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Aldi Challenges Wal-Mart
As Low-Price Leader

One of the great mysteries of American retail history is why supermarkets were so slow at emulating the Wal-Mart supercenter as it began to roll out across America over the last 20 years.

Although Kroger purchased Fred Meyer, it did little to roll out supercenters across its marketing regions. Meijer remains privately held and regional. It is only recently, with concepts such as HEB Plus and Kroger Marketplace stores, that major supermarket chains have entered the market with supercenter-like concepts. Even then, the concepts tend to be pale imitations, weak on things such as consumer electronics and toys and not exactly rolling out with abandon across the country anyway.

Of course, supermarkets didn’t have, and for the most part still don’t have, the expertise in general merchandise to feel they could out-execute Wal-Mart. So it is fair to say that most chains have spent the past two decades not so much trying to figure out how to compete with Wal-Mart but, rather, figuring out how to get out of its way.

Although many chains have succeeded and an awful lot of Wal-Mart’s growth came at the expense of independent operators, the opera is not over and one suspects that these chains may yet regret ceding to Wal-Mart the great middle-class customer base and the great growth format of the latter quintile of the twentieth century.

Now, however, one wonders if Wal-Mart, in its response to Aldi, isn’t setting itself up to fail by not moving to copy the Aldi format — just as supermarkets once failed to respond to the Wal-Mart supercenter.

The Wall Street Journal just ran a piece entitled, Aldi Looks to U.S. for Growth, that details how an already-established and growing concept is primed to use the current economic situation to pursue even more rapid growth:

German store chainAldi is so cheap that Wal-Mart Stores Inc. closed its discount outlets in Germany two years ago partly because shoppers found the U.S. giant too expensive in comparison.

Now, the U.S. arm of Aldi is cranking up expansion in Wal-Mart’s home turf and seizing on the economic downturn to lure consumers to its Spartan stores and cheap groceries. The discount chain will open at least 75 U.S. stores this year, well above its typical pace, including its first Aldi store in New York City.

The company is counting on the economic downturn to crash a traditional barrier to the U.S. grocery business: Americans tend to be loyal to big-name brands.

Store-brand goods generally make up 22% of U.S. food sales in terms of unit volume, according to research by Nielsen Co., while in some European markets, they account for about 30%. At Aldi, 95% of the goods are the retailer’s own brands.

Aldi’s expansion shows how the tough economy is changing the competitive landscape across industries. Aldi first arrived in America in 1976 and began opening what has now become a collection of 1,000 U.S. stores, mostly in the Midwest and Northeast.

“This is the perfect confluence of factors for us,” says Jason Hart, president of Aldi’s U.S. division. He is charting a push into the Dallas-Fort Worth area next year with 25 new stores and a $40 million distribution center that will serve stores planned for Texas and Oklahoma, prime Wal-Mart territory.

A Wal-Mart spokeswoman said Aldi’s plans wouldn’t affect its price strategy or operations.

Supermarket chains such as Safeway Inc. and Kroger Co.are reporting higher sales of store-branded products. Mr. Hart and other Aldi executives say they had planned to expand before the downturn, but the moves have new urgency.

The push comes as the retailer is running out of room to grow in its German home market, where an estimated 90% of households shop at its stores, and Aldi and other deep discounters account for 40% of all grocery sales.

For expansion in the U.S. and Britain, where it is also building new stores, Aldi tweaked its retail formula. New stores have higher ceilings and more windows to make the 17,000-square-feet outlets feel less cramped. It is adding more fresh produce, designed to lure middle-class shoppers.

But the essence of the business is low prices through store-brand foods. It buys in bulk from suppliers and commissions them to make its own store brand of groceries cheaper than rivals. In the U.S. Midwest, for example, its prices are between 15% and 20% less than Wal-Mart and 30% to 40% cheaper than regional chains, said David Livingston, a supermarket analyst with DJL Research in Waukesha, Wis.

David Livingston has contributed to the Pundit here, here and here, and he knows what he is talking about.

There has been an explosion of new concepts at Wal-Mart lately — Marketside, which we have spoken about here, here and here, and the super-secret “Project Sombrero,” which we explained here.

A concept that consistently underprices Wal-Mart, though, is not just another competitive concept; it is a competitor striking at Wal-Mart’s core competency.

Wal-Mart failed in Germany for many reasons but, most of all, it never acquired the low-price image it has in the states, and it didn’t do so because it was not, in fact, the low-price leader.

As it has grown, Wal-Mart has had a problem in that it has acquired a thicker expense structure than it started out with. This makes it difficult to be the low-price leader and maintain decent margins.

Wal-Mart should use the Aldi challenge as an opportunity to get back to its cost-cutting roots and open a concept that can under-price Aldi. Otherwise, 20 years from now, it may be wondering when it lost its place as low-price leader in the minds of US consumers.

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