You can thank Aldi for grocery prices being 3% cheaper in Southern California

October 23, 2017

By Nancy Luna | The Orange County Register

With 18 months under its belt in Southern California, German-born discount chain Aldi has quickly become the ultimate disruption in a region teeming with supermarket choices.

An epic price war in Southern California has triggered grocery prices to drop an unprecedented 3 percent as traditional food retailers scramble to fend off small-format discounters and e-commerce giants like Amazon.

“Southern California has moved from one of the highest priced markets in the country to the most competitively priced market,” said supermarket analyst Burt Flickinger, managing director of New York-based Strategic Resource Group.

Local shoppers can thank food deflation and Aldi.

The no-frills, limited assortment stores operated by Germany’s Albrecht family offer deeply discounted knockoffs of Americans’ favorite brands. Stores are four to five times smaller than traditional supermarkets and employ roughly one-fourth of the staff.

Industry watchers say Aldi’s presence forces markdowns by worried rivals.

“There’s all kinds of gamesmanship. Some chains will lower prices in advance when Aldi comes,” said Craig Rosenblum, senior director at market research firm Inmar Willard Bishop Analytics.

The war is just starting

Aldi’s Southern California invasion has only scratched the surface.

Since March 2016, Aldi, short for Albrecht Discount, has opened 40 stores stretching from Downey to Anaheim to Palm Springs. By the end of the year, Aldi plans to open 14 stores including four more in Orange County: Santa Ana, Laguna Woods, Westminster and La Habra. On Thursday, Oct. 26, Aldi is opening a store in Temecula.

Next year, the company said it would open 20-25 stores.

California is part of an aggressive plan to invest $3.4 billion nationwide to grow to 2,500 from 1,700 stores by 2022.

Flickinger, who tracks supermarket prices and sales, likens Aldi’s growth to a “military” assault.

The chain, with its U.S. headquarters in Batavia, Ill., is shoring up forces in untapped markets as it enters a head-on battle with Walmart, Amazon and Lidl. The latter is Aldi’s biggest European foe — a discounter with a similar assortment of inexpensive, private-label goods. It opened its first U.S. stores in Virginia and North Carolina over the summer.

Flickinger projects Lidl will hit California by 2020.

Aldi is fearless — ready to battle any and all competitors.

“If someone goes low, we’ll go lower,” said Tom Cindel, group director of operations for Aldi’s Moreno Valley division.

Word of mouth marketing

If Aldi were to describe a typical Southern California convert, that person might be Enrique Escuer.

Word of mouth got him into the store. The discounts and money back guarantees keep him coming back.

The 24-year-old California transplant heard about Aldi from his roommate, who is dating a woman from Germany. The Westminster resident said both are “crazy about the Aldi family.”

When the first three Aldis opened in Orange County last year, he drove to the store in Fountain Valley to give it a shot. He normally shops at Stater Bros.

“I’ve been coming ever since. The prices are really unbeatable,” said Escuer, carrying a basket of frozen foods, bread, produce and cheese.

Cindel, who oversees operations in Southern California, said “word of mouth” marketing is Aldi’s bread and butter. Friends tell friends. Neighbors tell neighbors. Co-workers tell co-workers.

“That’s how it starts. People look at this as their little secret,” he said during a recent tour of the chain’s newest store in Garden Grove.

“We just don’t want it to be a secret.”

An industry in upheaval

Aldi’s march out West comes as the $543 billion supermarket industry is a state of upheaval.

Traditional stores such as Ralphs and Albertsons are seeing market share erode at a fast clip. The top national players, which include Kroger, Albertsons and Publix Super Markets, are projected to lose 3.5 percent total market share by 2021, according to a 2017 food retailing report by market research firm Willard Bishop.

Even more daunting: Traditional supermarkets and mass retailers (Walmart, Target) are projected to see sales drop a combined 5.5 percent by 2021, according to the Willard Bishop report.

In Southern California, Aldi is already making a dent.

Flickinger said local Aldi stores are generating $20 million to $22 million per store, per year. That compares to $12 million to $14 million for Albertsons and $17 million to $18 million at Ralphs.

Legacy food retailers are scrambling to survive.

Albertsons, Vons and Vons Pavilion have merged. Target is adding more beer and wine to grocery aisles, and opening dozens of small format stores. with small-format stores. Walmart is testing curbside pickup, fast app-based returns and remodeling stores to emphasize convenience. Costco began offering two-day free shipping.

And, let’s not forget the 800-pound gorilla: Amazon.

The e-commerce giant’s $13.7 billion summer acquisition of Whole Foods Market has given shoppers another reason to shift loyalties. Once the purchase was complete, Amazon began reducing prices and selling Whole Foods’ private label 365 brand to Prime and Fresh members.

In the first week of dropping prices, foot traffic at Whole Foods stores increased 17 percent year-over-year, according to a report by mobile data research firm Thasos Group. The largest percentage of defectors came from Target, Costco, Kroger (Ralphs), Walmart and Sprouts shoppers, the survey noted.

Flickinger said Aldi should worry least about Whole Foods/Amazon. Even with the latest markdowns, Whole Foods is “simply unaffordable,” he said.

“Whole Foods has made so many myopic mistakes. It will take five years for Amazon to fix.”

Aldi adapts to California tastes

Aldi’s grocery mix is a story of survival of the fittest.

“Every item has to fight for a spot on our shelves,” Cindel said.

The chain works with food manufacturers across the U.S. to create copycats of roughly 1,500 brands deemed to be the most popular among shoppers. By creating their own house labels, Aldi maintains it can save shoppers up to 50 percent on their grocery bill.

In California, stores opened with a slightly larger assortment of items to appeal to buying habits. They’ve also expanded, and added items along the way. One big surprise: flap steak.

“It’s such a big item here in California. Customers want it. Competitors carry it. We have to have it,” Cindel said.

How much do they sell it for? This past week, Aldi was selling choice flap steak for $5.99 a pound. Ralphs was selling it for $10.99 a pound on Instacart, and $9.99 a pound at a store in Orange. (Though, the latter was called flap meat.)

California Aldi stores also carry more tortillas, wine, gluten free products and about 10-20 percent more produce than the rest of the country. Some changes, including adding loose produce, have been adapted to stores nationwide.

“California is leading the way in many innovative things,” Cindel said.

Still, when it comes to customization, Aldi walks a fine line.

High quality in low quantity is how Aldi rolls. Stores don’t sell 10 types of ketchup or five sizes of laundry detergent. Instead, they offer one or two options for each grocery item. In some cases, the knockoffs are stocked next to their national brand equivalent.  For example, Kellogg Company’s Pop-Tarts ($2.48) sit next to Aldi’s Millville Toaster Tarts ($1.99).

A random check of prices shows Aldi beating the competition on other items. A half-gallon of Aldi’s Friendly Farms almond milk is $1.99. A private label version at Ralphs is $4.09. National brand Blue Diamond Almond Breeze is $2.99 at Stater Bros. Greek yogurt, which Aldi added in recent years to meet consumer demand, is 69 cents for the private label 100-calorie tub. The Yoplait versions at Ralphs and Stater Bros. cost $1.39 and $1, respectively.

Aldi also appears to be copying its distant cousin, Trader Joe’s. (The companies, related through the Albrecht family, have no operational ties.) Trader’s Pita Bite Crackers sell for $2.69 for a 6-ounce box; Aldi’s sea salt Savoritz in-house brand are $1.99.

Flickinger said Aldi’s impact is real.

In Southern California, a survey of basic groceries such as eggs, milk, celery, ketchup, tuna and bananas shows prices have dropped, on average, 3 percent compared with two years ago, according to data collected by his firm. Strategic Resource Group, which tracks the supermarket and retail industry, said nearly every grocery banner is seeing an overall price drop except Whole Foods Market and Target.

Walmart and WinCo Foods, which has locations in the Inland Empire, are “lowering prices” beyond 3 percent.

With Aldi’s store brands so high quality, and inexpensive, Flickinger said even Amazon will have trouble pitching Whole Food’s 365 label online. “Aldi has checkmated Amazon on the private label side,” he said.

Making the switch

A new 44,000-square-foot Stater Bros. opening Wednesday, Oct. 25 in Tustin will employ more than 100 workers and sell close to 100,000 items.

By contrast, Aldi stores have five grocery aisles with products shelved inside cardboard boxes. The 11,000-square foot stores don’t offer full service bakeries or meat counters. Shoppers bag their own groceries and must fork over a 25-cent deposit for a shopping cart. Stores employ anywhere from 15 to 25 non-union workers.

“Everything we do is designed to keep costs down, so we can pass that on to customers,” Cindel said.

Aldi wins, he said, when shoppers realize other stores are overstocked and overpriced for the same quality groceries.

But to get their attention, Aldi must first flood the zone.

“If we throw that Aldi logo in your face enough times, you’re going to go ‘OK, I’m going to give it a shot. And that’s when we got you,” Cindel said.

Supermarket: A Fractured Industry

  • Traditional stores such as Ralphs and Albertsons are seeing market share erode at a fast clip. The top national players, which include Kroger, Albertsons and Publix Super Markets, are projected to lose 3.5 percent total market share by 2021.
  • Traditional stores saw revenue drop 5.9 percent to $440 billion in 2016.
  • Stores counts are taking a dive, as well. By 2021, traditional stores will drop nearly 25 percent to 19,132 . The drop includes closures and store conversions to other formats.
  • Led by Aldi, limited assortment stores made the largest sales gain (excluding e-commerce) in the industry with a 5.8 percent increase in 2016. This format added 155 stores, and reached sales of $37.3 billion.

Future: Aldi’s Next Stores

Temecula opens Oct. 26, 2017 at 7:45 a.m. at 29655 Rancho California Road, Temecula.

Opening in November: Lancaster, Bakersfield, Pico Rivera, Alhambra, Santa Ana. Opening in December: Westminster, Chula Vista, Monrovia, Laguna Woods, La Habra, Glendora, Oxnard, Escondido.

Source: “2017 Future of Food Retailing” report by Inmar Willard Bishop Analytics