Recently while at coffee with our local coffee club a friend asked why Aldi’s prices are so low. He was puzzled why a German Company could enter the US market and be successful at their prices. Since I do the majority of my grocery shopping at Aldi, I shared my observations.
In general, their business model is similar to Dollar Generals. They use the very old business management 80/20 formula. They only permanently stock the 20% of the items that make up 80% of the typical shoppers’ dollar volume. This concept allows them to operate a high volume with a small format store requiring a smaller initial capital investment. This small format is more convenient for shoppers. By concentrating their volume on a relatively small number of items they increase their purchasing power on these items. The small format also reduces the store labor required as well as the parking requirement.
However, this is just the beginning.
- All of their employees are cross-trained for all labor tasks.
- Most stores are under 10,000 sq ft very easy and quick to shop
- Their front-end system is state of the art. Their scanners are ultra-fast and accurate. Their card terminals are also incredibly fast. My observation is that their checker throughput is at least double what I observe at Walmart and likely 3x faster.
- Occasionally, there will be no one to check out so, like DG, the checker is off stocking or performing some other task.
- 90% of their stocked items are their own label, but they maintain high-quality standards.
- All of their restockings is with full cases (no individual units), but they still are sold individually.
- At our local store, they operate most shifts with no more than five persons. Their labor to gross margin ratio is extremely low.
Everyone who shops there is aware that they do not bag groceries and incentivize the return of the carts, but in reality, these are very minor cost savings factors.
The result is that until someone else catches on they will always have the best prices by far on most items. It would be interesting to know their weekly gross margin per square foot and compare it to Walmart.
Interestingly Aldi does have a direct competitor in Europe. That company is Lidl and they use essentially the same business model except they stock more “branded” items. ALDI is actually two companies (they split when brothers disagreed). Aldi NORD owns Trader Joes in the USA, while Aldi SUD owns and operates Aldi in the USA.