The Price Of Aldi’s Expansion? It Could Be Cheaper Groceries

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When a store charges less than $2 for a 12-ounce package of cereal, it’s not thinking outside the box; it’s thinking inside it.

Which makes one wonder: Why wasn’t Aldi, the value-priced grocery chain from Germany, among the “aggressive” competitors Kroger and Albertsons
named in defending their $24.6 billion mega-merger to antitrust regulators? Target
, Walmart
, Costco and Amazon
were all blamed for creating an environment in which Koger said it needs to acquire Albertsons in order to thrive. But not Aldi and its cheap cereal.

Perhaps this is why: Back in March, when Kroger and Albertsons were justifying their merger, Aldi was flying under the radar with “just” 2,300 small-format stores. But since then, Aldi has unfurled an ambitious plan to add 800 locations by 2028. Also in March, Aldi completed its acquisition of 400 Winn-Dixie and Harveys Supermarkets in the Southeast.

Which means those less-than-$2 boxes of cereal will be much closer to more of the population. Aldi, in other words, could play a significant role in price competition.

Adding the Aldi Element To Antitrust

Should Aldi’s market infiltration trigger price wars, it would add an intriguing wrinkle to the Federal Trade Commission’s key antitrust concern: that a Kroger-Albertsons merger would result in higher consumer prices. Here’s why.

When one chain controls the majority share of a market, it can pressure its suppliers to charge less for the goods it buys. To compensate, those suppliers might charge their smaller retail clients more, who then pass those hikes on to shoppers.

Other factors influence this outcome, however, such as the number of nearby competitors. Research has shown that grocery mergers in markets with a few dominant players often result in post-merger price increases, while mergers in less-concentrated markets result in price reductions, according to a report by Georgetown University.

Aldi’s influence, therefore, depends keenly on its location strategy around Kroger’s thousands of stores in 36 states and Albertsons thousands of stores in 35 states.

The Little Chain That Could

Aldi operates thousands of stores, too, but they’re much smaller – around 18,000 square feet, while the average grocery store is 48,400 square feet. Size matters: Based on sales, Aldi ranks just 26th in Progressive Grocer’s top-100 list of the largest retail grocers. Walmart, Amazon, Costco and Kroger are the top four.

Still, three critical factors could play into Aldi’s favor as it enters new grocery store battlegrounds.

The Timing Factor

Aldi announced it would add 800 stores the same week a judge scheduled an August court date to hear the FTC’s case against the Kroger-Albertsons deal. With consumer prices being a central issue of the FTC challenge, the intervening months could present an advantage for low-priced Aldi.

Aldi’s focus on private-label brands boosts this well-timed advantage. By late 2023, 54% of consumers, sick of paying 19% above pre-pandemic prices, said they plan to stick with less-expensive store-branded products vs. national brands such as Kellogg’s
and Tide, CNBC reported.

And nearly 78% of Aldi’s inventory is private label, Statista reports. People who shop there make the trip likely knowing they won’t find national brands, except for the few surprise items Aldi occasionally carries at competitively low prices.

Kroger, too, owns an impressive portfolio of private brands, representing 22% of total sales (Statista), but it’s still tethered to higher-priced national labels that take up a lot of shelf space.

The Landscape Factor

Kroger and Albertsons, in their response to the FTC’s complaint, argue their merger is necessary to survive aggressive competition. In particular, they cite the evolution of a “fiercely competitive landscape” that increasingly includes non-traditional supermarkets.

Specifically, Kroger and Albertsons named Walmart, Target, Costco, Amazon, Sprouts Farmers Market and Trader Joe’s (which is owned by Aldi U.S.’s parent company; more below).

Some of these rivals are expanding: Target and Walmart plan to open hundreds of stores and add to their grocery sections, Costar reports. In 2024, Sam’s Club embarked on its most aggressive growth plan in years – 30 stores over five years, CNBC reported. And competitor Costco, with roughly 600 U.S. locations and 130 million members, expects to open 28 new clubs in 2024 alone.

These ambitious expansion plans present formidable competition, and into the middle of it steps Aldi.

The Scale Factor

Aldi might prove to be as formidable a competitor as Walmart, Costco and the others, for a few compelling reasons.

  1. As a European-based, global company, Aldi U.S. has “enormous” buying power, which has enabled it to become a low-price leader, writes Neil Saunders, retail analyst and managing director of GlobalData Retail, in his blog.
  2. Aldi’s streamlined store model, with fewer products in smaller footprints, improves its efficiency and secures its profit margin, Saunders adds. These features also make for easier trips, which can be important to consumers who are as conscious about time as they are about price.
  3. Because Aldi’s smaller formats don’t require as much land as Kroger, Costco and Walmart stores, the retailer has more opportunities to penetrate tight markets.

“Aldi is effectively throwing down the gauntlet, and its challenge will cause disruption and pain for other retailers,” Saunders writes.

But Let’s Not Forget The Other Competitors

Aldi is not the only low-priced retailer that could enter Kroger and Albertson’s competitive radar as they await their hearings. Lidl, another low-priced German food chain, expects to add 150 or so stores by 2025, for a target of 1,100.

And there’s Trader Joe’s, which announced in March it will open 16 stores. Pertinent fact: Trader Joe’s is owned by Aldi Nord, while Aldi U.S. and Winn-Dixie are owned by Aldi Sud (“Aldi” is the company name of these two separate, multi-national chains). Aldi U.S. and Trader Joe’s operate separately, but both seem to spot an opportunity to infiltrate opportunistic markets, as well as the appeal of unique in-house brands.

Which leads to the big consumer opportunity. If a Kroger-Albertsons merger is approved, and it leads to higher prices at the combined chain, then the lower prices at Aldi, Lidl, Trader Joe’s and others could persuade shoppers to change stores, even if it means driving a little further.

Put another way, if food retailers can appeal to shoppers by thinking inside the box, those shoppers are likely to break out of the boxes of their old shopping routines.

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