Business

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Martin Meissner/AP
Guenther Blumhoff puts shopping bags in
the trunk of his car in front of an ALDI
market in Gelsenkirchen, Germany. (AP)

Aldi and Subsidiary Trader Joe’s Revered By Customers, But at What Price?

August 14, 2008 01:13 PM
by Anne Szustek
The German-owned grocery chains’ spartan business model means bargains for adoring customers. But their ownership and ubiquity have earned them some enemies.

Bargains Are Their Niche

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Aldi, with 950 stores in 28 states, according to Supermarket News’ estimates, is the 25th-largest grocery chain in America, with sales of some $5.8 billion. The National Retail Federation Stores magazine ranks it 91st, with an estimated $3.6 billion in sales. Aldi opened its first U.S. store in Iowa in 1976. If considering only the size of its spread across the United States, Aldi “is not that huge a success,” Planet Retail analyst Matthias Queck told the Chicago Tribune.

The store is a type of grocer known as a “limited assortment discounter.” Aldi has some 1,300–1,400 items in its inventory, compared to 45,000 at larger chains. For the most part, it only sells house brands, which, the store is quick to point out, test favorably against some recognizable labels.

Rather than hire baggers or cart handlers, customers bag their own groceries in paper bags, selling for 5 cents each, or heavy-duty plastic sacks selling for 10 cents. Shopping carts require a 25-cent deposit, which customers retrieve once they return their carts to the corral. Many product displays are left open on pallets and the stores can operate with as few as two employees on duty. Credit cards and checks are not acceptable forms of payment at the store, due to the processing charges and potential for returned check fees.

This all factors into prices up to 40 percent lower than those of regular supermarkets—something that has won the chain vocal fans. Amy Clark, creator of MomAdvice.com, a site focusing on lifestyle for stay-at-home mothers, “I often tell my friends and family that Aldi Supermarket is how I can afford to be a stay-at-home mom. Although I say this jokingly, I do credit Aldi a lot for allowing the room in our budget that we needed for me to be home with my son.”

And Aldi hopes to use the lackluster economy to its competitive advantage. It launched its first TV ad campaign in 15 years and plans to expand to 1,000 stores in the United States by the end of the year. The company is also beginning to open up to questions from the media.

Chris Hewitt, the vice president of Aldi’s regional headquarters in Oak Creek, Wis., told the Milwaukee Journal-Sentinel, “We recognize it’s an opportunity to share our story.”

Its Web site is emblazoned with a banner urging the U.S. Olympic Team to “bring home the gold!” It extols its Midwestern beginnings in the country, telling the tale of how Aldi’s business “has been continuously honed and refined since our first store opened in Southeastern Iowa in 1976.”

Yet its American sales account for only about 10 percent of its total revenue.

Background: A store is born

Aldi is a syllabic abbreviation for “Albrecht Discount,” named for the store’s founders, Karl and Theo Albrecht. The two brothers were conscripted to serve in the German army, reports British paper The Daily Mail. After returning from Allied POW camps, Theo took over their mother’s store after World War II, and Karl worked in a deli. Their first store, in Essen, Germany, began their entrepreneurial foray into the grocery business.

Now Karl and Theo rank 10th and 16th on Forbes’s “The World’s Billionaires” list. Together they own 8,000 stores around the world that rake in $67 billion in sales.
BusinessWeek wrote in 2004, “Aldi is Europe’s stealth Wal-Mart. Like the Arkansas-based giant, Aldi boasts … seemingly unstoppable growth—including an estimated sales increase of 8% a year since 1998 … matching or even beating Wal-Mart Stores Inc. in its ability to strip out costs.”

On the “Our History” section of Aldi’s U.S. Web site, nothing is mentioned of this—although its international home page consists of a list of links to individual pages for countries where Aldi operates. The Milwaukee Journal-Sentinel writes that the U.S. office “doesn’t provide details on its ownership;” however Martha Swaney, a spokeswoman at Aldi’s U.S. headquarters in Batavia, Ill., said Trader Joe’s is managed separately.

Trader Joe’s, a Hawaii-themed chain heralded for providing gourmet grocery at rock-bottom prices, employs similar practices. House brands constitute the vast majority of product on its shelves, and like Aldi, employees are paid generously for the grocery industry. Both chains pay starting cashiers as much as $12 per hour, and offer employees retirement savings plans. It shares Aldi’s relative secrecy as well: in 2004, the Monrovia, Calif.-based grocer declined an interview with BusinessWeek.

Key Players: Karl and Theo Albrecht

The Albrecht brothers keep a low public profile. They split the company into northern and southern divisions after a falling out in the 1960s over whether to sell cigarettes.

With the help of his two sons, Theo oversees Aldi’s northern division. Through a trust he created for his sons, he owns American hipster standby supermarket chain Trader Joe’s. Theo also controls a stake in Eden Prairie, Minn.-based supermarket conglomerate SuperValu, which owns several large grocery chains including Cub Foods, Jewel-Osco, Albertson’s and Save-a-Lot—the last of which Tom Behtz, vice president of Aldi’s northern Ohio division, told Cleveland Business News could be a source of new customers for Aldi in the region.

BusinessWeek quotes a Forbes article that said Theo is “more reclusive than the Yeti”—perhaps a lingering defense mechanism after his 1971 kidnapping by a lawyer with gambling debts. Theo Albrecht was released after his assailant received £1.5 million (about $2.8 million) in ransom. Not much is known about his personal life, although he is said to enjoy golf and collect antique typewriters.

Karl has retired from managing Aldi’s more profitable southern division, which includes its home market, Germany. Forbes describes him as “fiercely private: Little known about him other than that he apparently raises orchids and plays golf.”

Opinion & Analysis: Not everyone loves Trader Joe’s

And like its corporate kin Aldi, Trader Joe’s has its fans and detractors. Blog Racked has a page devoted to progress on a Trader Joe’s going up in Brooklyn, set to be the third location to open in New York City. An April 30 post reads, “It looks like construction is finally, finally underway. … It’s not shelves filled with Pirate’s Booty and Trader Joe’s Triple Berry-O’s cereal, but we’ll take what we can get.”

Residents of Berkeley, Calif. voiced concerns in 2006 over a Trader Joe’s proposed to open near the University of California’s flagship campus, citing traffic and the proximity of lower-priced alcohol on sale to the college and homeless shelters as potential cons to the project.

Steve Wollmer, who, at the time he was interviewed by the San Francisco Chronicle, was living 250 feet from the proposed site, said, “Trader Joe’s is a nonunion store owned by a secretive German family that sells specialty food and low-cost alcohol. Do we really need this in our neighborhood?”

Related Topic: ‘What’s Next for Trader Joe’s?’

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