Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Grocery Wars

Why Aldi is America’s most Disruptive Grocer

Strangely, the German-owned Aldi is America’s most disruptive grocer. In fact, Aldi is doing more to change the American grocery landscape than Amazon (NASDAQ: AMZN).

Currently, Aldi operates over 1,800 stores in the United States, with plans to add around 400 more soon. However, Aldi’s sales are limited Progressive Grocer estimates Aldi sold $14.665 billion worth of groceries in 2017.

In comparison, America’s largest standalone grocer; Kroger (NYSE: KR), had $79.24 billion in grocery sales in 2017. Meanwhile America’s largest “grocer” Walmart (NYSE: WMT) sold $156.809 billion worth of groceries. To clarify, the Walmart Supercenter is America’s most popular “grocery store.”

Why Aldi is so disruptive 

Aldi is so disruptive because its stores break all the rules of the American supermarket business.

First, there are few amenities at an Aldi. There is no pharmacy, bakery, deli, meat counter, cafe, coffee shop, bank, pizzeria, jewelry store, gas station, etc. Instead, Aldi just sells groceries and a limited selection of dry goods.

Third, Aldi limits its inventory, usually offering one brand of a product. Fourth, Aldi emphasizes high quality and freshness.

Fifth, Aldi concentrates on private-label sales. In fact, Aldi’s website boasts over 90% of its products are Aldi private label. Notably Warren Buffett estimates Costco sold $39 billion worth of its Kirkland private label in 2017, Business Insider reports. Hence, Buffett calculates Kirkland food sales now exceed those of Kraft Heinz, which sold $26.3 billion worth of food in 2017.

Sixth, Aldi offers a simple bare bones shopping experience with a small staff. Famously, Aldi requires shoppers to “rent” carts. To explain, the shopper pays a quarter for the cart, but gets the coin back if he returns it.

What is Aldi?

The emphasis on private label, small stores, and simplicity enables Aldi to offer extremely low prices. For instance, $1.99 a pound a ground beef and 79₵ a pack mushrooms in Hutchison, Kansas, on 24 April 2019.

However, Aldi offers higher quality than dollar stores like Dollar General (NYSE: DG). Moreover, Aldi emphasizes fresh food. Thus, a good way to think of Aldi is as Trader Joe’s for the working class.

Another way to view Aldi is as a smaller Costco Wholesale (NYSE: COST) without the membership fees. In fact, like Costco, Aldi emphasizes private label brands. In addition, like Costco Aldi offers a “treasure hunt” shopping experience with its’ Aldi Finds; special prices on select products.

Finally, Aldi’s small size and no frills strategy allow it to put stores where other grocers “fear to tread.” For example, in small towns, the Rust Belt, Inner City areas, older neighborhoods, and older suburbs. Notably, both Aldi and its half-brother Lidl are making a big push into New York City and Long Island.

Why Aldi Succeeds in America

Everything about Aldi is unusual. Notably, Aldi is one of the few foreign grocers to succeed in America. Some very competitive foreign grocers including Britain’s Tesco (LSE: TSCO) failed dramatically in US grocery markets.

In particular, Aldi targets the working and lower middle classes at a time competitors ignore them. For instance, critics; like the Reverend Jesse Jackson, allege Kroger deliberately closes stores in poorer areas and redirects resources to affluent communities, USA Today reports.

On the other hand, Aldi opens stores in working-class neighborhoods, older suburbs, small towns, and some inner-city areas. In addition, Aldi concentrates its US footprint on the shrinking income regions of the Northeast and the Midwest known as the “Rust Belt.”

How Aldi Cashes in on Income Inequality and Wage Stagnation

Aldi is positioning itself to cash in on America’s growing income inequality and increasing wage stagnation. Specifically, Aldi is the perfect shopping experience for an increasingly cash-strapped middle class. Indeed, Pew Research estimates middle-class Americans’ purchasing power in 2016 had not grown in over 40 years.

For instance, the average median individual income in the US was $31,099 a year in 2016, the Federal Bank Reserve of St. Louis estimates. To clarify, this figure covers all Americans including those without jobs.

On the other hand, the take-home pay for the average American worker is $905 a week, or $47,030 a year, the Bureau of Labor Statistics (BLS) calculates. Moreover, wages for some groups are much lower.

Americans have little Money

For instance, the take home pay for a working woman is $41,912 a year or $860 a week, the BLS estimates. In addition, the take home pay for African Americans is $737 a week or $38,324 a year. Plus, the take home pay for Hispanics is $696 a week or $36,192 a year.

Finally, 50% of Americans on Medicare; which begins at age 65 for most recipients, earn less than $26,200 a year, The Henry J. Kaiser Foundation estimates. Plus the median income of a Medicare beneficiary (the average Senior citizen) was $26,200 a year in 2016.  

Consequently, a lot of Americans are pinching a lot of pennies. Therefore, Aldi’s customer base is vast and growing. To clarify, the average American family spends between $885 and $1,056 on groceries a week, CheatSheet estimates. Moreover, CheetSheet claims a US family can save 21%; or $2,000 a year, on food by shopping by shopping at Aldi.

Aldi’s Strange History

Aldi; or Albrecht Discount, began as a family grocery store in Essen, Germany, in 1913. Interestingly, a woman Anna Albrecht founded Aldi, Business Insider reports.

However, it was Albrect’s sons; Theo and Karl, who transformed the grocery into a discount empire after World War II. In the 1960s, Theo and Karl got into a fight over selling cigarettes they could not resolve.

As a result, the brothers split the business into two chains Aldi Nord (north) and Aldi Sud (South). In fact, it is Aldi Sud that operates the Aldi-branded grocery stores in the United States.

Bizarrely, Aldi Nord and Aldi Sud compete directly in the United States. To explain, Aldi Nord owns the Trader Joe’s grocery stores.

Aldi Sud plans to spend $3.4 billion to to open 800 more stores in the United States by 2022. Currently, Aldi operates in 35 states so its footprint is as large as Kroger’s. In fact, Business Insider claims Aldi Sud could be America’s third largest grocer by 2022.

Aldi Nord is expanding its US footprint through aggressive acquisitions. For instance, Alid Nord will convert 27 Best Markets in New York and New Jersey into Lidil stores, Supermarket News reports. Currently, Aldi Nord operates over 474 Trader Joe’s and over 66 Lidl stores in the US.

Can you Invest in Aldi?

Unfortunately, individuals cannot invest in the privately held Aldi Nord and Aldi Sud. However, you can invest in a company that is partnering with Aldi Sud.

The publicly traded department store Kohl’s (NYSE: KSS) plans to open five to 10 shared locations with Aldi. To explain, Kohl’s gives Aldi half the store space, The Simpleost reports.

The idea is to reduce Kohl’s footprints; and expenses, and get Aldi into new markets like Waukesha, Wisconsin. To explain, Kohl’s is one of many retailers reducing size to cut expenses and protect itself from Amazon.

Importantly, Kohl’s allows customers to return Amazon merchandise in its stores, Thinkum Media notes. Hence, Amazon’s popularity could drive more customers to Aldi with Kohl’s help.

However, I think Mr. Market overprices Kohl’s stock at $69.95 on 2 May 2019. Conversely, I consider Kohl’s a good dividend stock because it paid 67₵ on 3 April 2019. Moreover, that dividend grew from 61₵ on 26 December 2018.

Aldi’s Bright Future

In the final analysis, I think Aldi has a bright future in America because of low incomes.

In addition, Aldi could repeat the Kohl’s partnership with many other retailers. Tncluding TJX’s HomeGoods, Walgreens (NASDAQ: WBA), CVS Health (NYE: CVS), Nordstrom (NYSE: JWN), Sears, Amazon bookstores, Staples, and Best Buy (NYSE: BBY), to name a few.

Finally, new technology like ride-sharing apps can help Lydl and Aldi grow. To explain, Lyft’s Grocery Access Program gives low-income people a ride to the grocery store.

Obviously, low-income shoppers will most likely ride Lyft to Aldi. Notably, Supermarket News estimates up to 23.5 million people could benefit from this program. Nor is it just Lyft, Alphabet’s (NASDAQ: GOOG) self-driving car subsidiary Waymo gives customers rides to Walmart in Arizona.

Thus, Aldi’s simple and disruptive model could be the future of the American grocery store. Investors had better take note because Aldi’s success could spell doom for some traditional retailers. 

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