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GERMANY’S ALDI DISCOUNT GROCERY CHAIN EXPANDS IN U.S.

By Rodger Brown

When Wal-Mart announced in July that it was abandoning an eight-year effort in Germany, the harsh lesson was clear: American shopping habits don’t always translate in foreign markets.

But it has been a totally different story on this side of the Atlantic for Aldi, the German discount grocery chain whose roughly 4,000 stores back home helped squeeze Wal-Mart out of that market. American-style team chants and smiling bag boys found little favor in Germany, but Aldi’s austere Germanic efficiency has won over legions of price-sensitive Americans during its nearly two decades of expansion in the U.S. In August Aldi announced a major U.S. expansion, promising at least 20 new stores for the central Florida cities of Orlando and Tampa.

Batavia, Ill.-based Aldi USA operates about 800 stores in 26 American states. The German parent has some 5,000 stores in 16 countries. Worldwide the company grosses about $40 billion a year, of which the U.S. stores account for roughly $5 billion. The company is privately held and notoriously reticent about releasing information.

“Aldi is rapidly expanding in several areas of the country, including the East Coast areas of Connecticut, Maryland and Virginia,” said David Behm, the Aldi vice president in charge of the new expansion, in an e-mail message to SCT. “We already have stores in Georgia and North and South Carolina, so Florida represents the next logical place for our growth to continue.”

Brothers Karl and Theo Albrecht founded Aldi in 1948 (the name is a contraction of Albrecht Discount). According to company lore, the brothers were released from allied prisoner-of-war camps after World War II and returned home to the war-ravaged industrial city of Essen, where their parents had run a small store since the early 1900s.

The Albrechts worked together until 1961, when they fell out and split the company into two chains: Aldi Nord, owned by Theo, and Aldi Sud, owned by Karl. The reason for the rift was disagreement over whether to sell tobacco products at the checkout counters. (Aldi Sud stocked no tobacco for 40 years, but finally relented in 2003.) While remaining distinct financial entities, the privately held companies operate as if they were one.

Aldi’s business model evolved in a postwar Germany where labor costs were high, but management kept prices low by continually paring operations down as much as possible. The result was a prototype that is simple, clean and highly efficient — a combination of Bauhaus design and a spare, functional ambience.

“There is no piped-in music, we don’t have baggers, and we don’t have lobster tanks,” Behm said at the ICSC Florida Conference, in Kissimmee, in August. He was contrasting the company’s formula against the increasingly service-oriented Publix and Kroger grocery chains, with their expanding delis, bakeries and sushi chefs. “We try to keep it simple,” Behm said.

In Germany Aldi’s customers, who comprise a broad range of income brackets, welcome the trade-off of amenities for price. As a consequence, Aldi and other discounters control about 40 percent of the grocery market, according to consulting firm KPMG International. Some 80 percent of German consumers live within 20 minutes of an Aldi store.

In the U.S., meanwhile, Aldi’s target demographic tends to be concentrated around the lower-middle-to-low-income end, said Jeff Hershey, a retail consultant specializing in supermarkets and shopping centers. “And they look in areas, like in Florida, where there would be an older consumer.”

By keeping its selection figure low (at about 1,000 products, versus nearly 100,000 at Wal-Mart), Aldi ensures that its merchandise remains familiar to customers. Further, the company maintains economies of scale by buying huge quantities of the same goods across all regions in which it operates, analysts say. And because it features almost exclusively private-label products, the company keeps a balance between low prices and high profit margins. “They’re looking for people who would be willing to trade off a name brand for a lower price,” said Hershey. Recently, at an Aldi grocery store in Mableton, Ga., near Atlanta, those shoppers included a multigenerational Indian family, a cluster of Hispanic males, two elderly white men and some young black families. The store layout resembled a clean, well-lit stockroom with neat, wide aisles. Products were offered in open cartons. A lone cashier rapidly passed items over a scanner. Aldi charges extra for grocery bags, so a good many shoppers were taking advantage of empty cartons to repack their purchases.

The Mableton store, like most Aldi units, was newly constructed and freestanding. The simple design combined with ample parking space gave the store a spare yet respectable presence, especially in a neighborhood of older, open-air centers that house threadbare supermercados and the like.

Terecia Andrews, a customer from Cobb County, says she shops the Mableton Aldi at least once a week. “It’s cheap, but it’s good. I go to work by here, so it’s close. They don’t have everything I need, but what they got is a whole lot cheaper than the Kroger’s.”

Ironically, while Aldi appeals to cost-conscious shoppers with its low-cost, private-label canned vegetables and hamburger-helper-style mixes, Trader Joe’s, the hot “discount gourmet” shop, has leveraged the same low-cost, no-frills angle to pitch environment-friendly products to an affluent market. (The Albrechts own Trader Joe’s as well, but not as part of Aldi.)

“Aldi has a limited appeal, but in the right locations, they tend to be very successful,” said Hershey. “I’ve seen very few units close. They build to fit and have a very standard prototype they work with, and they vary from it almost none at all.”

Behm says Aldi likes to maintain close control over its stores by owning them. “Typical sites are freestanding stores of about 16,500 square feet. Lot sizes are usually about 2.5 to 3 acres. We will also do shopping center endcap locations or outparcels with good access and visibility.”

Behm says the new Aldi stores in Florida will begin opening in 2008 or 2009. The company had been opening 10 or 15 U.S. stores annually in recent years, says Hershey. “They pull from a very large area,” Hershey said. He says an Aldi would do well in combination with a Family Dollar or a Dollar General and with rent-to-own stores. “Anything with low-to-middle income would work well with them.” Though the chain is virtually nationwide in the U.S., “they’re limited in the number of stores they can put in, because of the limited appeal they’ve got. But they do fairly well, averaging about $85,000 to $100,000 [in] gross sales on a weekly basis.”

That’s not exactly Wal-Mart money. And though the business press has referred to the chain as “Europe’s stealth Wal-Mart,” Wal-Mart has nothing to fear on its home turf, Hershey says. “Oh no — it’s a totally different appeal,” he said. “Aldi has a limited, specialty market. Wal-Mart doesn’t have anything to be afraid of.”