Aldi’s Formula for Success: Small Selection, Low Prices

August 10, 2008 | By Mike Hughlett, TRIBUNE REPORTER

The shelves at Aldi are stocked with the likes of Clancy’s cheese puffs and Millville Kid’s
Krunch; Cheetos and Cap’n Crunch aren’t welcome here. Shopping carts require a 25-cent
deposit and, sorry, but no credit card purchases—they cost too much to process.

It’s a bare-bones approach to a grocery store, but Aldi has been expanding at a healthy clip
recently, grocery analysts say. And a weak economy and soaring food prices can only help the
German supermarket giant, which makes its U.S. headquarters in Batavia.

Aldi, which counts the Chicago area as its biggest U.S. market, is a breed of supermarket known
as a limited assortment discounter. It carries only a fraction of the items offered in a conventional
grocery store, and its shelves are dominated by Aldi’s own store brands.

But Aldi claims it offers about 90 percent of the foods people buy most, and at prices up to 40
percent below those of conventional supermarkets, analysts say.

As food prices rise, consumers have more incentive to “trade down” from well-known brands to
less costly alternatives like Aldi. “It’s benefiting from this economic environment,” said Mitch
Corwin, an analyst at Morningstar Inc. “What they offer may resonate with more people.”

Aldi stands for “Albrecht Discount,” and refers to Karl and Theo Albrecht, the reclusive,
octogenarian brothers who created the firm and are now among the world’s richest men. Theo
was kidnapped in 1971, a traumatic event that’s been credited for Aldi’s secretiveness over the
years.

The company, which has been sharing more information of late, is a big force in Europe,
particularly in Germany. Aldi came to this country in 1976 with a store in Iowa, and it now has
more than 900 outlets and ranks 25th among U.S. grocery chains, according to Supermarket

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News.

The publication estimated Aldi’s U.S. sales at $5.8 billion, about 10 percent of its overall
revenue. That U.S. sales figure doesn’t include Trader Joe’s Market, which is also owned by
Aldi.

Matthias Queck, a discount retail analyst with consultant Planet Retail, said Aldi’s U.S. foray
probably isn’t as successful as the company originally planned. Having 950 stores here after 32
years “is not that huge a success.”

Still, Queck and other analysts say Aldi has gotten more aggressive in its expansion efforts in the
past few years. And while privately held Aldi doesn’t disclose financial information, some
analysts say its same-store sales appear to be growing at a healthy clip.

The chain operates in 28 states, primarily in the Midwest, South and Northeast (outside of New
England). But Aldi first got traction in this country in Chicago, said Michael Jessen, vice
president for the Chicago region. “It’s the first area where we really saw some pretty terrific
success.”

Aldi has 157 outlets in the greater Chicago area, including 31 in the city itself. While grocery
market researchers don’t track Aldi’s market share, the company has only 27 fewer stores than
the Chicago market leader, Jewel, and tops the 80 stores operated by Dominick’s.

Of course, Jewel and Dominick’s stores are much bigger, with an average size of 65,000 square
feet. Aldi outlets are about 17,000 square feet. And that’s just the beginning of the gulf between
Aldi and conventional stores.

Aldi has 1,300 to 1,400 items. The others tend to sell about 45,000 items, when myriad brands
and product sizes are taken into account. For instance, at Dominick’s or Jewel, consumers can
choose between several brands of salsa; at Aldi, it’s “Casa Mamita”—Aldi’s brand—or nothing.

While less-expensive store brands are common at most grocery chains, they make up a whopping
95 percent of items at Aldi. Hershey’s chocolate bars, Arizona iced tea and Pringles potato chips

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are among the lonesome major brands on Aldi shelves.

And they wouldn’t be there, either, if Aldi could find a way to make similar products with the
same taste and quality, Joan Kavanaugh, Aldi’s vice president of corporate purchasing, said
recently as she walked through an Aldi store in Geneva that opened this year.

Aldi has been opening about 50 stores annually in recent years, though that number will shoot to
100 this year. A quarter of those outlets are slated for Florida, a new market for Aldi.

Another introduction this year: Aldi’s first national television ad campaign. It ran for 12 weeks
and Aldi was “very pleased” with the results, Kavanaugh said.

Queck, the Planet Retail analyst, said the TV campaign may mean Aldi has realized it’s been too
cautious with its marketing efforts.

Neither Aldi’s attempt to raise its profile nor its accelerated expansion was prompted by a
weakening economy, Aldi executives say. Analysts aren’t so sure, but at least it’s a happy
coincidence for the company.

With food prices rising at a rate not seen in 18 years and an economy possibly veering toward
recession, some consumers are redirecting their food-buying choices. The grocery industry
generally has benefited from this, as consumers have increasingly cut back on restaurant meals.

Within the supermarket sphere, Aldi stands to benefit by drawing shoppers from conventional
stores, analysts say. If the company can lure in new shoppers—and prove to them that trading
down doesn’t lead to lower-quality food—it stands to make long-term gains, said Jim Hertel, of
supermarket consultant Willard Bishop.

In other words, Aldi needs to land more new customers such as Monica Corbett of St. Charles.
She and her husband have four children, and as gas and food prices have shot up in the past six
months she started shopping at Aldi.

“The prices here are awesome. They have some things that are really good—and cheap.” Still,

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Aldi isn’t her sole grocery outlet. “Sometimes they don’t have the variety I want,” she said.

But that lack of variety is what keeps Aldi’s prices low.

Aldi outlets are low-maintenance affairs that usually employ only seven or eight people. There
are no dedicated stocking clerks or baggers. Customers pack their own groceries, ponying up 5
cents to 10 cents per bag, or bringing bags from home. The 25-cent cart deposit is also aimed
largely at labor productivity. In an automated process, shoppers pay a quarter but get it back
when they return their cart. This way, workers aren’t required to round up stray carts.

With less need for labor, Aldi bags an estimated three times more revenue per employee per hour
than does a conventional grocer, said David Livingston, a grocery analyst with DJL Research.

Plus, Aldi’s costs per food item are particularly meager since its stores offer relatively few
products. In essence, the company’s low labor costs are flowing over a small basket of goods.
“That’s the magic of the limited assortment store,” Hertel said.