The Ultra-Lean Grocer

Just past noon, Anna Chernova, a 68-year-old retiree, pushes her black metal shopping cart into an Aldi store on Chicago’s North Side. After arriving from Russia 16 years ago, Chernova regularly shopped at conventional supermarkets like Dominick’s and Jewel-Osco, but no more. “They’re too expensive,” Chernova says, lengthy shopping list in hand. Now she visits Aldi once a week, drawn by the no-frills chain’s $2.69 gallon jugs of milk (compared with $3.99 for a gallon of Dean whole milk at Jewel-Osco) and 33¢ boxes of salt (compared with 79¢ for a similarly sized box of Morton’s). “I’ve got to save my pennies,” she says, heading into the store.

Chernova certainly isn’t alone. Spooked by the biggest economic crisis in decades, Americans are making fewer trips to supermarkets, and many are leaving comparatively upscale grocers like Albertsons and Whole Foods in search of lower prices. According to a survey conducted last spring by TNS Retail Forward, a market-research and consulting firm based in Columbus, Ohio, 20% of respondents said they had changed which stores they go to for groceries and other household items, primarily because of the economic climate.

Enter Aldi, that spartan bastion of private-label goods where brand names like Coke and Betty Crocker have largely been banished for being too pricey. Aldi concentrates on selling core high-volume grocery products like ketchup and coffee. Want a choice in those categories? Forget it. By offering a single brand in a single size, Aldi executives say, the chain can substantially undercut conventional retailers on 90% of the products it sells.

And often the private labels don’t look noticeably cheaper. Consider the sleek, dark 16.9-oz. bottle of Ariel Extra-Virgin Olive Oil for $4.29. (A 17-oz. bottle of Bertolli’s extra-virgin costs $9.69.) “You wouldn’t be embarrassed to have that on your counter,” says Bill Bishop, a retail consultant.

The German-owned Aldi–short for Albrecht Discount–arrived in the U.S. in 1976, hoping to replicate a business model that had been wildly successful in Europe. With U.S. food inflation then in the double digits, the company’s timing couldn’t have been better. Aldi was one of the first so-called box stores, achieving rock-bottom pricing by offering a limited inventory and squeezing out all unnecessary costs, from in-store butchers to fancy displays. No credit cards or checks are accepted. And at any given time, there are no more than five staffers inside an Aldi store. For instance, during Chernova’s recent trip in Chicago, there were just two cashiers, an employee replenishing milk shelves and a security guard greeting customers. Even using a shopping cart requires a 25¢ deposit, thereby ensuring that employees spend less time chasing carts.

“Prior to the economic slowdown, we were prospering,” says Jason Hart, president of Aldi U.S., based in Batavia, Ill. And now? “We’re certainly getting a lot more attention.” The privately held company generated an estimated $5.8 billion in U.S. sales last year, up from $5.3 billion in 2006, according to trade journal Supermarket News. Aldi now has about 950 stores in 29 states and plans to open more than 100 stores in the next two years in Connecticut, Missouri and Texas.

The company is also making a big push into Central Florida in places like Sanford, located about half an hour’s drive north of Orlando. Sanford’s economic-development director, Robert Tunis, had tried for years to lure grocers. The city’s demographics are attractive: its population grew 27%, to about 50,000, from 2000 to 2006. Within a few miles of downtown, Tunis says, are households with annual incomes of $30,000 to $250,000. That’s partly what has drawn big chains like Target, Wal-Mart and Lowe’s. “You name the retailers, we’ve got them,” Tunis says, “but we’ve been underserved by grocers.”

He was among the first to arrive at the grand opening in late September of an Aldi store in downtown Sanford, next to one of Seminole County’s largest shopping centers. Now Tunis is hoping other grocers will follow Aldi’s lead. “There’s really no equivalent at the moment,” he says.

Aldi is able to carve a niche in neighborhoods that supermarket chains have neglected partly because its stores are typically just 10,000 sq. ft., far smaller than the 80,000-sq.-ft. palaces recently opened by Whole Foods and other big chains. The relatively small size and bare-bones operations have helped Aldi and fellow deep-discounter Save-a-Lot penetrate urban markets where real estate is generally more expensive than in suburban locales. “Both Aldi and Save-a-Lot are winning big time,” consultant Bishop says, “because they have an extreme value proposition, which is appealing at a time like this.”

Also compelling is Aldi’s BYOB policy, which strongly encourages customers to bring their own bags. How? By charging 10¢ apiece for plastic ones.