Part IV: Distribution Decisions

Title: Part IV Case Study: Aldi Adding Stores in U.S. Expansion

It's time to shop for groceries. There are several stores nearby, how do you pick where to shop? Is proximity to home most important? Do brand name products really matter? Or do lower prices win over everything else?

That is exactly what Aldi is hoping for as they announce plans to add more U.S. locations and renovate existing stores. Aldi's principle: Great quality shouldn't come at a high price; rather, great quality should come with everyday low prices.

Anna Albrecht founded Albrecht Discount over 100 years ago when she opened a small store in Essen, Germany. In 1948, her sons expanded the business when they took over management. Then in 1961, the name was changed to Aldi. They opened their first store in the U.S. in 1976.

Aldi will invest $3.4 billion over the next five years to expand its U.S. store base to a total of 2,500 locations across the country. This will make them the third-largest food retailer in the U.S. (by store count), behind Wal-Mart Stores Inc. and Kroger Co.

"We're growing at a time when other retailers are struggling," said Jason Hart, Aldi Chief Executive.

Aldi currently operates 1,600 U.S. groceries, and plans to spend $1.6 billion to remodel 1,300 of these locations. They also intend to have 400 of the new stores (mainly in Florida, Texas and on both coasts) open by 2018. The new store openings will create 25,000 jobs for the grocery chain.

Aldi has also made changes to product offerings in the markets as well. They have added more produce and increased organic and gluten-free options. They have also started offering fish, improved meat selection, and increased offerings of national brands.

"We are re-merchandising, remodeling, enhancing our product range and are focused on gaining volume so more customers start their shopping at Aldi, and we are able to complete their shopping lists more so than we have in the past," said Hart.

Aldi's U.S. expansion comes as their German rival Lidl enters the U.S. grocery market. They opened their first 10 U.S. locations in June 2017, with plans to open 100 stores as part of their multiyear initiative.

With two large grocery retail chains in the U.S. focused on offering lower prices than their competition, conventional retailers (like Wal-Mart and Kroger) may have to lower their prices to remain competitive.

"There's a tremendous amount of value at stake that will shift to Lidl and Aldi," said Kent Knudson, a Bain & Co. partner. "Traditional grocers can't afford to lose sales right now given how competitive it is -- it will be very disruptive."

"Given Aldi's expansion, Lidl's entry, Wal-Mart's response and Amazon's growing ambitions in this space, it is fair to expect a significant acceleration in the bankruptcy and liquidation cycle in this sector over the next few years," said Burt Flickinger, managing director at retail consultancy Strategic Resource Group.

Aldi is not letting the opening of Lidl locations change how they do business though. "We're doing what we've been doing to ensure we're the low-cost leader," said Liz Ruggles, an Aldi spokesperson. "We'll continue to maintain that -- we're very diligent."

Short Answer

1. How do grocery retailers provide efficiency for customers?

2. Assuming that competition forces some grocers to declare bankruptcy, which grocers do you think will be the first? Why?