Last week, news emerged that discounter Aldi Inc was working with officials from Moreno Valley, California on an incentive package to bring a new 87,000 sq m office and warehouse facility to the city. The company hopes to use this new property – located 60 miles east of Los Angeles – as a regional headquarters through which it can launch a dramatic expansion plan on the West coast.
In recent years, Aldi has been one of the greatest success stories in US retailing. Although it remains relatively small among modern grocery retailers in the US (ranking 14th in 2012), Aldi has increased its sales by more than 50% from 2007 to 2012 in a category that has grown only 13% during the same period. The recession has forged a new paradigm among US consumers in which bargain-hunting and coupon clipping no longer maintain the stigma that had once accompanied these practices. As a result, consumers have been increasingly drawn to Aldi’s discount format which features a no-frills atmosphere and a high penetration rate for private label products.
The Discounter Desert
Among all of the unique regional variations within the US retailing market, none is perhaps more striking than the dearth of discounters in the West. In 2012, per capita spending at discounters was $69, $81, and $139, respectively in the Northeast, South, and Midwest. The West stands in stark contrast against this backdrop, as the average consumer in the region spent a mere $6 at discounters in 2012. This paltry sum is 93% lower than the national average and stands as the most significant regional outlier within US retailing by a wide margin. Less than 3% of market leader Supervalu Inc’s Save-A-Lot outlets are in the West, while Aldi does not operate a single outlet in the region.
Discounters by State
Source: Euromonitor International
Aldi’s new regional headquarters near Los Angeles, therefore, represents the potential for dynamic change in the US discounter market. In fact, the company has already been slowly expanding from its base in the Midwest. Aldi entered the Texas market in March 2010 with force and has been steadily increasing its presence in the state. In April 2013, Aldi entered the highly competitive grocery market in Houston with 9 new outlets that it hopes to grow to 30 by 2015. Aldi stands as a growing powerhouse in the US grocery market that has embarked on a quest of Western expansion.
How the West is Won
To succeed in the West, Aldi must convey the message that its cost-saving practices allow it to offer the industry’s lowest prices on grocery items. For many consumers in the region, Aldi’s small format stores and simplified shopping experience will be quite foreign. The West maintains a strong car culture in which consumers typically make large shopping trips and stock up with bulk purchases. In fact, per capita spending at warehouse clubs in the West was 48% higher than the US average in 2012 and easily led all other regions. At the same time, per capita sales at small-format variety stores in the West were 50% below the US average in 2012. For this reason, the transition from a big-box shopping model to one that features small format discounters may be a challenging one. In April 2013, for instance, retailer Tesco Plc announced that it was exiting the Western US market after it was unable to generate a profit with its own smaller-format Fresh & Easy retail banner.
The key for Aldi in the West is price positioning. Tesco’s struggles were largely attributable to a pricing strategy that left Fresh & Easy caught between high-end and discount grocers at a time when the recession was squeezing mid-priced retailers. Aldi, on the other hand, has the advantage of offering some of the lowest prices in the industry. In order to draw Western consumers away from warehouse clubs and traditional supermarkets, Aldi must make its pricing advantage clear.
If Aldi can effectively market its low-price standing to Western consumers, the company will likely see growth in the region. Many consumers in the West remain highly value-focused, as the region was devastated more than any other during the recession. The unemployment rate, which was 9.3%, 9.6%, 9.0%, and 8.1% in the US from 2009 to 2012, measured much higher in the West during the same period at 10.2%, 11.0%, 10.4%, and 9.2%. While some indicators show that regional conditions are improving, many Western consumers are still looking to stretch their money as far as possible. For this group, Aldi’s rock-bottom prices will be a draw.
Euromonitor International’s forecast for discounters in the West is bullish, with value sales expected to jump nearly 222% in constant value terms from 2012 to 2017 (albeit from a small base). We expect Aldi’s low-price commitment and small-format outlets to thrive most in low-income urban areas and small rural towns in the West. In fact, our “Retailing in the US: Regional Insights” brief called attention to Aldi’s expected Westward expansion five months ago:
Aldi Inc is reportedly looking to expand dramatically on the West Coast, beginning in Southern California in 2013. Given the continued recessionary effects on the region, these new outlets have tremendous potential for success.
Discounters: Projected Growth and 2012 Per Capita Sales by Region
Source: Euromonitor International
As Aldi builds its presence in the West, it will reshape the retail landscape in the region. Across the US, discounters have been taking share from supermarkets and other grocery retailers in recent years as shoppers look to maximize value. This trend, which has largely been absent from the West, should accelerate as Aldi moves into uncharted territory.