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Produce Business

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American Food & Ag Exporter

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Deep-Discounter Aldi Gives
Tesco A Run For The Money

Jim Prevor’s Perishable Pundit, February 20, 2008

As the industry in the US is focused on Fresh & Easy, we get this report from a British newspaper, The Mail, that back home in Britain, Tesco is flummoxed by deep discounters:

Tesco worried by Aldi and Lidl challenge

They have long been seen as downmarket stores for the less well-off or the plain tight-fisted. Shopping at Aldi and Lidl is not for the aspirational or for foodies.

But times are changing. As prices rocket and the middle classes begin to count the pennies, the German discount stores believe their time has come.

More affluent customers are flocking to buy their products and even Tesco, the unrivalled champion of the UK grocery market, is beginning to worry.

It is so worried, in fact, that just yards from its headquarters in Cheshunt, Hertfordshire, Tesco has built a mock-up of an Aldi store where its executives, product buyers and marketeers can study the tactics being used by the enemy.

In the past year the number of Aldi’s shoppers in social category AB has surged.

Just over one in five shoppers at Aldi is in this group and the cause is simple — food price inflation. Prices are rising faster than any other category, with bread shooting up 14% in the past year.

It seems the £4.99 Canadian lobsters at Lidl and the £7.99 bottles of Chateauneuf-du-Pape at Aldi are hard to resist.

And the surge is spreading. When fashion magazines this month found that Aldi’s own-brand anti-wrinkle cream — 1.49 a jar — was the most effective on the market, the shelves soon emptied.

Aldi’s model is simple. Stores are run with as few as four staff at any time and managers, earning a minimum of £40,000 a year, regularly roll up their sleeves to stack shelves.

Aldi wants to open 50 stores a year, taking it above 400 by the end of 2008, and has plans for 1,500. Lidl has more than 450 and rising. Tesco has more than 2,000, but its largest ones are more than ten times the size of an Aldi store.

Tony Baines, Aldi’s UK managing director for buying, said: ‘We could have a store in every town in the next 15 to 20 years.’

About 5% of all grocery shopping is at discount chains. Baines believes that could rise dramatically. ‘I think the discount grocery market in the UK could grow to 20% — us with 10% and Lidl with the same,’ he said.

He is candid about where the growth will come from and sees Tesco as the most vulnerable to its strategy. ‘If you’ve got someone with 30% of the market, you could assume most of our growth is going to come from that,’ he said.

This turn of events doesn’t surprise us at all. We remember being called by a reporter for a consumer publication when Safeway was launching its “Lifestyle” format, and we were asked if we thought Wal-Mart would to be concerned over this new concept.

We replied that we were certain Wal-Mart would lose more sleep over Aldi and other deep discounters than it would over Safeway’s concept.

With financial uncertainty the story of the day, Aldi is the concept of the moment. And not just in the UK. In the US, press releases trumpet its low prices with headlines such as Aldi Pricing Pilot Means Even Lower Prices for More Than 100 Grocery Products:

As reports of food price inflation continue to dominate the news, ALDI is taking steps to further lower its already discounted prices on more than 100 of some of the most commonly purchased items in its St. Louis-area stores. Beginning Sunday and continuing for the next nine weeks, customers will see products ranging from macaroni to chicken breasts further reduced in price.

“We’re proud to offer customers the best possible prices on the quality products they purchase the most,” said Paul Piorkowski, division vice president. “ALDI already has prices that are up to 50 percent lower than the competition. This is an emphatic statement that we will continue to take the lead in value.”

Food price inflation rose 5.3 percent in 2007 over 2006 — the largest increase since 1990, according to the Bureau of Labor Statistics. In contrast, ALDI customers can expect as much as 12 percent to 27 percent price cuts on everything from frozen foods to refrigerated items to dry goods. In the first week, more than 10 items will be reduced in price such as 32 oz. elbow macaroni going from $1.29 to $1.09 while competitors’ prices range from $1.50 to $2.59. ALDI’s instant mashed potatoes are going from $1.09 to $.99 while competitors are at $1.13 to $1.67.

This is the first time in its history that ALDI is launching this kind of pricing program, and it will look at duplicating the effort across the country following its pilot in the St. Louis area. Reduced prices are intended to stay, with ALDI re-evaluating periodically what are among the most frequently purchased items for customers. Market conditions also will factor in to long-term pricing, as ALDI continues to beat competitors on price, quality and combined value.

“We are doing this for our loyal customer base as well as giving people new to ALDI a further incentive to try us,” said Piorkowski. “We find that once people shop at ALDI, they keep coming back.”

In the meantime Aldi is moving into Florida:

Aldi Expansion Begins With Distribution Site

HAINES CITY, FL — Aldi Group, a German-rooted discount grocery chain, is launching its expansion into the “land of Publix” with a 500,000-sf distribution center in Polk County. It also plans for dozens of new stores in Central and Southwest Florida.

The company, which promises markdowns up to 50% on common supermarket items, is investing $40 million in its Haines City warehouse on 73 acres south of Interstate 4. The center will service 25 stores beginning this fall, primarily in the Orlando, Tampa and St. Petersburg markets.

We will be aggressively expanding throughout Central Florida over the next several years,” David Behm, Aldi’s VP in Orlando, tells Real Estate Florida. The rate of expansion could be as high as 15 stores annually after this year’s openings, he says.

According to the company’s website, Aldi seeks locations with 16,600 sf and at least 85 dedicated parking spaces on up to three acres. Development lots or pads are preferred, with ground leases and inline end-cap spaces also considered. Co-owned and freestanding sites may also be part of the chain’s mix in Florida, Behm adds.

Aldi’s push into Florida is made more interesting given that its new distribution center will be built near the Lakeland headquarters of Publix Super Markets Inc., a regional chain that has dominated grocery sales statewide for decades. However, any comparison of Aldi to Publix would be, simply, apples and oranges.

“We consider ourselves the premier grocer on the discount side,” Behm says. Aldi, which is approaching 900 stores in 26 states among 8,000 stores worldwide, appeals to do-it-yourself types who can sack their own groceries, preferably in their own bags.

While its stores are intended to be basic, Aldi doesn’t want to be viewed as a dollar-store type operation, Behm says. The company seeks locations in trade areas with populations of at least 35,000 within three miles, on sites at signaled intersections or convenient access.

Aldi is the 25th largest grocer in the US with annual sales of nearly $6 billion, based on rankings by Supermarket News, a national trade publication. Publix, with 925 stores throughout the Southeast and $23 billion in yearly sales, ranks seventh.

While in city after city Aldi is building new stores:

Aldi headed for Wentworth and Ridge?

Aldi may come to Foodland site

Grocery chain (Aldi) to locate store next to mall

When we mentioned that Ron McCormick, Vice President of Produce of Wal-Mart, had announced a focus on heritage agriculture, many asked what that could possibly be about.

Surely, Wal-Mart executives couldn’t possibly think that reviving the Arkansas pickling cucumber industry was going to help attract customers or increase sales in any significant way.

Well what that was really about was the marketing department taking over merchandising. The marketing people at Wal-Mart came to believe that price was not enough and that Wal-Mart needed other things — things such as heritage agriculture — to earn the affiliation of the consumer.

Fortunately for Wal-Mart shareholders, Wal-Mart’s low-price leader image was well established and most of the nonsense tried by marketing (ads in Vogue, heritage agriculture, funky clothes that didn’t sell, etc.) didn’t resonate with consumers. So now, with price a priority among consumers again, Wal-Mart’s Back in Its Element.

Among Tesco’s problem in America is a confusion of focus. Many things it emphasizes — green, organic, and sustainable — are features of expensive things and upscale venues in the US. So these features clash with the discount-price image Tesco wants for Fresh & Easy.

Tesco would have done better to emulate the Albrecht family and market under distinguishing banners such as Aldi, the discount standard bearer and Trader Joe’s, its foodie, trendy cousin.

Perhaps the best hope for turning Tesco’s American enterprise into a winner is for the company to take a step back, slow the expansion and remerchandise and re-banner the Fresh & Easy stores according to what concept would most appeal to its neighborhood.

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