Running a supermarket in America has never been harder.
Profits are razor thin. Online shopping and home delivery are changing the way people buy their food. Dollar stores and drugstores are selling more groceries. Pressures are so intense that regional chains like Southeastern Grocers, the owner of Winn-Dixie and Bi-Lo, filed for bankruptcy. Large companies increasingly control the industry, which had long operated as a dispersed network of smaller, local grocers. And even Walmart — the largest player of all — faces new competition from Amazon, which bought Whole Foods in 2017 for almost $14 billion.
But when Walmart’s US CEO Greg Foran invokes words like “fierce,” “good” and “clever” in speaking almost admiringly about one of his competitors, he’s not referring to Amazon. He isn’t pointing to large chains like Kroger or Albertsons, dollar stores like Dollar General or online entrants like FreshDirect and Instacart.
Foran is describing Aldi, the no-frills German discount grocery chain that’s growing aggressively in the United States and reshaping the industry along the way.
New customers may be jolted at first by the experience of shopping at an Aldi, which expects its customers to endure a number of minor inconveniences not typical at other American grocery stores. Shoppers need a quarter to rent a shopping cart. Plastic and paper bags are available only for a fee. And at checkout, cashiers hurry shoppers away, expecting them to bag their own groceries in a separate location away from the cash register.
But Aldi has built a cult-like following. When it enters a new town, it’s not uncommon for hundreds of people to turn out for the grand opening. The allure is all in the rock-bottom prices, which are so cheap that Aldi often beats Walmart at its own low-price game.
“I am willing to do the extra work because the prices are amazing,” said Diane Youngpeter, who runs a fan blog about the grocer called the Aldi Nerd and an Aldi Facebook group with 50,000 members. “There’s a lot of Aldi nerds out there,” she said. “I didn’t realize that there were so many of us.”
Aldi has more than 1,800 stores in 35 states and is focused on growing in the Midwest, the Mid-Atlantic, Florida and California. It’s on track to become America’s third largest supermarket chain behind Walmart and Kroger, with 2,500 stores by the end of 2022. Its close competitor Lidl, another German grocer with a similar low-cost business model, is racing to grow in the United States, too.
Amid their aggressive growth push, the two discount chains have forced the rest of the grocery industry to make big changes to hold onto their customers. Aldi has even encroached on Walmart’s turf— literally. As if throwing down a gauntlet, in October Aldi opened a store in Bentonville, Arkansas, just a mile from Walmart’s corporate headquarters.
“I never underestimate them,” Foran said at an industry conference in March. “I’ve been competing against Aldi for 20-plus years. They are fierce and they are good.”
But as competitors fight back, can the company hold on to its low-cost advantage? Can it stick to what it calls the “Aldi way?”
The Aldi way: How the chain beats Walmart on price
There’s no secret to how Aldi keeps its prices so low: The company strips down the shopping experience in an unapologetically and brutally efficient way.
“They are able to drive out every fractional cent of cost without compromising on quality,” said Katrijn Gielens, professor of marketing at UNC’s Kenan-Flagler Business School.
Aldi is privately held, and through a spokesperson, the company declined to make its executives available for interviews. But Gielens estimates that its operating costs are about half those of mainstream retailers. The company also operates at a lower profit margin than competitors, she said.
From a customer’s point of view, the distinct experience starts at the shopping carts, which Aldi keeps locked up.
Aldi locks up its shopping carts to save on labor costs. Customers deposit a quarter, which they get back when they return the carts.
Rather than employ a team of runners to retrieve carts from the parking lot all day, Aldi expects its customers to return carts to the store after each shopping trip. It forces that behavior by charging customers a quarter deposit that they get back when they return their carts.
This is not a novel idea. Several American grocers tried it in the 1980s and 1990s, but abandoned the practice after it annoyed customers who had come to expect more services at their grocery stores. Aldi, which opened its first US store in Iowa in 1976, has stuck with the model, insisting the deposit system is key to its low-price strategy. The store’s most die-hard fans even celebrate it, heralding when Aldi offers “quarter keeper” keychains from time to time. Some fans even knit their own versions. A search on Etsy for “Aldi quarter keeper” turns up more than 500 results.
The quirks don’t stop there.
When customers enter stores, they’ll notice they look almost nothing like traditional supermarkets in the United States. With five or six super-wide aisles, Aldi only stocks around 1,400 items — compared to around 40,000 at traditional supermarkets and more than 100,000 at Walmart supercenters.