Why Aldi Is America’s Fastest Growing Grocery Store | WSJ The Economics Of

- [Narrator] This half gallon of whole milk from Aldi costs $2. 18 cents, eggs 1. 87, bread 1.

29. (gentle music) Aldi is the fastest-growing grocer by store count in the country, and its no-frills approach has also made it one of the cheapest. (trolley thudding) For the past decade, it's been growing at a rate of about 100 stores per year.

And when an economic downturn hits, it thrives. - It's about simplicity, and it's about efficiency, and it's about a consistent experience all the time. - [Narrator] This is "The Economics of Aldi.

" So how does the company keep its prices so low? Take its store set up. - You walk in, and the moment you step foot in our store, you can see all four walls.

- [Narrator] Aldi's are typically around 12,000 square feet, about the same as a Trader Joe's, and much smaller than the average supermarket. Operating a smaller space saves money when buying the property on the lease and on utilities. - The layout at Aldi is as much designed for our operational efficiency as anything.

And so being very specific about the amount of footsteps it takes to service our store and a very limited store size allows us to operate a very efficient operation, and that creates a lot of value. - [Narrator] To further its efficiency, Aldi doesn't have extra services like a customer help desk, a fresh bakery, or butcher, and its stocks significantly fewer products. Supermarkets typically carry around 31,000 products.

Trader Joe's has about 4,000, but Aldi stocks about 1,600. Often, there are just three to five employees on the sales floor, so having fewer items and leaving them in the boxes they were delivered in means employees spend less time stocking shelves. These cost-cutting strategies are critical to Aldi's profit margin, and they're why the company is able to offer items that are cheaper than the national average, but they also serve another purpose.

They help maintain Aldi's image as a discount store. Customers make compensatory inferences. Basically, marketing experts say "When people see an item's price, they quickly make assumptions about the product.

If it's cheap, they may assume it's lower quality, which is why Aldi's no frill strategy is so effective. " From the moment customers put quarters in their carts and walk into the store, they can see all the ways Aldi reduces costs. Marketing experts say, "These tactics all signal to the customer that milk, eggs, and bread are cheaper at Aldi because of its efficiency rather than its quality, though, the results of its cost-cutting strategies aren't always popular with customers.

In a survey of roughly 6,500 people, Aldi scored on par with, or slightly lower than many of its peers in categories like store cleanliness and item availability. But there's another key tactic grocers use to aid their low-cost images, Known Value Items. These are staple household products whose prices people often remember.

As Aldi has expanded across the country, other grocers have reduced their prices in response, particularly on these types of items. - When Aldi comes in, it prompts other retailers to look at their prices again and kind of, you know, surgically examine how to adjust what they sell and for how much. - [Narrator] That's because when people see lower prices for staple goods, they infer that the business offers low prices all around.

And when it comes to value for dollar, Aldi ranked highest in the customer survey at 96%, but stores can only compete on price so much without hurting their profit margins. So what does Aldi use other than price point to draw on customers? It's private label items.

(can thudding) 90% of Aldi's stock is private label, like its other strategies, this reduces costs for the company. - We take all of our buying power and we put it into the seven most popular or common salad dressings that a customer might buy. That allows us to deal directly with manufacturers and make sure that we get the best cost price.

- [Narrator] Analysts say that, Trader Joe's uses private-label items to differ from competitors by creating items that customers can only find there, like its Ube Mochi Pancake Mix, and Butternut Squash Mac & Cheese. But at Aldi, you'll find private-label items that look quite similar to the most well-known national brands. Instead of Wheat Thins, Aldi has Thin Wheat.

According to analysts, "This is because Aldi wants customers to think they're essentially getting the same product, but at a significant discount. " - There was a time when the perception was, you know, they're a generic brand and, you know, they're just cheaper, but not as good as the national brands, and those days are over. - [Narrator] As consumers felt the lasting impacts of inflation sales of store brand products increased.

From 2018 to 2022, there was a 34% increase in industry-wide private label sales, totaling more than $57 billion. - While some other grocers might have private label offerings, this is the existence of what we do. - [Narrator] Aldi has thrived during recessions.

The 2008 Financial Crisis sparked its growth and decision to add around 100 new stores per year. - What was really interesting is we never lost any of those customers, and as the economy improved and we had a really long run of economic improvement, Aldi grew throughout that entire period of time. - [Narrator] And now as inflation drains American's wallets, Aldi continues to grow.

- In the beginning, that was sort of their target audience, people who, you know, wanted bargains, and wanted to buy food for low prices. But in recent years, I think they've really expanded that audience to also go after people who want convenient shopping, who want the necessities, and wanna be in and out of stores.