The identity of one of the most successful German brands in America might just surprise you: It’s Aldi, the iconic discounter that has completely disrupted Britain’s grocery business.
Even though many people do not realize it, Aldi Sud has a major presence in the American Midwest, with around 1,360 stores in operation under the Aldi brand name. Aldi has made serious inroads into the grocery market in some U.S. cities and has developed a cult following among thrift-minded Americans.
Aldi’s growth in the U.S. has even prompted speculation that it could threaten some U.S. retail giants, including the grocer Kroger (NYSE: KR), Walmart Stores Inc. (NYSE: WMT) and the dollar-store operators Dollar Tree Stores (NASDAQ: DLTR) and Dollar General (NYSE: DG). The thinking here is that Aldi’s ability to deep discount enables it to attract increasingly thrifty shoppers who are trying to cope with lower incomes and a loss of job security.
Aldi Bucks American Shopping Trends
Aldi actually runs counter to many of the prevailing trends in American retail. Its stores are smaller and simpler than many competitors.
The average Aldi store is around 16,400 feet (4,999 meters) in area, while the average Walmart Supercenter contains 178,000 feet (54,254 meters) of space. The average Kroger supermarket contains 100,000 square feet (30,480 square meters) of floor, space but some Kroger marketplace stores can be far larger. Another Midwestern chain, Meijer, only operates supercenters, some of which are larger than anything Kroger or Walmart owns.
Aldi also offers a far more no-frills shopping experience than most American grocers. Its stores sell a much smaller selection of items and offer customers few amenities. The average Kroger supermarket might sell a dozen brands of potato chips and several different varieties of ketchup or canned tomatoes. An Aldi store will only sell one or two brands of each under a private label or house brand.
Retailers like Kroger and Walmart have been going out of their way to add a wide variety of amenities to their stores. Some Kroger Marketplaces offer shoppers medical clinics, bakeries, gourmet cheese counters, sushi bars, gas stations and even jewelry stores. Many Walmart stores feature banks, fast food outlets and even nail salons. Aldi, in contrast, lacks even pharmacies and delis, which have become standard features in American supermarkets.
Will Americans Actually Shop at Aldi?
The level of customer service at Aldi is also much lower. U.S. Aldi stores famously charge customers 25¢ (€.22) to rent a shopping cart. The customer gets his or her coin back if he or she returns the cart, the idea here being to reduce labor costs by eliminating the need for an additional employee to gather carts and put them away.
Inside the store, Aldi refuses to take credit cards and most forms of electronic payment. Walmart and Kroger take every credit card available in the United States. Walmart has been developing its own payment app, Walmart Pay, and experimenting with another called Current C. Several other American grocers, including the popular organic supermarket chain Whole Foods Market (NASDAQ: WFM), take Apple Pay and Android Pay.
It remains to be seen if this lower level of customer service and lack of amenities will appeal to American shoppers used to far more elaborate stores and attentive employees. There is some evidence that Americans are looking for a simpler shopping experience because of the growth of dollar stores. In recent years Dollar General’s revenue growth has exceeded that at established retailers like Target and Walmart.
Dollar or small box discounters such as Dollar Tree and Dollar General offer a very simple shopping experience. Like Aldi, these rapidly growing chains offer a very limited selection of products and few amenities. The success of these chains indicates there could be a demand for something like Aldi in Middle America.
Doubt is cast on that argument by Walmart’s decision to shut down its dollar store experiment, Walmart Express. America’s largest retailer has decided to exit the dollar store arena and concentrate its expansion efforts on supercenters and Neighborhood Markets—smaller outlets that look a great deal like Aldi stores.
Is There a Market for German-Style Shopping in America?
Yet the success of another retailer, Trader Joe’s, which is owned by Aldi Sud’s sister company, Aldi Nord, indicates that there is a market for German-style shopping in America. Like Aldi, Trader Joe’s sells a limited number of high-quality house brand products at low prices. Unlike Aldi, Trader Joe’s caters to a more urban and upper income clientele.
As with Aldi, Trader Joe’s has acquired a cult-like following in parts of the U.S., particularly in California. Some of Joe’s most popular products, such as a low-cost wine called “two buck Chuck,” have become legendary.
Both Trader Joe’s and Aldi have attracted a large clientele with low prices and a simplified shopping experience. The problem that they face is that they have competitors that can replicate that experience.
Kroger in particular has shown an ability to offer very deep discounts. Its City Market subsidiary in Colorado often undercuts the prices of dollar stores on a variety of products. Walmart offers low prices and a growing ecommerce capability that can even undercut some of Amazon’s prices.
Aldi’s Big Challenge in America
Interestingly enough, Aldi has so far avoided direct competition with Kroger and its privately held rival, Safeway. Most of the American Aldi stores are located in low-income areas or economically depressed communities in the Midwest. To some observers, it looks as if Aldi has stayed away from the more highly competitive grocery markets in the nation’s more prosperous regions, such as Colorado.
That could change because Aldi is moving into Southern California, where a Kroger subsidiary called Ralph’s dominates the grocery market. Aldi is also ramping up its marketing efforts with television commercials and an enhanced website. Yet it remains to be seen if Aldi can appeal to the American middle class.
Aldi has demonstrated that a German discount retailer can succeed in America. Unfortunately, the grocer has not proven that it can be more than a niche player in the United States.