Right Business, Right Time: Struggling Economy Means Boom Times for Discount Grocer Aldi

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Christian Charisius / Reuters

The newest grocery store in Manhattan has less than half the selection of a typical supermarket, and features brands you’ve never heard of. And the grocery chain in question, Aldi, is enjoying a remarkable success streak, with new locations and rising profits both in the U.S. and around the globe.

Big city shoppers accustomed to big city prices have good reason to welcome Aldi. Upon the early October opening of a new Aldi location near a Target, Costco, and Marshall’s on 116th Street in Harlem, Retail Wire described the main attraction to today’s consumers:

Compared to the bodegas, and the Pathmark for that matter, Aldi offers highly competitive prices.

Owned by a German company—which also owns Trader Joe’s, by no small coincidence—Aldi is in the midst of quite a growth spurt. Locations are opening not just in major cities (the Manhattan location is its fifth in New York City, and another is planned for Brooklyn), but in places such as Woodbury, Minnesota, the Dallas-Ft. Worth area of Texas, western Massachusetts, and more. All told, the chain will open around 80 U.S. locations in 2012, after adding 75 in 2011, bringing its total up to around 1,200 stores in 32 states.

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Aldi’s strong growth isn’t limited to the U.S. either. The company plans on adding 40 new locations in the UK by the end of 2013, bringing its total there to over 500. The company is expanding in Ireland as well, where it expects to be running 99 stores by the end of the year. Sky News recently reported that year-over-year profits for the discount chain rose a staggering 200% in the UK.

What we have here is a remarkably profitable business, which apparently works well in suburbs, rural communities, big cities, and in the U.S. and Europe alike. How does Aldi do it?

Low prices. Aldi’s attraction starts with its prices, which are estimated to be 25% to 50% cheaper than comparable products at other supermarkets. The chain was voted as America’s favorite low-cost grocery store last year, a title it earned yet again in 2012.

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Less selection. Aldi keeps prices low in several ways: It stocks fewer items than the typical grocer chain (1,400 options, rather than tens of thousands at megastores); it operates smaller stores (1,700 square feet); and it focuses almost exclusively on its own generic private label brands. More than 90% of the items on Aldi shelves feature labels you won’t find in any other store. Such generic foods can have lower price points and still be remarkably profitable for supermarkets because the store isn’t paying a premium to a major manufacturer for a well-known brand. “That’s something that is really giving us the ability to keep the prices as low as we do,” said Aldi division vice president Matt Lilla at a ribbon-cutting ceremony in Minnesota.

The customer is on board. To the uninitiated, many policies at Aldi locations seem odd, perhaps even stingy. A quarter is needed as a deposit in order to get a shopping cart. Shopping bags aren’t provided, at least not for free. Credit cards aren’t accepted as payment, and coupon usage is almost nonexistent since the manufacturer brands featured in coupons are almost never sold at Aldi. These policies may seem offputting—and surely, they do turn some consumers off—but given Aldi’s success, customers are largely embracing the chain’s occasionally annoying operations, because the tradeoff in savings is worth it.

No need to buy in bulk. Warehouse clubs such as Costco have been favored by value-seeking shoppers for many of the same reasons that consumers are drawn to Aldi, including low prices and merchandise that can’t be found elsewhere. But because Costco, Sam’s Club, and others boast low unit prices by selling in bulk, customers often wind up buying far more than they need. Members of these clubs are well aware that it’s nearly impossible to leave the store with a bill less than $100. At Aldi, however, everything is sold in normal-size portions, so there’s no need to buy four bottles of ketchup when you only want one. It’s about as rare for an Aldi shopper to spend more than $100 than it is for a warehouse club shopper to spend under $100.

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Clean, organized stores. The idea of a discount grocery store may call to mind dim lighting, clogged store aisles, dented canned goods, confusing, haphazard signage, and foods that are near or beyond their expiration dates. Instead, what shoppers find at Aldi are large, brightly lit aisles, clearly marked prices, and plenty of fresh foods. The atmosphere doesn’t seem discount or second rate, and that makes the low prices seem like even better bargains.

The global economy. Throughout the Great Recession era, consumers have demonstrated a willingness, or rather need, to trade down and spend less money. Hence the strong rise of dollar stores and thrift shops, and trends such as bicycles outselling cars in Europe. Given tough times, consumers are finding it easier to swallow food brands they may not be familiar with at Aldi, as well as minor annoyances like needing a quarter to get a shopping cart.

Brad Tuttle is a reporter at TIME. Find him on Twitter at @bradrtuttle. You can also continue the discussion on TIME’s Facebook page and on Twitter at @TIME.