First the good news. Both of these retail chains are clearly succeeding in the United States with very different operating models. Over the past decade Walmart (we estimate $160 billion US grocery revenues) has increased its US store count from 3,700 to +4,700. Aldi entered the US in 1978 and now has 1,900 stores (with an estimated $15 billion in US sales) and is expanding rapidly.
Aldi has followed its European model with small, no-frills stores offering a limited assortment of private label products. The typical Aldi store is very small format: it averages 15K-20K square feet (with five aisles) and 1,500-2,000 items while Walmart’s average store has 150K square feet (driven by its 3,560 Superstores with 178K square feet) and 40K grocery items. We believe the simplicity of the Aldi format and its “own brand” reliance allow it to target its products at an average discount of 10%-20% below Walmart’s. Aldi has reached nearly a 2% share of the US grocery market, and is likely hoping to achieve 8%-10% in the decades to come – matching its success in the UK and Germany.
The two grocery chains approach branding and marketing of their private label products in unique ways. Reflecting its core value-driven customer, Aldi’s private label products (“PL”) account for 90% of the items sold in its stores. Building on its global experience (Aldi has $60 billion in worldwide revenues), Aldi has segmented its PL brands to cover specific categories and tout specific benefits. At last count, Aldi had eight PL brands in the US. We expect PL to capture an increasing share of grocery sales across the industry as a whole, as middle-class households continue to struggle with rising medical expenses and college tuition bills: over the next decade PL share is forecasted by CST Consulting to rise from 20% to 25%.
Walmart uses its Great Value label as its primary umbrella brand to cover its grocery business (as well as other lines), without direct reference to consumer end benefits (e.g. health and wellness), and uses Sam’s Choice in its club stores. It prices the Great Value brand at a discount to national brands, and shelves its own brand next to national brands which makes the price comparison very clear to shoppers. The shoppers are also informed of the Great Value brand’s end benefits by this close association with the national brand. Unlike Aldi, Walmart does not want to be known as a discount store but rather offering variety and quality at low every day prices: PL serves as an option to the most price sensitive of its shoppers and thereby limits share losses to discounters like Aldi and Lidl. We estimate Walmart’s Great Value brand captures approximately 20% of its grocery revenues. Walmart also has a range of food options – salad bars, fresh prepared foods, food counters, deli counters – as well as pharmacies and extensive health and beauty aids and cleaning products that are unmatched by Aldi.
While direct competition to date between the two chains has been limited to date, their overlapping stores have led to a number of consumer benefits, including:
- Where Aldi has entered the geographic market (is in close proximity) of an existing Walmart store, Walmart has aggressively responded with lower prices across a range of grocery staples to match or even be lower than Aldi and thereby limit market share inroads.
- Aldi has upped its game, improving its range and freshness of vegetables and fruits, adding “healthier” items and organics, and generally attempting to attract more solidly middle-class households versus its traditional price focused customer base.
Other possible impacts, some of which represent bad news for national brands, and likely to gain traction are:
- Aldi and Trader Joe’s teaming up for new product development and purchasing economies of scale. These firms shared a common family connection several generations ago, and since both are reliant on private label products closer cooperation would seem more likely than not.
- To the extent Aldi begins attracting more middle-class households with its improved stores and further site expansions, Walmart may (again) experiment with smaller format, private label heavy stores. The Walmart Express experiment, with 100 stores, was shut down in 2016. Walmart appears to be more concerned with Trader Joes and Whole Foods, having expanded the number of its 40K square foot Neighborhood Markets to 700 (up from 200 in 2012).
- Walmart’s ability to leverage its online website to promote its Great Value brands and build an even richer picture of its PL customers and their needs. This would also serve to build a counterweight to Amazon/Whole Foods’ PL offerings.
- Slower moving items currently sold by manufacturers of national brands will be pushed off retail shelves, and either be delisted or sold exclusively via websites direct to consumer. Fans of less popular flavors/types of Keurig- compatible coffees (and the Nestle system) – which did not gain widespread appeal after their introduction are already relying on Amazon to find their favorites.
- New product introductions and innovators in the grocery industry will need to rethink their go-to-market strategies, and forego ever more expensive slotting fees and trade spending in favor of direct to consumer propositions.
For additional insights on the private label landscape please reference our recently released study, Private Label Dynamics, at www.cstconsultingpartners.com.