One of Aldi's greatest competitive strengths is its ability to seem benign.
The retailer's more than 1,000 stores in North America are so tiny that they could easily be overlooked by competitors. Its merchandise mix is mostly private label so it doesn't appear to compete with a large portion of supermarket items. Even its retail channel name — limited assortment — implies something on the margin.
But competitors, especially conventional grocers, are increasingly taking notice of Aldi's full impact as this alternative format grows business during the downturn. That was underscored in comments about Aldi during SN's recent Financial Analysts Roundtable.
“It's the stealth bomber of retail,” said Neil Currie, executive director, UBS Securities.
“Aldi is just a very productive store with a…powerful value-for-dollar offering,” said Andrew Wolf, managing director, BB&T Capital Markets
SN's roundtable is being published in multiple parts over a period of weeks, and the full discussion of Aldi will appear in an upcoming issue.
So what is Aldi doing to draw this kind of respect?
Its pricing is all-important. It just undercut competitors in the Dallas market by slashing private-label milk prices to 99 cents a gallon, a level so low that even the Bureau of Labor Statistics couldn't find another example in the past 15 years, according to a report on DallasNews.com
Productivity is another big part of Aldi's success. “A 15,000-square-foot Aldi can do the same sales as a 35,000- to 40,000-square-foot supermarket, so the size of the stores are somewhat illusory,” Currie said.
Quality and customer drawing power are other important aspects. Aldi's products are much higher quality than many believe. While Aldi attracts a large share of lower-income shoppers, it attracts many higher income customers too because of all the trading down taking place.
Aldi certainly has challenges, including drawing customers who are accustomed to more upscale shopping experiences, and being flexible with its format in tight real estate markets.
The retailer's major U.S. limited assortment competitor, Save-A-Lot, a unit of Supervalu, has different challenges. Unlike Aldi, it focuses in large part on a licensing model, which means it needs to attract business people who can obtain financing at a time when such funds are tighter, according to analysts (for a Save-A-Lot discussion, see this week's roundtable installment).
Supervalu recently said it will increase the percentage of company-owned Save-A-Lots to meet expansion goals. Save-A-Lot's recent initiative to co-brand 10 units in the Greenville, S.C. market with Rite Aid could provide a window into another possible company growth strategy.
Back to Aldi. It has quietly grabbed the attention of consumers and the retail industry during hard economic times. Now it will have to prove it can retain and grow customers when the economy improves. And this time Aldi won't be able to operate in stealth fashion because everyone will be closely watching.