The Secret's Out

JON SPRINGER

For a retailer that won't ever be accused of being too fashion-conscious, Aldi is about as hot it gets right now.

“We're not exactly trend chasers here,” Jason Hart, president of Aldi's U.S. division, confessed during a recent interview with SN. “I would argue instead that trends are coming to us. Whether it's the growth of the alternative format, the growth of the small footprint, the big growth of private labels, or the recent trend toward value. That's what our business is all about.”

Throw in a shopping trip promising shoppers a weekly treasure hunt, along with a budget-driven plastic bag policy that just happens to put the retailer on the right side of the “green” movement, and Aldi — the bare-bones discounter that can't afford to be trendy — just might be the perfect vehicle for today's food shopper.

Aldi's package was created not in service of these trends, Hart explained, but to meet its own mission of providing quality food at the lowest possible prices through an emphasis on efficiency and thrift.

“It's not that we don't pay attention to trends in the marketplace — we do — it's that we're cautious and diligent in our approach,” Hart explained. “We have to be sure we stay within our model and try not to be all things to all people, as a lot of retailers have done, not all successfully.”

Its success in meeting these goals has the discounter on a brisk expansion kick, with new divisions opening in Florida this fall and Texas next year, and expansion planned for the Northeast and New England. Aldi, which has been opening an average of 50 new stores per year over the last three years, will open 100 new locations this year and by year-end expects to be operating 1,000 stores in 28 states from Vermont to Oklahoma. Its expansion will showcase a bright new store prototype merchandising a selection of Aldi's private brands undergoing their own renewal.

To relay this news, the normally opaque retailer is making a concerted effort to raise its profile. It ran television ads in the U.S. for the first time this year and is reaching out to the press to tell its story.

“We want to be more widely recognized as a trusted grocery brand that delivers high quality and high-value products,” Joan Kavanaugh, vice president of purchasing, told SN.

Aldi remains reluctant to share financial data, however. It would not comment on the accuracy of SN's estimate that it generated $5.8 billion in U.S. sales last year.

New Prototype
A new store in Geneva, Ill., a few miles from Aldi's headquarters in Batavia, showcases Aldi's new profile.

The store, while maintaining the same 10,000-square-foot selling floor as previous incarnations, is considerably brighter and airier than previous models, thanks to its high ceilings, colorful walls and new graphics. The store exterior is dominated by a two-story, glass entryway presenting a cleaner, more attractive package.

Aldi prefers to own its own buildings and will build new stores in this style wherever possible, said Hart. The new design was unveiled for the first time late last year.

“The biggest difference is the impression you get when you first walk into the store,” said Hart. “It's a much brighter store, it's more open, and there's more of a fresh feeling to the store than there used to be.”

In addition to the rollout of new stores, Aldi has renovated its existing stores to include the same package of colors, graphics and new offerings — including fresh meat cases — over the last two years.

Aldi applied its customary discipline to control costs as part of the renovations, said Kavanaugh, choosing graphic elements that wouldn't require constant changing, for example.

“We just have to be smarter about how we do things,” she explained. “In the remodeling process, our goal was to improve the look of the store without the additional expense. So when it came to painting the walls, you could paint them white or green — it's the same cost for paint. We used to have white walls without graphics. When we added graphics, we had to be conscious about choosing images we could use for the long term. We didn't take pictures of brands that might change or products that would need to be replaced on a regular basis.”

A budget for renovations ultimately serves Aldi's goal of reducing costs, added Hart.

“Part of our expense structure is not using every piece of equipment until it's dead or out of gas,” he said. “We really strive to keep things current — whether it's equipment that makes employees more productive, or refrigeration equipment that uses less energy, we're always looking for opportunities to lower operating costs.”

The improved look of the Aldi store made its way into a series of television commercials that ran in Aldi's largest markets over a 12-week period this spring. The Florida launch will also be supported by TV, officials said.

Aldi approached the new medium in the same way a new product gets onto its shelves: It gave it a chance to earn its space in the lineup. According to Kavanaugh, the company paid for the ads by reducing expenses in print advertising rather than adding to its budget. As for their success, Hart simply said: “It's part of the program now.”

New Brands
Key to Aldi's retailing success is its lineup of private-label goods, which it refers to as “select brands.” Those items make up around 95% of the 1,300 SKUs at a typical Aldi store.

Whereas hard discount competitor Save-A-Lot has added some name brands to categories like soft drinks, Aldi would like to reduce its selection of name-brand goods, except those featured in weekly special buys, officials explained.

Aldi, however, will not stock a private-label product until it is satisfied it can hold up in comparison to its name-brand counterpart. A pallet of Kellogg's Rice Krispies Treats on display recently at the Geneva Aldi store provided such an example.

"We have looked at a number of options but until now we haven't found what we consider to be the right match for this product,” Kavanaugh explained. “But we're working with a supplier who has a product like this under development now. We would expect this product would eventually replace the Kellogg's product.”

Other national brands arrive to test the product's popularity with shoppers. “Products have to earn their place on the shelves here because real estate is so precious,” Hart said. “If items don't perform, you've got to move it out and replace it with something new.”

Aldi is currently evaluating its corporate brands with an eye on making brand attributes more relevant across product categories and the selection less confusing for shoppers, Kavanaugh explained. This will likely result in fewer overall brand names when the process is complete next year, she said.

“We have several brands like Fit & Active and Grandessa that are very strong, and we have several products under those brands. They are effective at communicating what they are and what they mean,” she explained. And whereas all frozen chicken products might be under one brand today, the re-branding contemplates the full-muscle cuts under one brand and nuggets under another, Kavanaugh added.

“We think we can do a better job of marketing and telling the story through advertising,” she said.

Shoppers who have not visited an Aldi store recently might be surprised to find that selections of produce and meats have grown considerably in recent years.

These departments developed to help Aldi transition from a store that was shopped occasionally to a store its customers could count on weekly, officials said.

“When I started with this company in 1991, we sold a total of seven produce items. Now we sell 50 to 55 items and it's continuing to grow,” said Kavanaugh.

“When you have an everyday-low-pricing strategy, you're always looking to increase frequency. The ‘aha’ moment for us was realizing this was a section of the store that could really drive frequency.”

Produce has also become an effective hook for new shoppers, Hart added.

“When a new customer comes in and isn't familiar with our select brands, they know broccoli is broccoli. Celery is celery,” he explained. “It's something a new shopper latches onto pretty quickly. There isn't much of a learning curve with a head of lettuce for 99 cents.”

A variety of nonfood specials ranging from apparel to electronics completes the selection at Aldi. These items — including laptop computers at $599, T-shirts at $9.99 and cordless vacuum sweepers at $19.99, all sold “while supplies last” — help create a “treasure hunt” atmosphere at the store and provide shoppers with motivation to come back, Hart said.

Economy as Opportunity
Officials say prices at Aldi run 15% to 25% below the private-label items at Wal-Mart and discount competitors like Save-A-Lot, and 35%-40% below conventional grocery store brands. While that offering attracts its share of lower-income shoppers, its appeal is hardly limited to that demographic.

In fact, the average household income of the Aldi shopper is $65,400, according to a recent customer survey, reflecting that value favors no particular demographic.

“We've always gone after the savvy shopper who appreciates high value and savings,” Kavanaugh said. “We're still going after that person, the smart shopper who recognizes a value. What's happening now is that as we've grown and the word of Aldi is getting out, we're just becoming better at [attracting that shopper].”

Shoppers who frequent Aldi can get around 90% of their weekly shopping needs at the store, Aldi officials say. They “fill in” at a range of conventional stores. “They tend to be the coupon clippers, loyalty card users and sale chasers at other retailers,” Hart said.

Aldi as a result prefers locating stores in areas convenient to the leading grocery stores, Hart said.

“We look for the same things other grocery stores look for in a location — population densities, good income and traffic counts,” he said. “We have to be conscious of cost controls but location is not an area where you can usually cut corners. So you'll find us in the strong retail areas. We don't want to be on the dying side of town. We want to make the right initial investment so we're satisfied with that store in 20 years.”

A sagging U.S. economy and food inflation over the past year have been a mixed bag for most retailers, and Aldi is no exception, Hart added. But he is confident that pressure on consumers over the long term only stands to benefit Aldi.

“The economy is definitely pushing more people our way,” he said. “There is a need for consumers to save money on everything, especially groceries. And we offer an opportunity for those customers to save on their groceries without compromising on quality.”

Officials also believe the economy is making disciples of Aldi customers.

“Customers seem to be appreciating the savings more than ever,” said Kavanaugh. “Low prices are not new for us, but I think that as gas prices and food prices have gone up, customers have become more appreciative of the savings. And as a result they are becoming more passionate about and spreading the secret. That's driving new people into the stores.”

Officials are quick to point out, however, Aldi's trajectory came without assistance from rising gasoline prices and a subprime mortgage crisis. “The economy hasn't changed our plans,” said Hart. “It's just given us another opportunity.”

Founded in Germany by brothers Karl and Theo Albrecht, Aldi (the name is a condensed form of “Albrecht Discount”) operates in 18 countries and arrived in the United States in 1976. Its stores might be best known for its shopping carts requiring a 25-cent deposit, and policies not to accept credit card payments or provide shopping bags.

Those quirks help illustrate Aldi's commitment to removing costs from retailing, and as Kavanaugh pointed out, also speak to “green” concerns other retailers are only now getting around to. “All the retailers now are talking about making changes to their bag policy. It's always been that way at Aldi,” she said. “It's central to our mission.”

German Roots

Aldi was founded by reclusive brothers Karl and Theo Albrecht, whose retailing history dates back to postwar Germany, when they took over stores run by their parents.

Their partnership reportedly broke up in 1960 after a disagreement over whether to sell cigarettes. The rift led to their creating separate companies to run what would become known as Aldi. Karl took control of stores operating in southern Germany (Aldi Sud) while Theo took over the northern Germany sites (Aldi Nord).

The divisions remain separate entities to this day, with different logos and separate control of Aldi stores in other countries. Its U.S. stores use the logo of Aldi Sud, although officials said it is run as a standalone entity, but with operating principles imported from its parent company.

“We have buying departments in each country,” explained Jason Hart, president of Aldi's U.S. division. “But the employee environment and the customer environment are the same. People who have shopped our stores in Europe and in the States can see the obvious similarities.”

A recent effort to reach out to consumers and grow faster marks something of a change for Aldi, which for most of its history has preferred to keep quiet and guard its secrets. Some observers said its famous silence dates back to a 1971 kidnapping of Theo Albrecht. Befitting Aldi's nature, Albrecht was said to have bargained hard over his ransom and later reported the payment as a business expense to save on taxes.

Joan Kavanaugh, vice president of purchasing at Aldi, said recent surveys have sparked Aldi to make a greater effort to reach out to consumers. “We have found that the two biggest reasons people didn't shop Aldi were that the location was not convenient and that they were not familiar with the store,” she told SN. “What that tells us is we have to build more stores, and we have to get the word out about what Aldi is.”

The Albrechts, now in their 80s, are said to be Germany's richest men. Among their investments is the Trader Joe's chain in the U.S., which was purchased by a family trust of Theo Albrecht in 1978.

Small Staff, Low Turnover

It was only a coincidence that a white stretch limousine was parked across four parking spaces just as SN arrived at Aldi's Geneva, Ill., store to meet with company officials and tour its new prototype.

Turns out a limo driver had made a quick stop at Aldi for some supplies, and was not there to chauffeur the company president. At Aldi, that's not how they roll.

Both Joan Kavanaugh, who today is vice president of purchasing at Aldi, and her boss, Aldi President Jason Hart, were recruited by the discounter directly out of college and have spent their entire respective careers there. (Hart is one of three people who comprise the office of the president at Aldi; Chuck Youngstrom and Vern Frazier are the others). They described working for the German retailer famous for its thrift and attention to cost control as enriching and challenging.

“It's a very rewarding place to work,” said Hart, who began in an Aldi management-training program in 1993. “You have a lot of autonomy to do your job, whether as a cashier, or an assistant manager, or a district manager. We don't have a lot of levels to the company, so it lends itself to a very independent environment for our people to work.”

About 170 people work at Aldi's U.S. headquarters in nearby Batavia, a small city located about 40 miles west of Chicago. Though its stores get by with small, busy staffs — depending on the location, an Aldi store employs between 10 and 25 employees — rapid growth has the company on the hunt to add talent in areas like merchandising and information technology while also looking for employees to work in new warehouses and stores.

Hart said employees at Aldi tend to earn better pay and benefits than industry averages, and as a result, Aldi's turnover is below average for the industry. And that serves Aldi's mission to keep costs down.

“An important part of the Aldi success story is the loyalty of the employees. It's not unusual for cashiers to celebrate 10-, 15- or 20-year anniversaries with us,” Hart said. “In a retail industry known for its high turnover, we have just the opposite.”