Gro­cer Aldi to open 45 SoCal stores

The dis­count chain could spur a price war in a crowded field, some an­a­lysts say.

Los Angeles Times - - BUSINESS - By Shan Li

Ger­man dis­count gro­cer Aldi plans to open the first of 45 South­ern Cal­i­for­nia stores in March, a move that an­a­lysts say could force some com­peti­tors to lower prices.

That’s just the start for Aldi, which has qui­etly ex­panded to nearly 1,400 lo­ca­tions in 32 states over the last few decades. The com­pany is build­ing a re­gional head­quar­ters and dis­tri­bu­tion cen­ter in Moreno Val­ley to sup­port fur­ther ex­pan­sion in com­ing years, said Ja­son Hart, Aldi’s chief ex­ec­u­tive for U.S. op­er­a­tions.

“There is no other place with the same den­sity of peo­ple that ex­ists in South­ern Cal­i­for­nia,” Hart said in an in­ter­view. “It’s an im­por­tant mar­ket with re­ally big po­ten­tial for us.”

Aldi is com­ing to a re­gion with a grow­ing bounty of food op­tions.

Haggen, a Pa­cific North­west chain, is in the process of re­brand­ing 83 su­per­mark- ets that it bought in the Golden State. Re­tail gi­ants Wal-Mart Stores Inc. and Tar­get Corp. are briskly ex­pand­ing their gro­cery op­tions. On­line play­ers Google and Ama­ are jump­ing into gro­cery de­liv­ery.

The ad­di­tion of Aldi will tighten the squeeze on South­land su­per­mar­kets, which have been scram­bling to of­fer cus­tomers more op­tions both on­line and at stores. Safe­way and Al­bert­sons merged this year to try to gain an edge. Now, Aldi’s en­trance will force gro­cers to com­pete fiercely for pa­tron­age, some an­a­lysts said.

Aldi has “long-term po­ten­tial for chang­ing the mar­ket” in South­ern Cal­i­for­nia, said food an­a­lyst Jim Prevor, founder of Per­ish­ablePun­ “But it’s go­ing to take them a long time be­fore they have a crit­i­cal mass of stores that they can shift the whole mar­ket.”

Some new con­tenders such as Fresh & Easy have strug­gled to dif­fer­en­ti­ate them­selves in a crowded field. But in­dus­try ex­perts say Aldi has a clear con­cept to sell to shop­pers: Good qual­ity at deep dis­counts.

“Fresh & Easy and Aldi stores are roughly the same size,” said Jim Her­tel, man-

aging direc­tor of food re­tail con­sult­ing firm Wil­lard Bishop. “The dif­fer­ence is with Aldi, you walk in there ex­pect­ing to pay less — sig­nif­i­cantly less.”

Aldi’s en­trance will spark “a pro­nounced price war” in the re­gion, said Burt Flickinger III, man­ag­ing direc­tor of con­sult­ing firm Strate­gic Re­source Group. “Aldi has been Wal-Mart’s worst night­mare. It will be tough on Costco as well as all the es­tab­lished food re­tail­ers.”

By at­tract­ing South­ern Cal­i­for­nia fam­i­lies tired of ris­ing food prices, the dis­count chain could open up to 100 stores within a decade and 250 stores in the next 20 years, he said.

“Aldi has al­ways done best with mar­kets with the high­est cost of living,” Flickinger said. “Cal­i­for­nia has the high­est cost of living in the con­ti­nen­tal United States.”

But mak­ing a profit in the South­land can be tricky for su­per­mar­kets.

The re­gion is “by far the big­gest food mar­ket in the U.S. and Canada,” Flickinger said. “The is­sue is that the cost of real es­tate and taxes and other op­er­at­ing costs are so high. Re­tail­ers typ­i­cally make less money in Cal­i­for­nia even though prices are higher.”

Fresh & Easy is a cau­tion­ary tale. Bri­tish su­per­mar­ket gi­ant Tesco lost about $2 bil­lion on the chain, which was launched eight years ago. Crowds of shop­pers were ea­ger to try the new stores in 2007, but even­tu­ally many were turned off by the un­known prod­ucts and paltry ser­vice.

In 2013, bil­lion­aire Ron Burkle’s Yu­caipa Cos. bought Fresh & Easy and be­gan closing poorly per­form­ing stores, in­tro­duc­ing new prod­ucts and de­vel­op­ing new for­mats.

Aldi has a unique con­cept that stands out from stal­warts such as Ralph’s and Vons, an­a­lysts said. Aldi is con­trolled by the Al­brecht fam­ily in Ger­many. (Through a fam­ily trust, the Al­brechts also own Mon­rovia-based Trader Joe’s.)

The stores, which sport a spar­tan look, are more on par with drug­stores at about 10,000 square feet, com­pared to a stan­dard su­per­mar­ket, which can clock in at 50,000 square feet or more.

More than 90% of the items for sale are Aldi’s pri­vate la­bel. Each store car­ries about 1,300 items, of­fer­ing only one or two op­tions of peanut but­ter or canned green beans. That en­sures hefty dis­counts from sup­pli­ers be­cause Aldi buys in huge vol­umes. The re­duced costs are passed to shop­pers who can save 20% to 40% on most prod­ucts, in­dus­try watch­ers say.

“It’s a big-time value play,” Her­tel said. “You can prob­a­bly do 85% to 90% of your weekly gro­cery shop­ping needs as long as you’re not brand con­scious.”

Although the se­lec­tion is small, Aldi also fo­cuses on qual­ity to lure shop­pers who may shy away from pri­vate­la­bel mer­chan­dise, an­a­lysts said.

“Su­per­mar­kets have cheap pri­vate la­bel … but they in­ten­tion­ally make the pack­age unattrac­tive so as not to dis­suade peo­ple from buy­ing their higher-mar­gin prod­ucts,” food an­a­lyst Prevor said. “Aldi makes each item look good. No­body feels stig­ma­tized for hav­ing the ‘cheap’ prod­uct in their bas­ket.”

The shop­ping ex­pe­ri­ence also is a sharp de­par­ture from a typ­i­cal gro­cery store.

Cus­tomers who want to use a shop­ping cart must de­posit a quar­ter, which they get back once the cart is re­turned. The sys­tem pre­vents theft and also cuts down on work­ers needed to cor­ral carts scat­tered in park­ing lots.

Shop­pers must pack their own gro­ceries.

Best-sell­ing prod­ucts are of­ten put out on the floor on ship­ping palettes, in­stead of stacked on shelves.

That means each store needs only about 20 em­ploy­ees on av­er­age. That’s com­pared with large su­per­mar­kets with dozens or even a few hun­dred em­ploy­ees.

Aldi, which is nonunion, will of­fer a start­ing wage of $13 an hour for Cal­i­for­nia em­ploy­ees. By the end of 2016, the chain will em­ploy about 1,100 peo­ple in the state.

Aldi’s Hart ac­knowl­edges “there is a lit­tle bit of a learn­ing curve” for first-time shop­pers. The com­pany is plan­ning on “ex­ten­sive” ad­ver­tis­ing to in­tro­duce the Aldi brand, which “needs to be ex­plained a bit,” he said.

But cus­tomers quickly get used to Aldi, Hart said, once they see the prices.

“There’s an ‘aha’ mo­ment, when they start to put to­gether the way the store op­er­ates and the way we do things a lit­tle dif­fer­ently,” he said.

So far, Aldi’s for­mula seems to be work­ing.

The dis­count gro­cer landed in the U.S. in 1976 and grew steadily for decades. In 2014, the com­pany be­gan ag­gres­sively ex­pand­ing, open­ing about 130 stores, a pace the com­pany ex­pects to con­tinue un­til 2018.

Her­tel said stores op­er­ated by the pri­vately held com­pany col­lec­tively muster an­nual sales in­creases in the high sin­gle dig­its for lo­ca­tions open at least a year. In com­par­i­son, Save-A-Lot re­ported a 3.6% rise and Kroger Co., par­ent of the Ralph’s chain, re­ported a 6% climb in same-store sales in the fourth quar­ter.

Hart said Aldi has in­creas­ingly at­tracted more af­flu­ent cus­tomers who en­joy a good bar­gain. In Cal­i­for­nia, Aldi plans to carry a wider range of wines and or­ganic pro­duce than its stores in other states.

An­to­nio Perez Chicago Tri­bune

ALDI, which has 1,400 stores in 32 states, landed in the U.S. in 1976 and has grown steadily for decades. Above, shop­pers at an Aldi store in Niles, Ill.

An­to­nio Perez Chicago Tri­bune

ALDI stores are more on par with drug­stores at about 10,000 square feet. Above, shop­per Patti Ger­sten­beger bags her own gro­ceries at a store in Niles, Ill.

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