By Charlie Whiteley
German grocery chain Aldi is expanding rapidly in the United States and finding equally rapid success. It has doubled its number of stores over the last 10 years, totaling around 1,900 stores. The company is currently amid its five-year plan to become the third largest grocery chain in the US by 2022, a dramatic change in the market. Given its relatively new standing in the American grocery market, Aldi’s successful business model is asking serious questions of traditional American powerhouses like Walmart. How has Aldi grown so fast, and is this growth sustainable?
Aldi’s success in the US has not compromised its basic principles of business. According to their website, Aldi seeks to provide a, “Faster, easier, and smarter way to save money on high-quality groceries.” They stay true to this model both in their German base and the US market. Compared to traditional American grocery stores, Aldi is smaller and has less products on offer. They also have less employees, and do not engage in normal grocery processes like bagging. While traditional supermarkets offer around 40,000 different products, Aldi offers just 1,400. Altogether, this cuts operating costs, allowing Aldi the opportunity to offer extremely competitive, even bargain prices. A typical US food basket costs 19% less than the same exact food basket at Walmart. Through these substantial savings, Aldi is growing its US market share at an unbelievable pace.
Is Aldi’s success just a result of lower prices then? Surprisingly, Aldi’s growth is not due to increases in lower-income shoppers. A study by Bain and Company suggests that Aldi has increased its share in other shopper segments, especially in two groups of consumers called family focused and mainstream shoppers. While the survey categorizes family focused consumers as “deal searchers”, the mainstream shoppers resemble those consumers that traditional American grocery chains seek out. While lower prices are reason to get new customers through the door, it is Aldi’s other perks that have consumers hooked.
Aldi is not the only European company finding success in the American market. Fellow German grocery chain Lidl has also found success in their American expansion. Having first moved into the market in June 2017, it has already expanded from 27 stores to 71. Outside of grocery chains, other mainstream European brands have a significant foothold in American markets, including Ikea and H&M. Popular consumer products like Spotify have also dominated the US in recent years.
The success of Aldi and other European brands evidences an overlap between the preferences of European and US consumers. Especially through Aldi, it is clear consumers value savings and an easily navigable consumer experience. In the case of a Spotify, American consumers have shown their appreciation for a bundled entertainment experience. With an increasingly global marketplace for goods and services, the gaps between consumers internationally has shrunk. This opportunity presents a fantastic opportunity for European brands to globalize their business.
In the near future, the success of newly expanding European brands will disrupt the American marketplace. Already, Aldi’s low prices have started a price war, forcing their competitors into losses to remain competitive. However, the most important change Aldi will bring forth is more efficiently run corporations. A disruptor naturally causes change in the market, either the competition adapts to the challenges or loses substantial business. For example, the previously discussed Spotify played a substantial role in ending Apple’s virtual monopoly of the music streaming business. Apple were forced to adapt and released a similar product in Apple Music. For consumers, this change was welcome, as a massive selection of music could now be listened to for the same monthly price instead of iTunes’ individual purchase model.
Aldi’s rapid growth will force competitors to make a similar change. That means better food prices for consumers, and a more efficient experience at the grocery store. As more European and international businesses follow Aldi’s lead, consumers will certainly benefit.
Image Source: Forbes
The opinions expressed in this article are the author’s own, and may not represent the views of The St Andrews Economist.