Grocer Aldi targets nearby rivals in its bid to boost its US footprint

Key Points
  • Aldi is a year into its five-year, $5.3 billion U.S. growth plan.
  • The plan calls for building around 800 new stores, remodeling older locations and upgrading and expanding its assortment.
  • By 2022, Aldi said it will be the third largest U.S. grocer by store count with 2,500 locations, behind Walmart and Kroger.
Aldi bets on US expansion
Aldi bets on US expansion

Grocery retailers better keep an eye on available real estate nearby, because a new competitive neighbor might be moving in soon.

Aldi is a year into its five-year, $5.3 billion U.S. growth plan, which includes building around 800 new stores, remodeling older locations and upgrading and expanding its assortment.

"It's pretty simple," Aldi U.S. CEO Jason Hart told CNBC. "We are going where competitors are, we like to be close to the competition for convenience reasons for our customer. We like them to shop exclusively Aldi, but we recognize that consumers are going to more than one store."

By 2022, Aldi said, it will be the third largest U.S. grocer by store count with 2,500 locations, behind Walmart and Kroger. Since announcing its growth plan in June 2017, it has added more than 140 new stores from coast to coast, opening its 1,800th U.S. store Thursday in Texas.

Aldi is opening stores for the first time in Florida, Texas and the East Coast, while at the same time "densifying our existing markets like Chicago, like St. Louis, like Cleveland where we have been for decades and decades," Hart said.

Aldi U.S. is part of a privately held German company, Aldi Sud, which opened its first U.S. stores in 1976. Makeovers of older stores include cosmetic updates and cost-saving measures like new eco-friendly lighting, but most importantly a new merchandise assortment. Today, Aldi said it's halfway through its plan to remodel 1,300 older stores and its goal for 20 percent of the products in every store to be new compared with last year, with a 40 percent increase in fresh food.

Fresh food is a key draw for shoppers, and organic and gluten-free options are growing in popularity, the grocer said. Aldi's organic produce sales have increased by over 200 percent in the last three years. The grocer continues to add to its private label gluten-free products and says its "liveGfree" brand bread has been one of its best sellers for two straight years.

While Aldi U.S. does not release sales figures since it is part of a private company, Hart said its U.S. sales have doubled the last five years and the goal remains to double sales again in the next five years.

Adding stores is an easier way for a retailer to grow sales than to increase sales at existing stores, otherwise known as comparable or same-store sales growth. But Hart said "our same-store sales over the past several years has been much more than the industry has realized."

IBISWorld estimates Aldi's U.S. revenue was around $13.5 billion in 2017, compared with Kroger's $97 billion. While analysts and consultants agree Aldi has experienced growth, Randy Burt, a partner in the consumer goods and retail practice at A.T. Kearney, estimates Aldi has just about a 2 percent market share.

Generally, grocery is considered a staple purchase, rather than a discretionary one, which suggests if Aldi is growing sales, some other competitor is losing out. Hart said Aldi is pulling sales away from a number of rivals, typically the ones closest to its stores.

According to Hart, "we are appealing to a wider range of customers and we are appealing at an accelerating rate to more and more customers as they discover the difference at Aldi, which is saving money on high quality products in a convenient, less frustrating shopping environment."

The company says last year, more than 7 million new households shopped at its stores. Currently, 40 million consumers shop its stores each month, and the grocer hopes to serve 100 million customers monthly by the end of 2022.

Simple shopping, low prices

Aldi may be upgrading its stores and assortment but its core strategy remains the same: simple shopping at low prices.

The grocer's stores are about one-fifth the size of a typical supermarket with just five aisles and 12,000 square feet. While the updates have expanded the types of products Aldi sells, it still sells fewer products in each category to make shopping less complex. Instead of 12 varieties of olive oil, Aldi sells — after exhaustive testing — what it deems are the four best choices.

More than 90 percent of what the grocer sells is private label products, or products Aldi has developed with suppliers that can only be purchased at its stores. The private label strategy helps it keep prices low, along with charging for bags, and keeping displays no frills with the original shipping boxes holding the inventory in the stores.

Not all shoppers are comfortable buying private label brands instead of national brands, and Hart admits that's a "challenge" to overcome in its effort to attract new shoppers. But more shoppers, particularly millennials, are moving toward buying more private label products, even at the grocers that offer a variety of both.

Kroger's private label sales are up 40 percent in six years, making up just under a third of its unit sales. Sales of private label food grew 4 percent over the last year after falling in 2017 from 2016, according to Nielsen's Total Food View. Still, the group says private label still makes up just 15 percent of packaged foods and household products sold in the U.S., compared with 40 percent in the United Kingdom.

While the margins are thin in grocery, and the competition is only getting more intense from store expansion and remodeling programs to expanded online shopping options.

Germany-based Lidl, which has many similarities to Aldi in its format, private-label and pricing strategies, opened its first U.S. stores a year ago along the East Coast. But Lidl's entrance into the U.S. market has not been without challenges. The company said it would open up to 100 stores within its first year, but a year later, it opened just 53.

New ways of shopping

While online grocery makes up just 3 percent of all grocery sales in the U.S., according to Bain, it is a category that many grocers want to win.

Amazon's Whole Foods just announced grocery pickup within 30 minutes of placing an online order starting in two U.S. cities. The pickup option is in addition to its expanding grocery delivery options. Last week, Kroger launched "Kroger Ship" delivery service in four U.S. cities. Walmart has a goal of reaching 40 percent of the country's population with its grocery delivery program by the end of the year.

Aldi U.S. is just beginning to explore grocery delivery through a partnership with Instacart in four cities. Hart said it's looking to grow the offering as the initial response has been "overwhelmingly positive."

But stores remain Aldi's cornerstone, and Hart likes the return on investment Aldi has seen so far from its multibillion dollar expansion and remodel strategy.

"We are quite confident in our prospects moving forward as the industry tries to deal with the growth of the alternative ways people are shopping, and we are one of those alternative ways," Hart said.

Correction: This story was revised to correct that Aldi US is part of Aldi Sud.

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