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Aldi supermarkets opening 11 outlets in North Texas

Posted Monday, Mar. 15, 2010  comments  Print Reprints
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Privately held Aldi was founded in 1913 but expanded rapidly after World War II. Brothers Karl and Theo Albrecht -- Aldi is an abbreviation for Albrecht Discount -- launched the concept in 1961, later splitting into northern and southern companies.

Karl Albrecht has been quoted as saying quite candidly that "At Aldi, the customer is not king. We are providing not service, but mass production."

Based in Essen, Germany, Aldi operates more than 8,000 stores in Europe, the United States and Australia. It had estimated worldwide sales of about $62 billion in 2008, according to Euromonitor International. The United States is its second biggest market, after Germany.

Supermarket News estimated Aldi's U.S. sales in 2008 at $6.2 billion, ranking it 25th among food retailers, two places behind its sibling company, Trader Joe's.

The southern group runs the Aldi chain in the United States, where it opened its first store in 1976 and now has more than 1,000, while the northern group separately manages Trader Joe's, a steep-discount gourmet chain acquired in 1979.

The secretive Albrecht brothers, who reportedly split operations in a dispute over cigarette sales, both retired in 1993.

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Aldi is not like other supermarkets.

The German-owned chain, set to open 11 North Texas outlets this week and another 21 by year's end, offers no in-store pharmacies, DVD or carpet shampoo machine rentals, deli counters, bakeries, propane tank exchanges, hot takeaway meals, sackers or even free sacks.

Instead, paper bags cost 6 cents each and shoppers "rent" carts for 25 cents -- refunded on their return.

And there are very few familiar brands.

About 95 percent of goods are Aldi "fantasy" brands, all unknown to local shoppers. They don't carry the company banner, but instead are labeled Kirkwood, Grandessa, Priano, Bremer, Clancy's, Casa Mamita, Deutsche Küche or Wernesgrüner, among others.

What Aldi's limited-assortment, 16,000-square-foot stores lack in amenities and selection, they counter with remarkably competitive prices. An 18-ounce box -- there's just one size -- of store-brand corn flakes costs $1.19.

By offering only 1,400 items, compared with 60,000 at its large supermarket rivals, Aldi focuses on buying power. That makes Aldi 30 to 50 percent cheaper than traditional supermarkets and 15 to 25 percent cheaper than big-box discounters like Walmart, says Scott Huska, 43, Aldi's North Texas division vice president.

And the 1,000-store chain is not afraid to take on the behemoth from Bentonville, Ark., head-on.

"Every one of our first 11 stores will be within a mile and a half of a Walmart," Huska said, noting that one new Aldi occupies a third of a failed Tom Thumb supermarket in far south Fort Worth, directly across McCart Avenue from a Walmart SuperCenter. Aldi has been cited as a reason for Walmart's departure from Germany.

Even before Aldi opened here, competitors began rolling back prices, Huska said.

"We see that around the country all the time," he said. "It's awfully coincidental. Why didn't they lower it for customers before?"

Plenty of competition

Rival chains aren't expressing outward alarm.

"Competition always make us better," says Gary Huddleston, a Kroger spokesman in North Texas. "Kroger believes most customers appreciate one-stop shopping, low price, a great shopping experience and exceptional service."

If Aldi is so competitive, why is its market share so minuscule after 34 years in the United States?

In Kansas, it has a 1.16 percent share, compared with 39.5 for Wal-Mart Stores and 24.5 for a Kroger banner, Dillon, according to an Information Resources survey in the March issue of Shelby Report, an industry monthly. By contrast, 46 percent of grocery sales in Germany are made at deep discounters, mainly Aldi and its closest domestic rival, Lidi.

"In Germany, that format -- hard discounters -- has a dominant market share," says Jim Hertel, managing partner of Willard Bishop, industry consultants. "Obviously, we are not in Germany.

"They do have the very best prices in town, even better than Walmart," Hertel said. "But it's not going to be for everybody. Folks who are loyal brand shoppers won't find what they are looking for. If you want a particular flavor or size or style of something, you are not going to find it."

Hertel attributes some of Aldi's small U.S. market share to its policy of restricting its variety of fresh fruits and vegetables. That keeps transport costs and waste down, but makes the chain merely a fill-in shopping destination for many.

That said, Hertel said his firm believes that Aldi was the fastest-growing food retailer in 2008, the latest year analyzed, with same-store sales growing 14.3 percent compared with 2007. Grocery sales at Wal-Mart Stores were up 12.4 percent.

The reason for Aldi's strong performance? House brands meeting or exceeding national counterparts in quality but priced far lower, which works like a charm during an economic downturn, Willard Bishop concluded.

And that can help the push into Texas, Hertel says.

Good timing

"I would say Aldi is looking at the current economic environment and saying, 'This is our time.' People are trying things and buying things that they wouldn't if times were better. But times aren't," Hertel said. What's not clear, he said, is whether they will continue to shop at Aldi when conditions improve and incomes rise again.

To get people try its unfamiliar private-label items, Aldi offers a "double guarantee" -- a full refund plus a free replacement if the product was unsatisfactory.

Risky? Apparently not.

"We almost never get a return," says Chris Daniels, North Texas division director of operations. Huska said that many of the house brands are made by major producers like Tyson Foods.

Huska draws a picture of a highly simplified approach that enables to Aldi open 27 stores in nine weeks. "I don't know of any retailer that has done that," he said. His managers wear many hats -- there's no human resource department in Denton -- and they are committed, "bleeding blue," he said, referring to Aldi's logo color.

New employees have been attracted by medical benefits, including vision and dental coverage, offered even for workers on a 20-hour weekly schedule. And they receive among the industry's highest wages -- $10 an hour for cashiers, $20 for manager trainees, he said.

Store managers can earn $65,000 to $85,000. Huska declined to say how many hours a manager -- or himself -- puts in, citing a lawsuit filed in Cleveland by former Aldi managers who claim they were not fairly compensated. Aldi disputes the allegations in the suit.

For Texas, product selection was tweaked for local buying habits, said Hector Alejandro, a Houston native who serves as division purchasing director.

Added were larger, three-gallon jugs of water, year-round bags of charcoal for grilling, bologna with red casing, Southwestern-style beans, Earl Campbell brand sausage, gallon containers of sweet tea, and five tortilla items, up from two.

And there's a small section of Hispanic-oriented products -- 50 items, up from 25 -- with corn flour in 10-pound bags but priced cheaper, per pound, than larger sizes at specialty retailers, Alejandro says. But it's a very limited selection -- no mole, for example.

In for the long haul

Huska asserts that Aldi has never failed in a U.S. regional market and is in Texas for the long haul. "Our goals are for five years, 10 years."

Only once before, in Florida, did it open a slew of stores at once instead of pushing out, daisy-chain style, until enough stores justified opening a distribution center. In North Texas, Aldi built a distribution center in Denton, then secured store sites. Complications with the $54 million warehouse set back the target store opening from 2009, Huska said.

The competition here -- among the fiercest in the country -- doesn't faze Aldi, says Huska, who thinks increasing the store count to 100 in a few years will be "very easy."

Safeway left North Texas in 1987, but returned 12 years later through the acquisition of Tom Thumb. In the past decade, Winn-Dixie pulled out, as did Grocery Outlet, a limited assortment discounter from California. Remaining are national powerhouses like Wal-Mart, Kroger, Target, Supervalu's Save-A-Lot and regional players like Brookshire's, United Supermarket's Market Street, Minyard and a number of growing Hispanic-oriented retailers like Fiesta.

The new Aldi stores are somewhat larger and brighter than ones that first dotted the Midwestern landscape in 1976. And while there is no freshly made sushi or from-scratch bakery, Aldi periodically offers some quixotic nonfood specials -- from $17 toaster ovens to $69.99 wheelchairs.

Whose customers?

And the customers they attract are more up-market than their old image might suggest.

According to a February survey by Kantar Retail, the percentage of Aldi shoppers earning $50,000 and $74,999, and $75,000 and $99,000, increased slightly from the year before. Meanwhile, those in the $24,000 to $49,999 income bracket, while greater, slipped slightly from 32 to 30 percent of its clientile from February 2009.

"... In the past four weeks, Aldi shoppers have shifted slightly upmarket," it said.

Aldi customers come from all walks of life, Huska says.

"We attract smart shoppers -- value-oriented Middle Americans looking to stretch their budget as well as higher earners who recognize high quality and ask themselves, 'Why pay more?' The money they save can pay for a golf trip," he said.

Larry Chiagouris, a marketing professor at New York's Pace University, praises Aldi for sticking to its steep discount, limited assortment philosophy. His book, The Wheel of Retailing, details how other retailers succeeded early by cutting prices and keeping costs down but then added inventory and began "to look like the competitors it had taken market share from."

"In challenging economic times like now, Aldi should be thriving with its low-cost private label items," said Chiagouris, a Chicago native familiar with the chain.

"But when the economy comes back, will demand for branded goods return or will people stay loyal to price point? Loyalty to Aldi's remains to be seen."

BARRY SHLACHTER, 817-390-7718

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