(April 23) Doubtless, no one in the offices of the major retail grocery behemoths is quaking at the presence of Aldi Inc.

But that doesn’t mean they don’t know that, in a world of Goliaths, David isn’t somewhere lurking about.

Retail analysts are quick to acknowledge the important niche that Aldi Inc., the U.S. offshoot of the Essen, Germany-based Aldi Group, fills in the U.S. retail grocery business.

“I think they’ve taken a very different approach to the market that requires a lot of patience,” said Neil Stern, senior partner at Chicago retail consultant McMillan/Doolittle LLP. “From a capital standopoint, they generate cash flow to build new stores. They grow when they can grow, which is a foreign strategy.”

Most of the major retail chains build their success around profit margins. Stern said Wal-Mart Stores Inc., the world’s No. 1 retailer, sets the pace with margins of about 5%, and the average among other chains is about 3%.

Not so, with Aldi, which bases its U.S. operations in Batavia, Ill., and is known as a “hard discounter” and generally builds its profits on customer sales.

“They operate on a margin of about 1%,” Stern said. “Aldi keeps their costs down so low, so the same business drivers needed for success aren’t quite as strong.”

Wal-Mart, Target Stores Inc. and, to some degree, Kmart Stores Inc. build their success on the one-stop, superstore concept, offering food and other items under one roof.

Aldi, by contrast, specializes in a limited assortment of private-label grocery products at prices well below those at larger competitors.

“Our unique way of operating makes it almost impossible for competitors to match our combination of price and quality,” the company states on its Web site.

Telephone calls to Aldi’s national office for comment were not returned.

Aldi is hardly a national secret, although the company has penetrated, to varying degrees, only about half of the U.S. Its spread has been deliberate.

The company, founded by brothers Karl and Theo Albrecht with a single store in Essen, Germany, in 1948, didn’t open its first U.S. store until 1976, in southeastern Iowa.

However, the chain slowly expanded to other regions in relatively short order. Now, the company operates more than 700 stores in 26 states, primarily from Kansas eastward. Annual sales are $4.8 billion, according to Business Week.

The magazine noted that Aldi is the 11th-largest grocery chain in the world, with $37 billion in sales and nearly 7,000 stores worldwide.

According to the 2003 Chain Store Guide, Aldi was No. 21 in the U.S.

Wal-Mart, by comparison, generated revenues last year exceeding $250 billion.

An Albrecht family trust also owns Monrovia, Calif.-based Trader Joe’s Co., an upscale specialty grocery chain.

“I remember them 25 years ago and I thought, ‘Man, these guys are never going to last,’” said Ed Odron, president of Produce Marketing Consultants, a Stockton, Calif.-based retail-consulting firm. “But they just chip away and chip away. They don’t make a lot of noise. Nobody brings them up in the boardrooms. They just kind of quietly sit there and do their own thing. They’re not trying to be everything to all people.”

Doing its own thing has long been an Aldi specialty.
The company’s typical store is modest by current standards — 15,000 square feet, compared to the major chains’ 40,000- to 80,000-square-foot stores.

Aldi seems to freely admit its limitations, with an inventory of no more than about 700 items, mostly staples. Traditional grocers often carry as many as 20,000 products. Wal-Mart Supercenters can offer as many as 150,000, according to Business Week.

Produce is no different, although the chain has upgraded its offerings.

One store in suburban Kansas City, for example, featured portabella mushrooms, several citrus offerings, grape tomatoes and several varieties of bagged salads among 20-30 items in stock.

“They’ve been pretty disciplined in (stock-keeping unit) management,” Stern said. “They’re still extremely disciplined in terms of what goes in and out of the store. I think they’ve made acknowledgement of what the consumer demands, which means more SKUs.”

And, in produce, Aldi carries many nationally known shippers’ labels.

Not that the other chains have much to worry about, in terms of direct competition from Aldi in the produce department, Stern said.

“Aldi may have 20 items in produce, so they’re still light years away from what even a good conventional does,” he said.
Aldi’s produce departments reflect the chain’s no-frills philosophy. There are no ornate displays, no produce-savvy employees nearby — a store manager can be seen stocking the department one minute, then operating a cash register in the front of the store the next, and then stocking canned goods in a different aisle a short time later. There isn’t even a scale.

Product bins are set out in a corner of the store.

There aren’t employees available to retrieve shopping carts — a system that requires customers to deposit a quarter in a coin slot attached to each cart. The system virtually ensures each unit will be returned after use because the customer must return the cart to get the quarter back.

Such cost-cutting measures stand in sharp contrast to a system employed by Wal-Mart, which has greeters at every entrance and an army of help in each department.

The payoff, Aldi says, is that the consumer will pay as much as 50% less for groceries purchased at its stores.

“They fit into the scheme from a price-based retailer that’s siphoning off customers from the mainstream retailers,” said Steve Lutz, executive vice president of the Perishables Group, Dundee, Ill.

And, Lutz said, it’s working.

“I think what you can say is that the deep-discount operators, whether an Aldi or a Dollar Store, are absolutely growing,” Lutz said. “That gets back to the threat to the mainline retailers, that they’re being picked off from a variety of angles.”
Mainstream grocery chains should keep an eye on Aldi and others in its niche, Lutz said.

“It’s tough for them to be a niche operator, so they end up getting picked off,” he said. “I think they have to worry about them.”

Aldi is making inroads on competitors, at least in the produce department, said Ed Mackowiak, vice president of sales and marketing for Fresh Look Marketing, a consulting group based in Hoffman Estates, Ill.

“I think they’ve made big strides, and I think they’ve expanded their SKUs somewhat to match consumers,” Mackowiak said. “But I think that changes in Aldi’s format include different varieties of produce point to the fact that produce is important to consumers. Consumers are interested in an expanded variety of items, as well as higher quality.”

Price remains a prime lure to many customers, and Aldi is taking advantage of that, Odron said.

Chuck Zerankosky, a bond analyst with McDonald Investments, Cleveland, said Aldi’s success is difficult to track, but he said that others in the niche are successful.

“That’s a very nice part of business,” he said.