Why Aldi is destroying traditional grocery stores

Aldi went from a single grocery store opened in America in 1976 by two German brothers to by 2024 being the third largest grocery chain in America and terrifying big retailers and executives like Amazon and Walmart. And they did it all by running a playbook that seemingly broke every rule of how to do business in America. This video is the rise of Aldi. By the way, today's video is sponsored by my company, Bedrock. More on them later. By the way, for every video I make, I create an accompanying document that is a cheat sheet you can use to learn more about the story. You can download the one for this video for free at girdley.com/youtube. The story of how it all happened actually starts back in 1946 in bombed-out post-World War II Germany when two brothers took over their mother's corner store. They were the Albrechts. The Germans are a notoriously frugal group of people. Great savers, by the way. And the two brothers, they were no different. They were obsessed with cost, and they did everything they could to strip costs out of their stores so they could keep prices low. The brothers kept costs down by having no fancy displays, no frills, no fancy signage, maybe even no music sometimes. And it turns out Germans loved it. By the 1950s, they had over 300 stores across the country. Then in 1960, the two brothers had an argument that would change everything forever. The cause for it? Cigarettes. Brother Karl, he wanted to sell them. The reason was Cigarettes are super high margin. If you go buy a pack of cigarettes these days, you might spend whatever, $60, $80 on it. Uh, most of that is taxes. Remember, you're just buying leaves rolled up in paper. Uh, the rest of it is pure profit. Most brothers would have destroyed the company, hired lawyers, and gone nuts on each other, ruined each other's relationships. But instead, they were pretty clear-headed about the whole thing. They just decided to split the whole country in two. Above a certain line, one would have Aldi North, and the other one would have Aldi South. And this explains so much about what would happen later. It was all about efficiency. The brothers didn't have time to argue and certainly didn't have time for lawyers. Eventually Aldi got so big and so dominant in Germany that they needed to go find a place where they could grow into. That place was the United States. Remember, today the United States is nearly 25% of the world's economy by GDP. Uh, if you want to do big business and you want to get big, eventually you got to figure out how to sell into America. That's what the brothers did. Brother Theo in 1979 would come into the United States by buying a quirky California chain that you might know as Trader Joe's. Karl, who owned Aldi Süd, in other words, in other words, Aldi South, came in and he was going to build out Aldi stores inside the U.S. Ironically, both of these stores would use basically versions of the same playbook to come and dominate. But we'll find out more about that later on in the story. So today's video is actually sponsored by a company I started called Bedrock Quality of Earnings. And BedRock is a service for business buyers. If you're going out to buy a business, one thing you don't want are surprises. There are tons of stories out there of people who buy businesses, they get into them, and 3 months later they realize the numbers that the seller told them, well, they weren't true. And in a situation where people are often buying businesses and signing personal guarantees, meaning they're really on the hook to return that money to a bank or anybody they borrow it from, that could be a disaster. So BedRock is a quality of earnings firm. They're people you hire that go in and look at the seller's books to make sure what you're being told is actually be true. And there's lots of quality of earnings firms out there. What makes Bedrock different is it's the only one that has 3 things. Number 1, a CEO, a guy who comes to us from a Big 4 firm and has been doing quality of earnings reports, well, basically for a long time, his whole career, basically. Bedrock is also backed by people you trust and know, including me. You know where to find me if you're unhappy with their service. And number 3, Bedrock uses the latest technology, AI and all that different kind of stuff. To make sure you get the best results at the best price. So if you're interested, book a call with the CEO, Will. You can go to bedrockqoe.com or check out the link in the comments below or the one on the screen. Thanks. To know more about how these guys operated, there's a famous story of the brothers. In 1971, Theo was kidnapped. The kidnappers reportedly requested, and he paid, 7 million Deutsche marks to get him released from the closet where they were holding him. Remember, these are two brothers for whom every penny was valuable. They'd spent decades obsessing over how to wring them out of their business, and here they were handing over $7 million of them. But Theo and his family, well, they had an angle for that. The next year after his release, he would go to the government and claim the $7 million as a tax write-off. It was a valid business expense in order to get him back working in the business. The ideas that they would have around building Aldi and Trader Joe's were so ingrained in them that it applied to their tax filings as well. They went on, Theo's family did, to argue with the German government for decades about whether they could write off this expense. Every penny mattered. This wasn't just frugality. This was an entire way of living for these brothers. And in 1976, the first store that would be branded as Aldi in the United States, it opened out in Iowa. No press release, no fanfare. But there was a problem. Americans didn't know what to make of it. They would go in, and being familiar with classical grocery stores, they expected somebody to give them free bags and bag their own stuff and let them use a shopping cart for free. And here was Aldi doing none of those things. To make it even worse, they didn't have any of the classic brands that people came to expect. Kraft mac and cheese and all that kind of stuff, you weren't going to necessarily find it in there. So people would walk in, get confused, and walk out. Here they were accustomed to shopping one way, and Aldi was asking them to change their entire worldview of what grocery shopping was about. And if you want to change the way people think about things, There's generally two ways to do it. One is pay for marketing. You go out and run advertisements and get them to think differently about the world. The other way is just be really, really patient. And that's what Aldi decided to do. And for the next 30 years, Aldi grew pretty slowly, one store at a time. Price was speaking to customers, and eventually it would take them time to move into a market. People would learn how it worked, and then once they saw how much money they could save, they kept going in. By 2008, Aldi had 1,000 stores. Remember, these are smaller footprints than, say, a Walmart or a big grocery store. They still move a lot of merchandise, but but they're nowhere near the same size. And while Walmart at the time had 4,000 stores, Aldi was basically just a rounding error in the world of grocery. But Aldi wasn't actually just being overly cautious. They're actually playing a very long game, and it was about to turn into an outcome that really nobody expected or saw coming. Your typical grocery store runs at, say, 2, 3, 4, maybe 5% profit margins. There's not a lot of room to compete on price. They're already dirt cheap. But where Aldi manages to compete is on being more efficient than all of them. Typical Kroger or Safeway or an H-E-B where I'm at might stock 30, 40, or 50,000 items. A Walmart would stock 120,000 items. Aldi would turn all of this on its head. In one of their stores you might see 1,200 or 1,400 items. And while you think this might be a weakness, it's actually a huge competitive advantage. Take ketchup for example. If you go into a typical grocery store there might be 40 different versions of it, low salt, all the organic, whatever. Aldi just says, no, would you like ketchup? We have one version of ketchup. Dad, I want to look at this. Tomato and basil, crushed tomato and fresh basil, whole tomato and basil, Italian tomato and basil, basil puree. Where have you been? Don't waste your life in the sauce aisle. Unlike other supermarkets, Aldi only stocks the best, so you save time and money. That's good different. And then analysts, when they've looked at this strategy, it allows Aldi to basically have enormous buying power, which means they can go to one supplier and say, we just want a lot of this one thing. And in practice, that means that their buying power enables them to have costs 15 to 20% lower than typical grocers. 90% of products inside of an Aldi are made for them specifically with their own private label brands, just like kind of Trader Joe's does. But this gives them enormous power to basically control the entire supply chain. You don't have Kraft or Procter Gamble or any of these other guys telling you what your products are going to look like and how they're going to be packaged. The secret is many of these products are made in the identical factories that your standard branded product is made in. Just the difference is Aldi gets to control it entirely. In economics and business, this is an idea called counter-positioning. Basically, the grocers have made themselves entirely about having tens of thousands of items, and they can't compete with Aldi because Aldi has basically said, "We're not going to have that many. We're going to position ourselves at the other end of the market and have just a few." And if Kroger or Walmart tried to copy Aldi and go take on their strategy, it would hurt them to do so. That's counter-positioning. This kind of theme goes throughout the rest of the store. They have very few people, if any, walking the aisles helping you out. You have to bag your own groceries. Heck, they don't even give you bags, and you got to pay a quarter to use a shopping cart. The quarter scheme that they have you do, a deposit to use a shopping cart, is actually a huge gamification of the whole thing. And it's actually really smart. It's a psychological trick that on the way out the door gives you a dopamine hit, feeling like you won the game and the system worked for you all by just playing around with a quarter. The stores are similarly smaller than a Walmart, 10 to 20% the size of one of these supercenters. And if you look at this, suddenly Aldi puts all these things together and they're 15 to 20% cheaper than a Walmart on similar items. Not because they're taking less margin. It's because they're that much more efficient. Similarly, Aldi has specifically said, "We are about a very specific type of customer." They're a person who cares first and foremost about the cheapest, lowest price on stuff. If you're somebody who wants a specialty thing or low-salt ketchup like we buy, uh, you're outta luck at Aldi. But for that niche who cares more about price than anything else, Aldi has created an amazing, basically unassailable moat around their business. So for decades after 2008 and into 2017, Aldi expanded slowly. And then in 2017, something radically changed with the business. The company announced they were investing $3.4 billion to go from 1,000 stores to 2,500 by 2022. Later on, seeing the early success of this initiative, they would up that amount to $5 billion. They were listening at the time to some of what customers were wanting, things like more refrigerated goods in the stores. More organic options and stuff like that. But at the same time, they'd figured out the model, and that was just pouring more fuel on the fire. This announcement sent shockwaves through the grocery industry. Folks like Kroger, Safeway, Albertsons, all those different brands, uh, started to panic about the types of competition they were going to see from Aldi in their markets. For decades, these grocery chains had competed by trying to be more of what they were, which was these big, complex giant shopping experiences, and they were trying to give people more reasons to come into the stores, adding Starbucks and sushi bars and brew pubs and all that kind of stuff. I don't know about you, I don't want to go buy a beer inside a grocery store. But look, with that overhead, when they tried to lower prices to compete with Aldi, that meant they started to bleed. And between 2018 and 2023, thousands of grocery stores, 2,200 in fact, would close in the United States. But during that period, Aldi would open 500 new ones. Turned out customers didn't want more experience. They just wanted to get in and out and get cheaper groceries. Attention, Aldi shoppers. These aren't just low prices. Who's saying that? It's a sale, sale, sale. There's no sale. What is this? It's the Aldi sale-a-thon. It's not a sale. Oh, it's not a sale? It's not a sale. Confetti. Good. It's not a sale. It's an Aldi thing. But it's interesting that This growth in 2017 was not sparked just by money, but by something else changing entirely in American society, which was for decades, if you went to Aldi, it was a, it was basically a social signal. You were telling people this is a place that you had to go shop to, not that you wanted to. And during the late 2018s, even as the economy was still good in a pre-COVID era, American attitudes towards how well we're doing economically started to change. Even as the statistics showed that Americans were getting wealthier than ever, that basically people started to more commonly talk about feeling like they were financially struggling. Much of that is because younger generations— millennials, even younger Gen Xs— feel like the game is rigged against them in many cases. Education is too expensive, houses are too expensive, and, uh, well, it's hard to argue with them. And while Whole Foods had been a signal that you were telling people that you cared about your health and you were willing to spend money on it, you were choosing Kroger because you wanted to create you know, custom environment for your family and you could afford to, Aldi was suddenly a place for people who felt like, well, times were tough. The first help for Aldi had been in 2008 when the Great Recession hit younger folks incredibly hard. Suddenly it was much more acceptable to be penny-pinching, and Aldi was perfect for that. Then as the 2010s happened, you started to see people sharing a lot more on social media, especially Instagram or TikTok. Here's what I found. Here's the deal I could get. Then as the pandemic came, suddenly inflation hit everybody incredibly hard. And the combination of the internet, this changing culture of how we think about frugality in the United States, and the tougher times for younger people meant that Aldi was perfectly positioned for a world that was going to make their kind of shopping much more acceptable socially. In other words, thrift was becoming a flex. That's how the young people talk. I don't know. It's what I read on the internet. Sorry about that. And the biggest chain to be scared by of this invasion of Aldi wasn't Amazon and other folks like that. It was actually Walmart. Remember, Walmart for decades had built its entire business on having the lowest prices for goods for Americans. And quietly into the 2000s, as Walmart had rolled out grocery stores, they had become the largest grocer in the United States by volume. And here was Aldi coming into their markets, selling groceries and like items for 15 to 20% cheaper. Fast forward into the pandemic in March 2020, the economy basically starts to shut down. Uh, we aren't going into offices. Stores are closing and all that kind of stuff as the pandemic sweeps across the United States. But suddenly Aldi's counter-positioning became a super weapon for the company. Remember, a typical Walmart might stock 150,000 items. Aldi only has 1,400. In a world where supply chains are falling apart during COVID well, that's a perfect place to be. So while Kroger couldn't get the 50 different types of ketchups it was stocking, Aldi was making sure they had the one that customers needed. And that proved to be a lifeline for many people. And as we've seen in other stories on this channel, when a disruption happens to cause customers to try somebody else, a lot of times those new customers for the new vendor, they just stay there. They don't switch back when things go back to normal. And that's exactly what started to happen for Aldi. And that stigma that had started to change back in 2008 where Aldi was for the broke people who couldn't afford something better, that broke entirely in the post-pandemic era. And in retrospect, the Aldi playbook is remarkable. They counterposition themselves to basically create a very dominant niche in the United States in grocery just by focusing entirely on a very narrow niche and doing that one thing incredibly well for those people, which is pricing stuff as cheaply as possible. Where business owners often get confused is thinking about their customer base as all the same, when in reality it tends to be built up of multiple different segments of people with different interests and different priorities. And here Aldi demonstrated that you can create an amazing business by picking a segment of that market and doing one thing incredibly well for them. And that one insight and practice of this ruthless efficiency has propelled Aldi to amazing heights, and something perhaps some of us can do as well. All right, that's it for this video about Aldi. If you enjoyed it— this is a success story— tell me in the comments below, because people don't click on success stories, unfortunately.