. It is the only real threat to Walmart’s low-price positioning while offering the ease of shopping that overgrown supermarket chains can never seem to get right. And yes, Aldi does have a true competitor, Lidl, which comes from another branch of the same Albrecht family that owns and runs it. (And to try to put to rest the urban legend that Aldi owns Trader Joe’s, it doesn’t: the parent of Lidl in fact owns it.)

Lidl got a much later start in the U.S. and only has about 170 stores here but has equally as ambitious plans to build out its footprint here. Elsewhere in the world, the two companies – officially Aldi Sud (south), the parent of Aldi here in the U.S., and Aldi Nord (north), owner of Lidl — are much closer in size and despite the family tree origins and similar nomenclature operate as independent entities.

The Americanization of Aldi

But for Aldi in America, this new deal is a big deal. It fills in a part of the country where it has been grocery understored and does so quickly and decisively. It also suggests that acquisitions as much as organic growth will be used to get it to achieve its long-term goals.

And it’s why whatever happens with the Kroger-Albertsons merger, the real story in grocery is with Aldi and how it is reshaping the sector. While many of the retail formats that have come along and gained popularity in the past 50 years — from Toys’R’Us to Gap to Bed Bath & Beyond — have all faltered or in fact fallen, Aldi has endured and remains on its upward trajectory. It is indeed a rarity in retail: it took on the big boys—both literally and figuratively—and it is succeeding.

It even carries Oreos and Hellmann’s now.

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