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No-frills zone

July 17, 2009

German discounting pioneer Aldi is using the economic crisis to expand its presence in the US. The move could help mitigate the company's troubles on its home turf.

Shopper with Aldi bag
With revenue dropping in Germany, Aldi is turing abroad for growthImage: DW

It is something that hasn't happened to Aldi before: In the midst of a severe economic crisis Germany's discounting pioneer is faced with declining revenues in its home market.

According to data from research company GfK, Aldi's sales in Germany declined by about five percent in the first five months of this year while the German retail sector as a whole shrank by only 2.2 percent.

It's an entirely different story in the United States. There, Aldi is rapidly expanding its reach and expects to open 75 new stores this year. The discount retailer entered the US market back in 1976, but its no-frills concept only really started to take off in recent years.

"And of course the current economic crisis is really helping Aldi to gain more customers, but is also making some changes in its concept", explains Matthias Queck, Senior Discount Analyst at market reseach firm Planet Retail.

For instance, Aldi has added more fresh products, especially produce, to its range of products and has spruced up its stores to make them more attractive to new customers. While older Aldi stores where often located in less affluent neighborhoods, many new stores are located in areas that attract suburban and middle class shoppers as well.

Low prices for high price markets

Aldi traditionally doesn't release financial figures, but experts believe the German discount chain is doing quite well in the US and making significant inroads in the retail sector.

How then does Aldi compete against US retail behemoth Wal-Mart on its home turf? It's very simple, say the experts, the same way Aldi and other German discounters forced Wal-Mart to shutter its doors in Germany a couple of years ago: low prices and high quality.

Wal-Mart headquarter
Aldi is taking on retail giant Wal-Mart on his home turfImage: AP

Thomas Roeb, a retail expert at the University of Applied Sciences Rhine-Sieg, argues that while Wal-Mart is considered a discounter in the US and has an image as a low-price retailer, its general pricing level is still fairly high. In comparison to Wal-Mart Aldi has a lower cost structure that allows it to become very successful in higher price markets like the United States.

"However, the consumers so far didn't really believe in the value proposition of Aldi and it is due to the economic crisis right now that people have started to try the concept." And, adds Roeb, more and more Americans give Aldi's no-frills concept a chance and actually find it attractive.

That's because consumers realize that they can save money when shopping at Aldi. Experts estimate that Aldi's prices are generally 10 to 15 percent lower than those of other national US retailers. How does Aldi do that?

It keeps costs down with a limited range of products, smaller stores, fewer staff, and by not staying open as late as some of its competitors. It has also developed an efficient logistics system and most of the products that it sells are its own brand. Its sheer size allows it to get discounts by buying large quantities.

Too successful

What can happen once Aldi's value proposition catches on in a big way, is evident in Germany. There, so-called "hard discounters" like Aldi, account for more than 40 percent of the country's retail sector. The discount model has been so successful that Aldi's many competitors in Germany are finally taking a bite out of its revenues.

Sign of Lidl store
In Germany, Aldi faces stiff competition from other discountersImage: picture-alliance/ ZB

After decades of imitating Aldi, says retail expert Roeb, its German competitors have finally caught on. "So it's less Aldi's loss in the German market, it's less that Aldi is doing something wrong, but rather the fact that the competition is doing something right."

That's why Aldi's future growth will come mainly from abroad with the US being a prime target for expansion, argues discount expert Queck:

"Just imagine that in the US, Aldi has just 1,000 stores spread over 29 states, so that leaves a lot of room for further expansion."

Compare that with the roughly 1,700 stores that Aldi Sued, the part of the Aldi company that manages its US operation, owns in southern and western Germany alone and you can imagine the huge growth potential for the discounter in the US.

Wal-Mart dwarfs Aldi

Despite Aldi's current advances in the US market, the question remains whether it can sustain its growth and customers once the economic malaise is over.

"I do believe that Aldi is going to be successful even after the crisis," says Roeb. "Because we have had the same situation in Germany and in some Western European countries in the past. Everywhere Aldi benefitted from economic crises to increase sales and consumers found the selection of products attractive so they found no need to switch back to their former supermarket."

While Aldi in the US with an estimated revenue of about seven billion dollars last year is tiny in comparison to Wal-Mart with its revenue of 375 billion dollars, the German discounter could challenge Wal-Mart in a specific segment - food. Wal-Mart, says Roeb is basically a non-food retailer that carries food as an important part, but not the main attraction of its product range.

"Aldi however is a food specialist. So when we are talking about competition between Aldi and Wal-Mart, we are talking about competition in the field of food. And I do believe that Aldi is going to cause some problems for Wal-Mart in the future and even today in the area of food."

That's because, Wal-Mart's image as a discounter in the food segment could be undercut by Aldi's value proposition. And that, adds Roeb, might end up having a negative impact on Wal-Mart's public image.

Author: Michael Knigge

Editor: Chuck Penfold