While it would seem like an inauspicious time to enter the competitive grocery industry in the L.A. area, that hasn’t deterred discount grocer Aldi Inc. of Essen, Germany. It recently announced that the first of approximately 45 stores will open in Southern California by the end of the month.
In August, Bellingham, Wash.-based grocer Haggen Inc. shuttered more than 100 of its stores and filed for bankruptcy a month later. In October, El Segundo’s Fresh & Easy Neighborhood Market, a subsidiary of British Giant Tesco, made a similar calculation: Nearly 100 of its own stores, including about 30 in Los Angeles, needed to bite the dust. The next month, Fresh & Easy filed for bankruptcy for the second time in two years. In January, Wal-Mart Stores Inc. was the next to check its work, announcing the forthcoming closure of nine stores in the region and 154 throughout the country.
Yet Aldi, which already operates 1,500 stores in 32 states, remains unfazed.
“Shoppers who love a great value are everywhere and California is no exception,” said Liz Ruggles, director of public relations for Aldi, in an email to the Business Journal, calling California a “natural next step.”
Despite a volatile market and tough competition, Southern California’s appeal, which stems from its $44 billion in annual grocery sales, has continued to lure companies such as Aldi, even as others have fallen by the wayside.
In addition to Aldi, Berkeley’s Grocery Outlet Inc. plans to open approximately 30 stores in the greater L.A. area by next year. Meanwhile, Whole Foods Market Inc. of Austin, Texas, plans to open its first 365 market, a smaller-store concept, in Silver Lake by the end of this year. Gelson’s of Encino; Commerce’s Smart & Final; and Albertsons Companies Inc. of Boise, Idaho, have each expanded their portfolios in recent months by purchasing vacated Haggen stores, showing that even in a state of flux, the region remains enticing.
“Obviously the cost is high, but the potential for profit is also if you’re successful,” said Lorie Griffith, an editor at Gainesville, Ga.’s Shelby Report, a publication that covers the food and grocery industry.
But the experiences of Fresh & Easy and Haggen should serve as cautionary tales for Aldi.
After launching back in 2007, Fresh & Easy seemed poised to bring a popular British chain into the U.S. market, yet it couldn’t muster enough sales to justify the cost of its massive Riverside distribution center, according to billionaire investor and supermarket magnate Ron Burkle, who spoke with the Los Angeles Times in November. Burkle’s L.A. private equity firm Yucaipa Cos. took over more than 150 Fresh & Easy stores after the chain’s 2013 bankruptcy. Tesco lost more than $2 billion as a result of the failed U.S. venture, according to the Times.
Haggen’s, which struggled to pay back a large debt after rapidly expanding in the Pacific Southwest, met a similar fate.
But in the dizzying cycle of Southern California retail, Aldi is pushing forward with a simple strategy: selling popular Aldi-brand groceries at rock-bottom prices while prioritizing efficiency. Its branded products include perishable and nonperishable foods as well as many other household items.
Aldi also places barcodes in multiple locations on its products so that cashiers can scan quickly, and it stocks a smaller inventory of items than other chains in order to save on overhead and electricity costs. Items sold in Southern California stores will be delivered from an 850,000-square-foot distribution center in Moreno Valley. Customers are also encouraged to bring their own bags and receive a 25-cent deposit back after returning their shopping cart, a strategy designed to ensure the company doesn’t have to pay someone to round them up from around the parking lot.
But despite the previous chains’ struggles, grocery analysts are optimistic regarding Aldi’s new strategy.
David J. Livingston, founder of Charlotte, N.C., supermarket research firm DJL Research, said that Aldi is likely to succeed regardless of what happened to its peers.
“Aldi’s success has nothing to do with the competitive environment,” Livingston said, adding that the company’s low prices on products ranging from toilet paper to peanut butter are a big draw. In fact, he is a regular Aldi shopper himself.
“The downside is you do have a limited selection,” he said. “There will be some things you cannot buy at Aldi. But if you’re a true Aldi shopper, you know that if Aldi doesn’t sell it, you probably don’t need it.”
Kien Tsoi, a commercial real estate broker at the Brentwood office of Jones Lang LaSalle responsible for leasing grocery-anchored shopping centers in Southern California, is similarly optimistic. Aldi, he said, had tested itself across the country before leapfrogging the Rocky Mountains and entering the Southern California market.
“(Aldi executives) definitely understand how their bottom line is affected with the changing needs of the consumer and they’re adjusting to that,” Tsoi said. “Knowing that they’ve been here for a while I think they’re going to be fine.”
Yet one of Aldi’s rivals isn’t so sure.
“When you look across the board at our prices, we think we’re a little less, or similar,” said Melissa Porter, a spokeswoman for Grocery Outlet, a discount brand that will open a store in Compton by next week. “It takes time to get people to try you, but what we’ve found is that they do adopt us.”
While Aldi might not squeeze the competition from the get-go, a five-year growth plan to open 650 stores across the country could improve its market share.
“If that format is successful and grows it could cut into others,” said Dave Heylen, vice president of communications for the California Grocers Association, a trade association in Sacramento.
Heylen added that all grocers will need to address the variety of ways that millennials, generation Xers, baby boomers and older seniors prefer to buy goods.
“That creates the diversity and the more challenging environment,” he said.