Aldi might soon become the second largest supermarket operator; and third largest grocer, in the United States.

The German discounter plans to open 2,500 stores nationwide by 2022, Business Insider reported. That would make Aldi, America’s second largest supermarket operator behind Kroger (NYSE: KR) which operated 2,796 supermarkets and supercenters in 2016.

It is not clear what share of the US grocery market this would give Aldi because its smaller stores sell less than competitors. Currently the largest grocer in the USA is Walmart (NYSE: WMT) which operates around 5,000 stores. Note: Walmarts are not considered supermarkets because they sell a wide variety of merchandise.

Can Aldi Really Grow that Big?

Kroger is the second largest grocer by volume after Walmart. Since we do not know what sort of volume Aldi will be selling in 2017 there is no way to tell if it will be rivaling Kroger and Walmart as the nation’s largest grocer.

Aldi is now the fifth largest grocer in the United Kingdom where it controls around 6.2% of the grocery market, The Guardian reported. Aldi currently operates around 700 stores in the UK but wants to expand that number to 1,000 by 2022, Reuters reported.

Aldi and its’ archrival Lidl now control around 11% of the British grocery market. The privately held German discounters success against the big British supermarkets; Tesco, Sainsbury’s and Asda has convinced some US observers that they might be a threat to Kroger. Lidl operates a well-known American grocer; Trader Joe’s, and it is opening stores under its brand name in Virginia this summer.

Aldi is capable of rapid growth; in the past 10 years it went from 2% of the British grocery market in 2007 to 6.2% today, according to The Guardian. It is also opening around 70 new stores a year in the UK, expanding its’ footprint by 10% a year. So yes Aldi might be capable of becoming a grocery giant.

Yes Aldi and Lidl are a Major Menace to American Grocers

For those who are unfamiliar with them Aldi and Lidl follow a simple but highly successful business model. They sell a limited selection of high-quality items in a no-frills environment at a very low price.

One way Aldi achieves this is by selling mostly house or private labeled branded items which come at a much lower price. For example: Chancy’s potato chips instead of Frito Lay’s.

Another is with simplified stores similar to a Costco Wholesale (NASDAQ: COST), items might be stacked in card boxes on pallets that can be moved into place by a forklift. The limits the need for stockers and lowers labor costs.

Aldi also operates smaller stores and takes steps like charge a quarter for cart rental. People who return the carts get the quarter back so Aldi effectively pays the customer to do part of the work. It also refuses to accept coupons which can reduce costs and work for cashiers.

Aldi stores also lack labor-intensive amenities like delis, bakeries, butcher shops, customer-service counters and pharmacies. This might be the chain at a disadvantage when competing with Kroger, Safeway, Publix (OTC: PUSH), Sprouts Farmers Market (NASDAQ: SFM) and Whole Foods Market (NASDAQ: WFM) all of which emphasize the sale of hot fresh food in stores.

Don’t Underestimate Aldi’s Popularity

The popularity and appeal of this no-frills business model should not be underestimated. Trader Joe’s; which sells high-end items like imported and gourmet food at a low price, has done serious damage to Whole Foods in some markets.

Like Trader Joe’s, Aldi has legions of rabid fans around the country. An example of their loyalty can be found in this Facebook page which is designed to “Bring Aldi to Colorado Springs.” The page had 854 likes and 845 followers as of July 11, 2017. When was the last time you heard of a supermarket with a fan page?

Aldi USA’s own Facebook page had attracted 2.184 million likes and 2.147 million followers on the same day. This is not scientific but it is a sure indication of followers.

Aldi has a Lot of Room for Expansion

Aldi USA has a lot of room for expansion; it is only in one West Coast State (California) and no Rocky Mountain or Desert Southwest state yet. Nor has Aldi penetrated most of New England or Louisiana. Its’ footprint is also very limited in some states; there’s only two stores in South Dakota for example.

Like Trade Joe’s and Whole Foods, Aldi seems to concentrate on certain kinds of markets. These include rural areas; such as Iowa, and some cities including Saint Louis. Cynics will say that Aldi is profiting on income inequality and wage stagnation and they are correct.

This means we will see Aldi grow well beyond its current footprint of around 1,600 stores. Naturally that expansion will be at somebody else’s expense but whose.

Who will Aldi Threaten?

My take Aldi is a big menace to smaller regional grocery chains, franchised discounters like Supervalu, and dollar stores particularly Dollar General (NYSE: DG) and Dollar Tree (NASDAQ: DLTR) – which owns Family Dollar. One reason for this is that Aldi is offering a wide variety of dry goods at its stores.

Aldi might also threaten Trader Joe’s, Costco Wholesale (NASDAQ: COST) and Sprouts at some point. One way it does this is by offering quality specialty items such as lamb at a low price.

It also sells wine and beer in some markets which can present a problem for both Costco and Trader Joe’s. Aldi seems to a good selection of premium beers much like Trader Joe’s (it is German after all). Like Trader Joe’s Aldi offers wines and beers of the month.

An interesting development would be Aldi developing more specialized local locations for particular markets. Examples of such stores might include locations that specialize in ethnic foods in particular neighborhoods or outlets that stock more high-end foods or gourmet items in the big cities. This strategy has already worked well for Trader Joe’s and Kroger.

Something other markets need to watch is the stocking of quality and specialty items at Aldi. Its’ website was recently advertising specials on leg of lamb, three cheese tortellini, India Pale Ale (IPA) and whole bean single-trade origin coffee from Peru.

My take is that Aldi is not a direct threat to Walmart, Kroger or Safeway; because they offer a number of amenities that Aldi lacks including pharmacies and hot food prepared in store. Instead it is more of a threat to retailers that target the working class and senior citizens (a growing segment of the population with 75 million aging Baby Boomers). This includes dollar stores especially Dollar General (NYSE: DG) and smaller grocers.

The Aldi Invasion is Definitely Disruptive but not guaranteed to succeed

Aldi itself will face some problems including Amazon (NASDAQ: AMZN) which is expanding its grocery business and trying to buy Whole Foods.

Whole Foods has been experimenting with its own Aldi clone 360 in some markets. That might become a major player with Amazon’s resources behind it. A major threat to Aldi would be a 360 where customers can pick up or return Amazon merchandise ordered online and pay for it in cash.

Other problems include Walmart and which are still capable of undercutting Aldi’s prices through deep discounting. A big long term threat to Aldi is same day-delivery of online orders which effectively counters Aldi’s convenience.

My take is that yes Aldi can become America’s second or third largest grocer; but achieving that goal will take a long, hard and bitter struggle, which will claim a lot of casualties. Investors need to watch Aldi closely because this chain is about to seriously disrupt the American grocery market.

This Article initially appeared at Market Mad House.


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