ALDI Looks to the West

Aldi is looking to do in the U.S. what it has done in Great Britain for years:Squeeze midmarket grocers from the bottom.

The German discount chain has ambitious plans to expand in the U.S. It is now in year two of a five-year plan to build 650 new stores on top of the approximately 1,300 existing ones, at an investment of about $3 billion.

Much of this expansion is slated for the West and Southwest, where Aldi is now little known. It plans to open its first Southern California stores next March, and will have about two dozen there by July. It also has big plans for Texas, where it currently operates about 90 stores; company officials say the total there could eventually reach 450, according to the Dallas Morning News.

Moving away from its U.S. bases in the East and Midwest will be a challenge for Aldi, especially in the competitive environment of the West and Southwest. But they will thrive if they can hook up with the right kind of shopper.

"The West is 'terra incognita' to a certain extent for Aldi. And it's very crowded with a wide array of retailers such as Albertsons-Safeway, Costco, Target, Haggen, Winco, and so on," says Mike Paglia, director of retail insights at Kantar Retail. "But it's also very fluid as some retailers grow and others struggle. So the biggest challenge for Aldi, I think, will be providing an offer that the shopper finds truly differentiated and cutting through all the 'white noise' put out by other retailers in the market."

That offer is, to put it as simply as possible, very low prices. Aldi has used a uniquely simple business model for years: Offer store brands almost exclusively, merchandise in pallets and cases to minimize stocking labor, and forego frills like bakeries and butchers.

Paradoxically, Aldi's smaller selection and store footprint (17,000 to 20,000 square feet) not only allows it to keep prices down; it even adds, in some ways, to the shopper experience. Keeping things simple and narrowing the range of choices is appealing to a certain kind of shopper.

"Aldi combines low prices and a simplified grocery shop," says Neil Stern, senior partner at McMillanDoolittle. "Smaller stores to navigate and less selection to choose from leads to a much faster shop, which is greatly appreciated by consumers."

Aldi doesn't neglect service, either, Stern says: "They also get credit for friendly associates, and they have made upgrades to the environment to add to a more pleasant shop." The service will perhaps be enhanced by the relatively high wages Aldi plans to pay in California: $13 an hour to start, going up to a potential $21.

Aldi also is moving beyond its bare-bones model in some important respects. It is expanding its private label lineup to include organics, fresh meat in some locations, and higher-end items like SimplyNature (natural/organic products), lifeGfree (gluten-free) and Never Any (clean ingredient lists).

"I think this is a critical part of Aldi's evolution," Stern says. "Rather than take a narrow view on assortment–top 1,000 selling items, they are now thinking about offering private label within each key category. This would obviously mean starting to include trending categories like gluten-free and organics. Aldi is consistent in staying with private label and making sure they are the lowest priced option in the category."