In all the industries I’ve ever explored, I don’t think I’ve ever found a company as uniquely placed among competitors as Aldi.
How Aldi Works
Aldi does things differently:
- It doesn’t hire cart chasers. Aldi’s carts require a $.25 deposit, which gives customers incentive to return the cart after using it.
- It doesn’t advertise. Aldi advertises only through a 2 or 4 page advertisement in a Sunday paper. The company does not air TV or radio ads, and it does not sign contracts with suppliers to co-brand their products.
- Aldi carries fewer items. A typical Aldi store has 700-1300 products compared to 30,000 or more at a larger Walmart location.
- Aldi reduces its labor cost. Aldi pays employees more than any other retailer, but it gets more productivity out of each person and volume reduces the cost relative to sales. New stock is loaded onto “shelves” 16 or 24 units at a time, as its products are shipped to stores in boxes that serve as sales displays.
- All aisles lead to the products that spoil the fastest. Milk, meats, and produce are all located at the back of the stores, where each aisle “empties.”
- Stores are designed for customer traffic. Follow an Aldi loyalist through any one of their stores; they’ll likely stroll every single aisle before leaving. No other retailer can match this.
- 95% of Aldi goods are private label. This reduces the price point, but it also gives Aldi an edge in margins and efficiency. It also yields derivative benefits. If you can control the dimensions of a product, you can minimize shipping costs by moving more product with the same number of trucks, for example.
- Aldi bottom-feeds on customer traffic. The company maintains a policy of putting its stores next to Walmart and Target locations, which draw customers for miles and miles.
- Aldi carries a single SKU of every product. You won’t find nine different brands or can sizes for peas, you’ll find just one.
- Aldi has buying power. As the 8th largest retailer in the world, Aldi has buying power. It also has concentrated buying power, in that it sells more of 1300 goods than most retailers sell of 25000.
- Aldi makes the most of its fixed assets. Retail is all about margin and asset turnover. Aldi turns over its stock far faster than larger retailers. I calculate the company’s sales per square foot at just over $500 per year. Walmart does about $422 per square foot with way more operating hours, employees, and variable costs.
- It has smaller stores. Aldi’s stores are 1/6th the size of a normal Walmart.
- Aldi pays up for talent. Store managers earn 25-75% more than managers at other retailers.
- Aldi doesn’t take credit cards. Credit cards add 2-3% in cost to each sale. Aldi does take debit cards, which cost less to process.
- Aldi has a positive brand image. Where Walmart spends years bickering with local governments to open new stores, Aldi’s small format and relatively unknown brand fly under the radar.
- Aldi sneakily targets two markets. It uses the Aldi brand to hit consumers are who unabashedly frugal. Trader Joe’s, which Aldi acquired, targets the more hip crowd with a similar model at a different price point.
- Aldi stores have shorter operating hours. This condenses costs to a period in which most people do their shopping.
- Aldi takes advantage of odd-lot pricing. Where a small grocer could not move an odd lot of milk or a cut of meat, and Walmart is too large to bother with smaller odd lots, Aldi can swoop in and steal a bargain for its customers.
- It is designed for efficiency. Aldi’s products have barcodes on every side of the packaging, reducing the time it takes to process each customer.
The first time I stepped foot in an Aldi store, it was heaven – a well-lubricated operational machine. Everything works perfectly, seamlessly designed for pure and raw efficiency. I have a particular love for this business; I just wish it were publicly-traded. I’m convinced that it will be the fastest growing retailer in the US for decades to come.