Private Label Buyer

In these scary days of retail, where bankruptcies and store closings seem to occur on a daily basis, a success story has the power to intrigue and amaze us. And one particularly intriguing success story is that of Batavia, Ill.-based ALDI Inc., a retailer that — steadily and quietly — has been winning over a growing base of value-minded U.S. consumers.

ALDI Inc., PL Buyer’s 2009 Retailer of the Year, is part of the Aldi Süd division of the German ALDI company, but operates independently. The retailer first came to the United States in 1976 with a store in southwest Iowa, with the goal of bringing food to its customers at the lowest prices possible. Its first U.S. stores carried only about 500 products. Over time, the retailer added products, including more refrigerated and frozen foods, “special purchase” items and more.

Today, ALDI boasts approximately 1,000 stores in 29 states. Although its locations still rely on a “no frills” approach — products are displayed within their cardboard shippers; shoppers must supply or buy bags and pay a 25-cent (refundable) deposit to free up a cart — ALDI now offers more than 1,400 regularly stocked items. And 95 percent of those products are ALDI’s own items — presented under 118 select brand names.

Expansion remains a critical element on the ALDI agenda. In 2008, the company opened more than 100 stores, expanding into Florida and Rhode Island. The company also announced plans to open at least 75 more stores in 2009 and to enter into Texas in 2010. ALDI’s newest stores sport a pleasant pastel décor and higher ceilings that let in more natural light.

“ALDI today is opening in more attractive facilities in higher-income areas,” notes David Livingston, principal of Pewaukee, Wis.-based DJL Research. “They have evolved from catering to low-income groups [to catering] to all income groups.”

What’s more, ALDI’s new products continue to skew more upscale and innovative. Case in point: The retailer recently entered into the premium skin-care market with the introduction of its Lacura brand — an award-winning product line with European ALDI roots. And this year, ALDI’s Fit & Active brand became the first private label brand to include guideline daily amounts (GDAs) on product packaging.

“The ALDI shopping experience continues to evolve positively,” stresses Jim Hertel, a managing partner with Willard Bishop, a Barrington, Ill.-based retail and foodservice consulting firm. “They have long been operationally focused as a core part of being able to deliver such great consumer values — reduced SKU counts, low in-store labor levels, cut-case/pallet merchandising, etc. — but seem to be taking the shopping experience much more into account.”

Doron Levy, president of Richmond Hill, Ontario-based Captus Business Consulting, believes ALDI’s evolution coincides with that of private label branding as a whole.

“Early on, private label was looked upon as a cheaper alternative to the better-quality name brand,” he says. “Now, house brands have more representation and, in some cases, dominate certain categories in grocery.”

Levy adds that ALDI’s product quality has only improved through the years, and that the retailer’s implementation of its special purchase program also has done much to grow business with new customers.

“U.S. consumers are in value mode, and they are ready to jump on private label, as most of the quality stigma has diminished,” Levy says. “ALDI’s presentation and layout give its brands a shine that other stores are missing. … Product branding and labeling is really on par with, and in some cases, exceeds name brand standards.”

ALDI’s private label focus serves as a critical differentiator, explains Joan Kavanaugh, the retailer’s vice president of corporate purchasing. She adds that private label now enjoys a high degree of acceptance among U.S. consumers, pointing to an October 2007 report from Chicago-based Information Resources Inc. that cites a 100 percent penetration rate for private label products.

“Offering high quality at high value — significantly less than our competitors — really sets us apart,” she says. “ALDI’s select brands are manufactured by many of the nation’s leading food producers, and in our test kitchen, we ensure our products meet or exceed the quality and taste of the national name brands.”

The test kitchen to which Kavanaugh refers is located at ALDI’s Batavia headquarters. Here, all food and beverage products are tested six times a year to ensure consistent high quality.

If a product does come up short during ALDI’s rigorous sampling and testing against the national brands, Kavanaugh says the retailer asks the supplier to make quality improvements. Most of ALDI’s select brands are manufactured by leading U.S. food manufacturers, she adds, although the retailer does manufacture some of its own chocolate in Austria.

“We work very closely with our suppliers in product development, as well as continually review the product for further improvement,” she says. “We give regular feedback through our test kitchen operation. In addition, our buyers regularly visit suppliers to develop new products and packaging improvements.”

Kavanaugh says ALDI’s growing base of shoppers is the best testament to the retailer’s quality.

“People would not keep coming back, and we wouldn’t be growing the way we are if we didn’t have exceptional, premium products,” she says. “If the quality is as good or better, why pay more?”

Why, indeed — especially considering ALDI’s increasingly sophisticated array of palate-pleasers? In fact, the retailer’s Jehling chicken egg rolls and Salad Mate Italian salad dressing recently took top honors in two separate Chicago Tribune taste tests — outscoring higher-priced national brands.

But Kavanaugh stresses that premium quality offerings have been the mantra since ALDI’s U.S. beginnings.

“Each product represents the best in its category,” she says. “We rigorously test our ALDI select brands to ensure our products meet or exceed the national name brands in taste and quality. Because we eliminate hidden costs commonly found among our competitors, we’re able to offer shoppers great-quality products at up to 50 percent less.”

Moreover, thanks to ALDI’s famous “Double Guarantee,” shoppers risk little when trying a new product. Any shopper who’s not completely satisfied can exchange the product for a full refund — and a replacement product.

Although it would be nearly impossible to list and describe all of ALDI’s 118 select brands here, Kavanaugh notes that each brand comprises a family of similar products. The Millville moniker covers the retailer’s cereals, for example, while the Cattleman’s Ranch brand graces ALDI’s fresh meat products.

One of ALDI’s newer, most-impressive select brands is Fit & Active, a health-minded food and beverage brand first introduced in 2004. Kavanaugh says the Fit & Active lineup now includes 121 varieties across 58 regularly offered core items. And more than 20 additional Fit & Active items are featured as special purchase items throughout the year. The average cost of Fit & Active items is $1.99, she adds, with the 100% fat-free chicken broth retailing for only 39 cents.

“As the first private label brand to include GDAs on product packaging, we’re hoping to help take the guesswork out of making healthier choices,” Kavanaugh says. “All Fit & Active product packaging will feature ‘Fit Facts’ on the bottom right-hand corner of each package, which include four standard nutritional values based on the USDA’s recommended daily allowance of calories, fat, sodium and sugar.”

Shoppers get even more at-a-glance nutritional information in the supplemental “better for you” section at the top right-hand corner on the package front, Kavanaugh says. Here, they’ll find notations such as “good source of vitamins and minerals,” “good source of fiber,” “caffeine-free,” “low cholesterol” and/or “no trans fats.”

Although food and beverage items account for the majority of ALDI’s offerings, non-food items such as household cleaners/supplies and health and beauty aids also are a focus. According to Kavanaugh, they account for 14 percent of the retailer’s core-range products.

But that percentage just might skew higher with the introduction of ALDI’s Lacura skin-care line, an assortment of high-end, but value-priced facial cleansers, toners, moisturizers, eye creams/gel and lip care products. The line currently is rolling out across U.S. stores, Kavanaugh says, soon to be augmented by a makeup collection slated for launch this season. Packaging for the Lacura line, with its pastel colors and clean design, conveys understated elegance.

Speaking of packaging, Kavanaugh says ALDI works with top design agencies to develop a look that reflects the high quality of each of its select brands. So packaging truly is an extension of the brands’ overall quality message.

“Our select brands are ALDI,” she stresses. “They represent the largest percentage of our products, and we take pride in our quality and doing business in a fair, efficient way that respects our suppliers, staff and shoppers. We’ve found that customers may try us for the prices, but they stay for the quality.”

Those customers to whom Kavanaugh refers — and collectively calls the “ALDI shopper” — are traditional supermarket shoppers who represent people from all walks of life, not just lower-income households. In fact, a March 2008 ALDI online survey found that the average household income for these folks is $65,400.

“We’re finding that the traditional supermarket shopper, the one who wants value for high-quality products but otherwise has to clip coupons and get memberships, now is an ALDI customer,” Kavanaugh says. “We find that price may inspire some new customers to try us, but quality brings them back.”

ALDI’s recent gains are proof that the retailer’s message is reaching consumers, despite a minimalist approach to advertising. Sunday newspaper inserts fill shoppers in on seasonal varieties and limited-availability special purchases, Kavanaugh says. In addition, the company relies on occasional targeted marketing such as direct mail, television and free subscription-based e-newsletters, and plans to incorporate more digital media in the future.

“We are not spending more,” Kavanaugh stresses, “just trying different combinations and reallocating.”

ALDI is particularly competent in shopper marketing, Hertel contends, especially when it comes to leveraging technology.

“Sign up online, and you receive weekly specials and new item notices by e-mail,” he says. “These notices frequently include branded products that are special buys and always highlight the value that ALDI delivers.”

Levy adds that the ALDI Web site is a great resource for new and existing customers who are interested in learning more about the retailer. Here, the company even explains why it requires a 25-cent deposit for its shopping carts (“This system cuts down on the labor of collecting carts left in the parking lot, damage to cars, and we pass the savings on to you.”)

But perhaps the greatest thing ALDI has going is word-of-mouth advertising, Livingston notes. Whether it’s neighbor to neighbor in a face-to-face discussion or moms sounding off on a growing sea of mommy blogs, ALDI increasingly is a positive topic of discussion.

But will the ALDI quality/value message resonate as loudly with consumers when the economic storm clouds blow over?

Levy believes it will — particularly the quality aspect.

“We are now seeing quality tiers within private label lines, and ALDI should focus in the upper tiers when the economy recovers,” he says. “Customers will remember the value message, but will not want to sacrifice quality if they can afford not to. ALDI has a very good guarantee and return policies, but to cater to the upper-income consumer, they will have to create some sort of premium customer experience within the store.”

Hertel agrees that quality will remain critical, particularly in fresh produce and meat.

“Fresh quality helps make food retailers a primary stop, not just a fill-in shop,” he explains, “and so will make continued same-store sales growth possible over the long run.”

When the economy is strong, ALDI does well, Livingston notes. When the economy is hurting, ALDI does even better. But he has little doubt related to ALDI’s ability to keep the momentum going post-recession.

“When the economy recovers, ALDI will still be doing well and will probably be even stronger after gaining additional customers,” Livingston says. “Why would customers not shop ALDI just because they have more money? They have excellent products at the lowest prices.”

What’s more, Livingston stresses, ALDI still has a lot of territory to conquer within the United States. The retailer is the only grocer he knows of that actually can benefit by being close to a Wal-Mart Supercenter, he adds.

“If there is a Wal-Mart Supercenter nearby, then there is room for a new ALDI,” he says. “So how many Wal-Mart Supercenters in the USA are there with no ALDI nearby? That is how many more stores they can open.” PLB

 

Authors note: In February, PL Buyer’s editors took a tour of the new (bright and beautiful) ALDI store in Geneva, Ill. Photographer Vito Palmisano shot the in-store pictures included with this article during that visit.