When it comesto Aldi, it’s time to “mind the gap.” Why?Aldi has transformed itself in some pretty powerful ways. Sure, itstarted as an ELDP retailer that offered an extremely limited assortment atextremely low prices, but – that’s not how it’s operating today. Aldi has evolved into a promotional merchantwith a strong price reputation which makes it an increasingly formidablegrocery competitor.

The netresult is an extremely disruptive force in an increasingly competitivelandscape in which the traditional grocery players are being squeezed betweentwo growing pressures – how to pay for additional services like online groceryand how to match low prices.

Fellow retailveteran Bill Bolton and I recently sat down for an in-depth discussion aboutsome of the changes we’ve seen Aldi make. We came up with the five changes listedbelow, each of which creates its own competitive advantage, but the combinedthe impact is exponential – especially given the hard reality of an overbuiltmarket where more stores are becoming less economically viable eachmonth/quarter/year.

1. Changing product mix

The change inAldi’s product mix shows up clearly in the physical layout of their stores. Thespace allocation of five to ten years ago has been completely revised.

Aldi now hasa full-scale produce department that is approaching 100 items. They’ve doneextensive work in pre-packaged meats and expanded in dairy. They’ve also doneextensive work with frozen foods. They even stock wine and beer in somelocations.

Aldi has alsoreplaced almost an entire aisle of groceries in the center of the store withgeneral merchandise, and increased their attention to the first aisle. And, they’veexpanded their specialty/premium product lines that allow shoppers to trade up.

2. Shift to gross margin strategy

Aldi continuesto practice aggressive cost management and still has only a fraction of theassortment a traditional supermarket offers. They now manage theirmerchandising mix in a different way.

• Aldi generates gross profit from thefirst aisle, general merchandise, perimeter and premium products – this allowsthem to reach some of their really aggressive price points and deliver themeven more effectively.

• They are generating profit reservesearly in the month on sales of higher-margin products that they use to drivetraffic in weeks 3 and 4 with lower-price, lower-margin products as consumerspending slows down.

You can seethis play out in their ad circulars – the number of pages changes depending onwhich week of the month it is. At the beginning of the month there’s plenty ofmoney in the consumer market, but by the end it runs out and retailers have tofight for their share of trips and spending.

So, at thebeginning of the month when Aldi is trying to make sure it gets a biggerbasket, the circulars are 12 pages, and they promote a lot of higher marginitems and general merchandise. By the end of the month, the circulars are downto 8 pages, and they promote the lowest prices of the month, especially onstaples. For example, milk at $1.49 per gallon will generate traffic, but Aldidoesn’t offer that at the beginning of the month because they don’t need to.

3. Reinforcing the low price reputation

Aldi reinforcestheir low price reputation by combining aggressive promotional pricing withstrong shelf pricing for basic staples.

For example,they’ll promote milk, eggs, bananas, avocados, and meat, which are highlyconsumable products that have recognizable price points. No customer has 5,000price points in their head, but they probably have these. And, Aldi is verysensitive to the local competition’s prices on these products. It looks likethe store manager has the discretion to price eggs, milk, bananas, and maybesome of their meat products so that they can beat the competition.

Aldi alsoreinforces their everyday low price reputation by focusing on certain staplegrocery items that are often on the shopping list like flour, sugar, etc.

4. Promotional capabilities & total store merchandising

Promotionalretailers typically chart out traffic and ticket sizes for each week and marketto themes to accomplish their objectives over the course of, say, a month, bydriving traffic to certain areas.

When it comesto promotional themes and merchandising, Aldi seems to do a very natural job ofmixing different types of products across what would be departments in atraditional grocery. The merchandising themes in their ads are more aboutcommunicating with the customer about what’s important to them and less aboutallocating space among departments.

For example,take Mother’s Day – they started with one page in the circular several weeks inadvance, and as the day approached they introduced other themes, includingtreating mom to breakfast in bed. Eventually several pages of the circular weredevoted to it. We saw a similar build-upto Father’s Day.

Aldi isbecoming more and more sophisticated as a total store merchandising team, asopposed to the old-style grocery merchandising, and it’s having a profoundimpact. It doesn’t look like they areorganized the way that grocery stores usually are, with their silos of meatdepartments, produce departments, grocery departments, wine and beer departments,etc. The traditional supermarket circular is all about dividing up the spacebetween departments – look through Aldi’s flyer, and you’ll see they don’tfollow those “rules.”

5. Strong communications with shoppers

Aldi isreally good at communicating and connecting with shoppers. Plus, they’re notconstrained by the departmental silos. They can orchestrate across the entirestore without worrying about whether the deli department will support the ideaor the produce person will give the additional space. Total store merchandisingis something that traditional retailers are trying to do, but the territorialnature of the departments limits what they can achieve.

When youvisit as many stores as we have in the past weeks, you can see the differentways that retailers use their stores to talk to customers and Aldi stands outas doing a really effective job. Throughout the entire Aldi shopping experiencethere are messages that explain what Aldi is doing that is of benefit to theirshoppers. In contrast, some retailers talkabout item and price and that’s all. Others explain how they do what they do (likegrinding beef every 3 hours.

Aldi is alsofocusing on on-trend products. Forexample, they’re carving out a strong position around the theme of feel goodand healthy, focusing on fresh, sustainability, organics, no trans fats, noMSG, no hormones, no artificial colorings.They are using their advertising, signage and even a free lifestylemagazine with healthy recipes and articles by dieticians to give theircustomers info they might otherwise get from a Whole Foods, Stop & Shop, orLunds & Byerlys.

What's ahead?

Disruption and more fragmentation on the price dimension

In additionto the changes discussed above, Aldi is also attracting more shoppers and morespending by expanding the number of stores, accepting credit/debit cards, andeven selling bags to those who want them.

While Amazongets credit as a significant disruptor, Aldi is creating and will continue tocreate potentially even more disruption by blending their highly efficient costcontrol strategies with some softer selling and merchandising techniques.

When theopening price points in a market are owned by Aldi, it leaves everyone else inthe market trying to figure out how to respond. This is why it is important tomind the gap between the old Aldi and the new Aldi. Disruption in the grocery industry is comingfrom many directions – and it includes Aldi as well as Amazon. What do youthink?

Special thanks to Bill Bolton for the researchand thoughts he contributed to this blog. Bolton is a retail adviser who hasheld leadership positions in both large supermarket chains and nationalwholesalers.

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