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Aldi Following Trader Joe’s as Germans Spurn Austerity

October 29, 2012

Aldi Following Trader Joe’s as Germans Spurn Austerity

While Aldi's U.K. stores have become a thorn in the side of Tesco Plc and its Trader Joe’s chain is mounting a challenge to Whole Foods Market Inc. in the U.S., the discounter is under pressure at home as affluent Germans seek better quality. Photographer: Paul Thomas/Bloomberg

As Chancellor Angela Merkel urges European leaders to accept austerity, German shoppers have had enough of it from Aldi.

The creator of the no-label hard discounting model, Aldi is finding that low prices alone are no longer enough to win customers in its domestic market, for whom bright, tidy shops and a wide choice of brands are growing in importance.

“German shoppers are just like anyone else, they do want an attractive store, as well as efficiency and low prices,” said Bryan Roberts, an analyst at Kantar Retail in London. If Aldi wants “to do more than just tread water, they’re going to have to put a bit more resource into making the stores more attractive.”

Aldi’s share of the 171 billion-euro ($224 billion) German grocery market has stagnated over the past five years, trailing gains by competitors such as Rewe Group. While its U.K. stores have become a thorn in the side of Tesco Plc (TSCO) and its Trader Joe’s chain is mounting a challenge to Whole Foods Market Inc. (WFM:US) in the U.S., the discounter is under pressure at home as affluent Germans seek better quality.

Aldi’s recently opened store in the northern German town of Castrop-Rauxel highlights the change of direction for the retailer, whose supermarkets are associated with generic goods, limited selection, and aisles strewn with boxes.

Shoppers at the outlet, which opened in March, are greeted by a large glass wall that floods light onto orderly shelves. An in-store bakery serves up fresh rolls and multigrain bread, and there’s a growing range of branded products such as Mars bars, Haribo sweets, and Nutella. The light-grey floors are impeccably clean and the supermarket has a large range of organic offerings, including yogurt and pasta.

Mars Bars

At the remodeled outlet, “there aren’t any food products that I can’t find,” Castrop-Rauxel shopper Birgit Koester said as she placed fresh vegetables and croissants into her cart inside the store, where she spends some 60 euros a week.

Still, changing the perceptions of consumers won’t be easy for a family-owned business that for almost a century has offered a narrow selection of unbranded goods at the lowest possible price.

Building on a Ruhr Valley store opened by their mother in 1913, brothers Karl and Theo Albrecht guided an expansion that has made Aldi the world’s 10th biggest retailer, with annual retail sales of $67.1 billion, according to Deloitte LLP. Theo Albrecht died in 2010 and is survived by his older brother, who at 92 is the world’s 23rd richest person, worth $21.8 billion, according to the Bloomberg Billionaires Index.

Biggest Investments

Shifting German stores away from the pure discount model that made the Albrechts rich will require one of the company’s biggest investments ever. The Aldi unit that operates stores in northern Germany will spend about 280 million euros renovating some 2,500 stores through 2014, according to Daniel Lucht from consulting firm ResearchFarm in London, who has studied the company. Aldi declined to comment, but the unit responsible for its 1,830 stores in the south is in the midst of a similar investment program.

The money will go to in-store bakeries and better presentation of products, Lucht said. Just as important is adding new brands, he said, because most consumers strongly prefer branded products for categories such as baby food and Coca-Cola, which Aldi started selling yesterday.

Trader Joe’s

With competitors such as Rewe, Edeka Group and Lidl getting stronger, it’s money that needs to be spent. Aldi’s share of the German grocery market was 14.7 percent in 2011, down from 15.3 percent in 2002, according to researcher Planet Retail. Boosted by acquisitions, Edeka raised its share to 25.4 percent from 16.1 percent over that period, while Rewe climbed to 16.4 percent from 14.7 percent. Schwarz Group, which owns Lidl, increased its share to 18 percent from 12.3 percent.

“It’s become harder for Aldi with competitors having more appealing stores and more focus on brands and fresh foods,” said Raphael Moreau, a retailing analyst at Euromonitor International.

Aldi could learn from its U.K. business, where a combination of low prices, fresh food and new stores has helped it win favor with cash-strapped Britons. The German discounter’s share of the U.K. grocery market increased to 2.9 percent in the 12 weeks ended Sept. 30 from 2.4 percent in the same period a year earlier, according to Kantar Worldpanel.

And it could take cues from Trader Joe’s, a U.S. grocer it bought in 1979. Sales at the chain, with about 355 stores across 30 states, rose by 23 percent to $7.4 billion in 2010 from $6.0 billion in 2008, according to researcher Stagnito Media.

‘Different Ambiance’

Like Aldi, Trader Joe’s offers fewer products than traditional supermarkets, but they’re mostly organic or otherwise designed to appeal to higher-income consumers seeking a healthier diet, said Joe Feldman, an analyst at Telsey Advisory Group in New York.

The chain, Feldman said, is seen as a “less expensive version of Wholefoods where you can get more healthy, more organic, more gourmet food at a lower price.”

That sort of image makeover is exactly what Aldi needs in Germany, said John Pal, a retailing professor at Manchester Business School in England.

“It’s a matter of what they can borrow from Trader Joe’s that might be beneficial,” Pal said. “It’s a different ambiance, a different service level.”

To contact the reporter on this story: Julie Cruz in Frankfurt at jcruz6@bloomberg.net

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net.


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