Steady as she goes

We preferred to be under the radar, head down and focused on our niche, which is great quality at prices no one can touch,” says Joan Kavanaugh, vice president of purchasing for Aldi. “And improving that offering every day speaks to the stability of the company and the importance of the U.S. market.”

The word “stability” may be a gross understatement when describing the Batavia, Ill.-based discounter. The real watchword is patience—in the extreme. Aldi, which came to the U.S. in 1976 after purchasing the Benner Tea Co., has been operating in stealth mode for 33 years, slowly and silently expanding its limited-assortment and limited-amenity deep-discount stores and occupying what some observers consider the fringe of retailing.

However, the fact that Essen, Germany-based Aldi has 1,000 stores here positions the U.S. as a key part of  its complex global network of nearly 9,000 stores and Kavanaugh readily concedes that the goal is to be a national grocery chain. The only question is when.

“That’s hard to answer. We have very aggressive growth plans and we’re comfortable with opening 80 to 100 stores per year long into the future. We’re just not at a point where we have a number we want to hit,” she tells Grocery Headquarters. “There may be a couple of states we choose not to enter because of low population density and we’re conscientious about not cannibalizing existing stores. But there’s a lot of opportunity and we will be national.”

Long-time Aldi watchers are true believers. “Aldi thinks in terms of decades rather than years,” according to Matthias Queck, senior discount retail analyst for Planet Retail in Frankfurt, Germany. “It’s taken them 33 years to get to 1,000 stores. Give them another 50 and maybe they’ll make it to California. They’re just not in a hurry. But they have stepped up expansion and have billions of euros to spend in the U.S.”

Traditionally, Aldi has financed expansion through cash flow generated by each marketing area. This may be why expansion was slow in the U.S., Queck says. But sales, and assumedly profits, are escalating thanks to somewhat larger stores, more appealing décor and a larger product offering—albeit private labels. “Also, Aldi’s German market is saturated and they are using loads of money to finance expansion elsewhere—especially in the U.K., Ireland, Australia and the U.S.,” says Queck.

At present, U.S. operations accounts for 16% of Aldi’s global sales of $73.5 billion, according to Planet Retail. Revenues from Aldi stores alone come to $6.9 billion, with an additional $5.1 billion generated by 315 Trader Joe’s stores also owned by Aldi. “It means there’s a lot of room for improvement and expansion,” he says.

This new growth spurt will include a number of new units in Florida—a market that Aldi entered last year—and in Texas, where stores will begin operating in the spring of 2010, primarily in the Dallas area. Store openings are also continuing in a number of markets along the East Coast, says Kavanaugh, who is enthusiastic about Aldi’s first New York store, which is scheduled to open later this year or early 2010 in the borough of Queens.

“There are lots of opportunities. New York is a fantastic market because of the high population density,” she says. “We’ve looked at the competitive set in the area and how much people are paying for groceries. We’re very confident that consumers will be thrilled about having Aldi in town.”

Overall, growth will be supported by a network of 19 distribution centers, ranging from 400,000 to 525,000 square feet, each of which is designed to service 70 to 75 stores in a 150- to 200-mile radius. Three of the existing DCs are enough to cover the East Coast, including New York, says Kavanaugh. But new facilities include Florida, Denton, Texas and one in the Atlanta area that is scheduled to open in 2011.

Meanwhile, the recession that swamped some mainstream supermarkets has had no impact on Aldi. “We’re fortunate in that we experienced significant growth well before the recession was a factor. And with an excellent store base and word of mouth working for us more people are walking through our doors every day. We’ve had increases in traffic and consumer spending in all 19 divisions,” she says.

Shopping frequency has been spurred by several factors. For one, stores in the U.S. carry about 1,400 items, including nonfoods. This compares with 800 to 900 items at stores in Germany and about 1,000 at Aldi stores in the U.K., according to Planet Retail’s Queck.

Sales have also been spurred by improvements in merchandising, including fresh foods which, aside from some frozen and refrigerated products, had not been part of Aldi’s repertoire. “Produce is much larger than it was in the past and we now sell fresh meat.” The addition of the latter mirrors Aldi’s strategy in European markets with stores now carrying such items as lean ground beef, marinated pork tenderloin and boneless beef strip steaks sold under the Roseland, Appleton and Granger labels.

Additionally, Aldi’s “Special Purchase” program has proven highly effective. “With an EDLP pricing philosophy, we don’t have weekly sales to shout about. Our core range is about 1,400. But every week we have 40 to 50 new products, some of which are only there for a day or two. It’s a real treasure hunt for customers. They find it exciting and it drives them into the stores on a regular basis. Sometimes, the products are seasonally relevant, like lawn and garden, and there are a lot of ‘Special Purchase’ items around the holidays. But most of them are food related—primarily grocery, but some chilled and frozen items as well,” she says.

Kavanaugh believes the program could be expanded, but adds: “We are always focused on whether our range is relevant to the market. One of the challenges we have is being a limited assortment grocer. Some items are simply not strong enough to have on the sales floor every day. But they work very well as quick in and out things that people don’t purchase very often—maybe once every six months.”

The Special Purchase program has been in place since Aldi came to the U.S. “But we’re doing more than in the past, fine-tuning it and marketing it much more effectively,” she says. “For one thing, we’re doing a better job of [creating themes]. Rather than sell 40 random items on any given week, we are trying to pull them together under a common theme that resonates with customers and gives them the incentive to get into the stores,” she says.

Kavanaugh is quick to point out that this is not part of a price cutting strategy that the chain tested for about 100 items at Missouri stores in 2008. “We will continue to have an EDLP strategy. Its served us very well and we have no plans to veer from that.”

Clearly, adherence to EDLP has helped Aldi flourish during the recession. “Tra­ditional supermarket shoppers are desperate to find high-value alternatives. There’s a sense of urgency to save money and Aldi has been the answer.”

As such, Aldi has targeted every type of retail outlet—conventional supermarkets, warehouse clubs and dollar stores—as its competition and is going after shoppers from every demographic group. “We don’t have just one niche and I think that’s supported by the significant growth we’re experiencing,” she says.  “We locate our stores where customers are and that means we hit a cross-section of them all across the country.”

Asked if the chain is trying to shed the image of Aldi as a store for “poor” people, Kavanaugh says, “Again, I believe Aldi is the store for all smart consumers. The fact that our foot traffic is up says that traditional supermarket shoppers are finding their way to us. Price is the first reason, but it’s the quality that keeps them coming back. They see our products being as good, if not better, than the national brands while saving up to 50% on that grocery bill.”

While the increase in traffic and sales has resulted in increased facings on certain items and higher stock levels, the chain is also committed to product development with 100 new items slated to be launched this year and a similar number in 2010, according to Kavanaugh. “There are all kinds of things in the pipeline. But the focus is making sure the products reflect current trends in the market.”

Several of these are taking center stage at Aldi. “We are experiencing growth in all categories but there are a couple of big ones. On the food front, canned vegetables are not as exciting these days, but [frozen] steamer bags are a big thing and that will be reflected in our offering,” she says.

In health and beauty care, Lacura, a line of 15 to 20 cosmetic and skin care products that were very successful for Aldi in Europe, have been introduced in all 1,000 U.S. stores this year. “The line includes cleansers, toners, day and night creams, mascara, foundation, nail polish and blush and has received a number of awards for its quality. We’ve had great success matching or exceeding national brand standard for quality. Meanwhile, we’re finding price differences on similar products at other stores as much as 75%,” Kavanaugh says.

As was the case with Lacura, Aldi takes a macro approach to new product rollouts rather than trying to tailor them to individual locations. “The vast majority of new items will be sold in every location since pretty much everyone’s looking for the same items whether they are on the East or West Coast or down South,” she says, noting that chainwide distribution also helps drive down costs.

However, Aldi also needs to be regionally relevant. As such, a percentage of the product range, albeit a small one, is region-specific. “For instance, in the New York area we sell New York cheddar. It’s one of the top items there but we tested it elsewhere and it didn’t do well.”

Although Aldi’s worldwide network of 9,000 stores gives the company incredible buying power there is relatively little crossover between countries since what works in Germany or the U.K. may not fly in the U.S. “Aldi U.S. is independently managed and operated, our merchandising and purchasing decisions are all made in the U.S. not by an international management team,” she says.

Planet Retail’s Queck agrees that Aldi, which is highly decentralized and headquartered in Germany, is loathe to interfere with local operations as long as things are running well. However, the company now has an international coordination board to uncover more synergies in global buying and other issues.

International co-buying is being done for the Lacura line as well as special purchase items. “It’s an additional opportunity for efficiency with 1,000 stores and a format that limits selection. We can also drive tremendous volume for our suppliers,” Kavanaugh says.

Much of that volume is in Aldi’s extensive stable of private labels that represent about 95% of the chain’s products. “We think it’s the best of both worlds for us and our customers—a very high-quality product but without all the initial marketing and advertising expenses that are attached to national brands. Our goal would be to have 100% private label if we could. But if we can’t find an excellent match for a national brand we will continue to sell it,” says Kavanaugh.

On the other hand, some of the leading national brand manufacturers are also used to producing store brands, she says. But, Aldi provides the recipes to insure strict quality standards. “We use our own test kitchen and independent laboratory analysis to see that our products meet or exceed national brand quality,” she says. Regular blind taste tests are conducted comparing Aldi items to two or three top competitors.

Overall, the chain is in the throes of an aggressive rebranding effort that not only includes new products, but also a streamlined list of product names and innovative new packaging that includes call-out boxes for such features as trans fat-free or low sugar, says Kavanaugh.

As the chain grows, it is also developing different tiers within private label. “It depends on the product line. But we are in the process of rebranding our product range and we’re working to categorize and improve them. One example that’s really resonated with customers is Fit and Active, a health-oriented brand that stretches across many products in the store. Some buyers are creating tiers within their categories. For example, there might be a kids or premium line within cookies. But it’s up to the individual buyer to determine what’s appropriate based on the market.”

Meanwhile, as the chain expands, name recognition has become increasingly important issue. “Historically we taken a limited approach towards marketing that kept advertising costs down and prices low. I don’t see a major change. But we are looking at our media mix. We started last year with a national television campaign and now we’re reducing print and adding TV in the top 30 markets with new commercials scheduled to air in October. It’s a matter of continuously fine tuning the media mix and using the same dollars differently in order to get the word out on the Aldi format,” Kavanaugh says. 

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