Grocery Update #45: The Age Of ALDI.

Also: FTC Vs. Pepsico. And Tom Philpott Vs. Biden & MAHA.

Discontents: 1. The Age Of ALDI. 2. FTC Vs. Pepsico. 3. Tom Philpott Vs. Biden & MAHA. 4. Philly Whole Foods Votes To Unionize. 5. Tunes.

1. The Age Of ALDI.

Nothing can stop ALDI, the German discounter taking over much of the U.S. grocery marketplace. And no wonder. Just look around. The U.S. economy is now bracing for the next four years of Trumpflation-addled restructuring and Argentinian-style economic shock therapy, as America’s Cheeto-hued 47th president threatens tariffs to major trading partners, rounds up and deports undocumented workers, cuts healthcare spending and childhood cancer research and dismantles the public agencies that are barely keeping up with the spread of zoonotic diseases driving up egg and milk prices. But there goes Aldi, just chugging along, picking up momentum as household economic indicators tank.

It has been barely four years since most major food companies started leveraging Covid-19 supply chain snafus to increase prices above the rate of their own cost inflation, many of them scoring record profits and shareholder dividends, with non-financial sector profit margins hitting record highs. The pandemic was great for Wall Street, not so much for Main Street. Grocery prices are now up on average over 30% since 2019, with many highly consolidated categories such as beef, frozen potatoes, soft drinks and pet food up even 50-60%. Meanwhile, unit volumes have flatlined, with many food industry titans such as Kellogg’s, Cargill and Pepsico closing facilities, or growing through acquisitions, such as Mars swallowing Kellanova, Pepsico devouring Siete Foods, and Flowers Foods snacking on Simple Mills. Flatlined volumes also mean people are buying less food.

Pandemic era-benefits ended nearly three years ago, and despite gross domestic product and national economic growth going gangbusters, on a household level the all-American trends of food insecurity, homelessness, child poverty, bankruptcies, credit card debt and deaths from noncommunicable diseases have been on the steep upswing. Are we great again yet? Even middle class families are heading to food banks more often. All the while, Aldi, the German discounter, is just crushing all that comes before it, opening stores in upscale suburbs, college towns, gentrifying urban neighborhoods as well as working class strip malls. It is the age of Aldi.

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Aldi already has over 2400 stores in the U.S. and is planning to open up over 800 more through 2028, as well as absorbing over 400 Winn Dixies across the Southeast. Aldi is in the top ten grocers by sales volume in the U.S., with over $30 billion in sales and higher market share than Whole Foods Market, Sprouts or Aldi’s sister company Trader Joe’s. Globally, Aldi has nearly 13,000 stores and $121 billion in sales.

Aldi started in Germany in 1946. It’s low prices and reduced assortment were born of the scars of Nazi Germany’s defeat, the postwar economic devastation, societal and household austerity birthed of their broken ideology and society. Frugality in this context was supreme. The Albrecht brothers, like many young Germans, were conscripted during World War Two into the German Wehrmacht. They were eventually wounded and captured by Allied forces, and after returning home to Essen, they took over their mother’s grocery store. The German food system had been decimated and food was scarce. The ex-Nazi war veterans needed a plan to survive. They decided to sell whatever was available, only non-perishables, at the lowest prices and would quickly discontinue anything that didn’t sell. Their frugal, austere, low price, low inventory, low shrink and low labor business model enabled them to quickly expand and open more stores in Essen. Aldi was thus born, their success growing in parallel to Germany’s miraculous post-Marshall Plan economic recovery and burgeoning postwar social democracy.

By 1961, Aldi had over 300 stores, but family businesses can be complicated. The brothers had some strategic differences and split the company in two, Aldi Sud and Aldi Nord. Aldi Sud went overseas to the U.K., Australia and the U.S. Aldi Nord stayed local in Germany and eventually acquired Trader Joe’s from founder Joe Coulombe… but that is another story. Aldi Sud, in the meantime, applied and supercharged its learnings from post-war Germany to ably navigate the volatile post-Great Recession, post-pandemic U.S. economy and become the fastest growing grocery chain in the states.

Aldi’s low prices are the result of intensive operational and supply chain planning.

There is no free market magic involved here. No secret Milton Friedman whisperers, no Chicago School theorists. Just stereotypical German efficiency and corporate centralization that would make Old Sam Walton blush with envy. Every penny is accounted for, resulting in prices that tend to be 25-30% lower than Walmart or Kroger and typically on par with Costco, who uses a wholesale business model and maximum markup of 14%. Yet Aldi has a relatively small format store model, sells retail, not wholesale, with modest store sales volumes and sales per square foot. The stores don’t usually seem to be going gangbusters. The product assortment is not very exciting, an extremely basic mix with around 1600 sku’s per store, mostly store brands, less than 1/20^th of what most full service supermarkets sell, with just a couple product options in each category, while most supermarkets have dozens. Austere, frugal.

No full service meat or deli counters, a handful of cash registers and some automated self-checkouts, plus a handful of employees manning the store at all shifts, rotating between departments as management dictates. No sales, no coupons, just everyday low prices. Grocery retail, stripped to the bone. Aldi has saved Americans over $8 billion in grocery spend over the last year. The Germans lost the war but are winning grocery. Austere, frugal, post-war trauma monetized into America’s fastest growing grocery format.

A quick scan of the store gives you a sense of the strategy. All over, product is stacked loosely on shelves in big cardboard display cases, made for retail efficiency and easy packout. Kind of shabby, but simple and easy to shop.

There is a cooler when you walk in. Big takeout pizzas, over 16 inches and 40 oz. of food, just $6.09, only fifteen cents an ounce. You can feed a couple of your high school aged kids dinner for $3.00 each. Granola bars, snack bars, breakfast bars, the colors and fonts blatantly ripping off the stylistic elements of national brand equivalents like Nature Valley or Nutri-grain, but just $1.69 or $1.75 for a box of six. That is thirty cents each. Literally 1947 Germany prices. Store brand ketchups for $1.95, Burman’s for 20 oz. or organic varieties called Simply Nature. Peanut butter, $1.79 for 16 oz. Millville Cereals, cartoon mascots bright, cherubic and coked up on enough corn syrup and cane sugar to stay hyperactive for days, selling 17 oz. of chocolate puffs, marshmallow stars, berry crunch or just plain “Kookies”, the canine mascot’s pupil’s dilated like a meth’d-up insomniac biker furry, all for just $1.95. Your favorite ultra processed foods, noncommunicable diseases in a box, for cheap, minus the externalized health care costs. Breakfast, served.

Some produce. Nothing exciting, but the basics. Lettuce, apples, spinach, grapes, maybe seasonal peaches, all wrapped or bagged in enough plastic to start another Pacific garbage gyre. But cheap and cheerful. Easy to stock and rotate. Canned peas and beans, .64 for a standard 15-16 oz. can. Milk, $2.49 a gallon, like it was still 1999 and you were googling on Netscape and not Google. Organic extra virgin olive oil, 16.9 oz, $6.19. Organic mac and cheese, $1.59 a box. Shredded cheese, 17 oz. for $2.89, slices for $1.65. Grass fed ground beef, $3.99/lb. Organic chicken breasts, $4.99/lb. Organic frozen peas or corn, $1.19 for 10 oz. German pickles, $2.99. Organic marinara sauce, 24 oz. for $1.95. Organic baby food squeezy packs, .89 each. Two liters of the obviously red labeled knock off soda called Summit Cola, .99. Because Coca-Cola used to have a secret narcotic ingredient and the Germans are mocking you for craving it while underselling Big Soda by 50% or more. Even cheaper German pickles for $1.45. You can never have enough German gherkins. Keto protein bars, a six pack for $5.09. Chocolate bars, $1.59. Asian trail mix, with rice crackers and “Japanese style peanuts”, that I was so stunned by the creative flavor profiles sanctimoniously colonizing a fellow former-Axis power that I didn’t get a price tag shot. But you get the idea. Killer prices, all day at Aldi. Shit, I hope they don’t steal that tagline.

So what is the secret formula to Aldi’s low prices? Once again, it is not magic. Just some retail math. And it requires all of the following to work. Don’t try this at home kids. Don’t try to out-Aldi Aldi.

First, the limited assortment. By selling just a few items in each category at high volumes, Aldi massively drives down production, logistics and inventory costs. Let’s say a regular supermarket focused on meeting a range of customer choices sells 20 varieties of chips from a dozen different vendors with their own supply chains. But Aldi, in the name of German efficiency and postwar austerity, they sell just two, both of which are their own brand labels. They have made the decision for you, it is ok, they know what you want. So let’s say both stores sell 100 bags of chip a week. On average for the supermarket, that is five units per sku, less than a case per week (most cases are 12 packs) from all those different vendors via their wholesaler, who has to order and hold small deliveries awaiting reorders from the retailers. For Aldi, that means 50 units, over 4 cases per sku, much easier and cheaper to stock and distribute from wholesale. Multiply that across the store and then across hundreds of stores and that means that the production costs for making and distributing large quantities of Aldi’s store branded products in each category are much lower, and then the shipping costs are radically lower, and then the associated labor costs of stocking out just a couple items, also much lower. This probably accounts for easily 10% in overall cost savings across the store, relative to competitors.

Next, Aldi is a an everyday low cost retailer. Like Walmart and Trader Joe’s, as well as Aldi clone, Lidl, Aldi does not do sale prices. Nope, no markdowns. They mostly sell their own brands of private label so they can contract for annual costs and control supply chains, logistics, quality and manufacturing, and occasionally stock some national brands on a rotating basis. Most brands reserve 20-30% of their gross margins to promote, market and discount their products to retailers and wholesalers. This is called their trade spend, and they accrue it annually to pay for the sales, flyers, coupons, BOGOs, online deals, slotting fees, ad fees, marketing and advertisement buys that keep their products in your eyes, your ears, your frontal cortex, on endcaps, on subway cars, on your Instagram, humming their theme songs while you shit, shower and shave (not necessarily in that order). Trade spend is a huge industry, possibly up to $200 billion a year, and is responsible for much of the growth of new product trends as well as maintaining the dominance of incumbent products, you know who they are. Aldi says yeah, forget all that, just put it into cost of goods and we will simplify this by just selling a few top sellers at the lowest prices every freakin’ day. This amortizes to easily 15-20% lower costs across most packaged and processed food categories, or about 75% of what Aldi sells. So, at least another 10% or so savings relative to competitors.

And the third leg of their formula is store labor. They do not have full service deli, meat or seafood counters. All of their produce is bagged and does not need to be misted, gently handled, layed out and rotated. All of their products are made off site and shipped in. Their staff rotates between departments based on the needs of the business throughout the day. They are stocking at all hours, then they are helming a cash register, then back to packing out cans, bags, boxes, trays. And there are only a few staff in the store at any time. Non-union. Profits still being hoovered up by the Albrecht family trust fund, multi-generational wealth. No pensions or employee ownership, wages at pace with other mass merchants and grocers, not living wages by any stretch, but not at dollar store desperation. This model drastically reduces labor expenses. While most supermarkets have 15 cents in labor expenses for every dollar of product sold (or 15% labor budget) mass merchants like Walmart are under 10 cents (or 10%), Aldi is likely in the 5-6% range across the store, meaning this is another 5-10% in savings relative to competitors’ labor models.

And finally, Aldi is a highly centralized operation. They have one purchasing and executive office, making decisions on products and marketing and strategy. They have an extremely centralized supply chain, including product procurement, wholesale, and logistics. Centralization is not sexy for the free market crowd, especially the academic justifiers, the think tanks, the corporate media talking heads who have never cut a purchase order or pressed “send” on a pricing file going out to retail. Centralization means lots of financial planning, like demand planning, inventory planning, growth and store development planning, trend watching, sourcing and implementation in category management, highly algorithmic pricing strategy and making sure that all supplier cost negotiations are dialed in to the fraction of a penny, dead net or your dead. The Soviets would be jealous of all this centralization, with their Gosplans, their five year plans, their command economies, with this German, industrial, first world, global north, highly developed capitalism that does not fit the Friedman/Hayek/Mises model of free marketeering in any way, shape or form. Unrecognizable to Ayn Rand. No, this Aldi shit is highly planned, privately owned, top down, one and done. Such strategic centralization also easily shaves another 5% off pricing from general and administrative expenses.

All of these pieces add up to some of the steepest cost savings in grocery retail.

Prices that beat Walmart, Kroger, Albertsons. A product assortment that is adequate, basic, just enough to do a complete shop on a budget. Quality that you won’t write home about but not bad enough to really complain much, given the prices. Small stores, in and out in a few minutes. Well-lit, clean, safe, well-stocked and mostly friendly. Efficient, austere, frugal. Ambitious, expansionist, future-proof.

This is how these Germans are winning American capitalism, in the age of post-Biden, incipient Trump volatility. This is how the Germans are winning grocery. Nothing can stop Aldi, right?

2. Lina’s Last Stand: FTC Vs. Pepsico

In what will be Lina Khan’s last action as Chair, the Federal Trade Commission has sued PepsiCo, Inc. (Pepsi) alleging that the second-largest food company in the world has engaged in illegal price discrimination by providing one customer—a large, big box retailer—with unfair pricing advantages, while raising prices for competing retailers and customers.

For years, Pepsi has disadvantaged retailers—ranging from large grocery chains to independent, local convenience stores—who compete with one of its largest big box customers by consistently giving that favored large, big box retailer customer key benefits and advantages, such as promotional payments, while denying those same benefits to its competitors, the FTC’s complaint alleges.

Pepsi’s unfair practices have led to inflated prices for American families, while denying competing retailers the ability to fairly compete. Pepsi’s illegal conduct violates the Robinson-Patman Act (RPA), the FTC’s complaint alleges.

“When firms like Pepsi give massive retailers a leg up, it tilts the playing field against small firms and ultimately inflates prices for American consumers,” said FTC Chair Lina M. Khan. “The FTC’s action will help ensure all grocers and other businesses—no matter the size—can get a fair shake and compete on the merits of their skill, efficiency, and talent.”

Under the RPA, specifically sections 2(d) and 2(e), sellers are prohibited from engaging in price discrimination by using advertising and promotional allowances—which are financial incentives given to retailers by manufacturers to promote a product or brand—to favor large customers over small businesses. The FTC’s lawsuit alleges Pepsi violated the RPA by engaging in price discrimination using advertising and promotional allowances, as well as other tactics, to favor one large, big box retailer customer over other businesses. This case marks the FTC’s latest RPA enforcement action since the Commission sued the largest U.S. distributor of wine and spirits—Southern Glazer’s—in December 2024.

A substantial portion of the law violations alleged by the FTC are redacted in the complaint due to the legal protections afforded to both Pepsi and their preferred customer—the large, big box retailer. The FTC staff will swiftly seek to lift the redactions in order to show the ways in which Pepsi violated the RPA on behalf their preferred customer and how those violations raised prices for Pepsi products for competing retailers.

Pepsi’s Practices

Pepsi provides its favored large, big box retailer customer with promotional payments and allowances without making these equally available to that customer’s competitors. Pepsi also provides this favored retailer with various advertising and promotional tools, known as services and facilities, without making those benefits available to its competitors on a similar basis.

Until Pepsi’s conduct is remedied, Pepsi’s anticompetitive actions will continue to create an uneven playing field by denying competing retailers, which include family-owned neighborhood grocery stores, the chance to fairly compete against Pepsi’s favored large, big box retailer customer.

3. Tom Philpott Vs. Biden & MAHA.

Tom Philpott, the longtime Mother Jones journalist has written a scathing takedown of the Make America Healthy Again movement and the Biden-Harris food policy paradigm. Readers of this newsletter will be familiar with our critiques of RFK and his coterie of wellness influencers, billionaires, entrepreneurs and media personalities, but should also be tuned into our long criticism of the Biden and Harris food policy and economic legacy. But Tom is a master of the craft, our hero. An excerpt:

Now that Trump has tapped him to lead the Department of Health and Human Services, my fear is that Kennedy’s reckless anti-vaccine stances, conspiracy theorizing, and love of some of the internet’s most unhinged “wellness” bunkum will make legitimate critiques of the ways we grow and process food appear equally crackpot—affirming a narrative that Big Ag and Big Food have promoted for decades. In this way, rather than pushing food production in a healthier direction, Kennedy’s ascent could bolster the status quo.

Vilsack, while careful to pay lip service to the virtues of healthy eating and environmentally conscious farming, supported an entrenched system wherein the federal government pumps billions of dollars in subsidies to ever-larger farms that produce titanic amounts of pesticide-goosed corn and soybeans. He said little about the resulting erosion and water pollution in the Midwest, and even less about the poor quality of the foods engendered by overproduction of these crops. More than half of the calories we consume come from these foods, which have been linked with diabetes and high blood pressure—conditions that affect nearly half of American adults.

Booker spent much of the Biden years pushing against these trends, but, in a shift few saw coming, his Kale Caucus was utterly drowned out by Kennedy’s MAHA movement. During Kennedy’s brief presidential bid and subsequent alliance with Trump, he joined forces with fringe alternative medicine enthusiasts and wellness influencers to deliver fair critiques of the food system amid lots of conspiratorial nonsense about vaccines, infectious diseases, and fluoride. Joe Biden and Kamala Harris, meanwhile, largely ignored food-system issues…

4. Philly Whole Foods Votes To Unionize.

Workers at the Amazon-owned Whole Foods flagship store in Center City Philadelphia have voted to unionize with UFCW Local 1776, marking a significant victory in their fight for fair wages, improved benefits, and a safer, more supportive workplace.

Since filing for union representation with the National Labor Relations Board (NLRB) in November, these courageous workers have faced an aggressive anti-union campaign by Amazon management, which has sought to keep employees from exercising their rights to representation.

“We are incredibly proud of the Whole Foods workers who have stood up to Amazon’s union-busting tactics and demonstrated the strength of solidarity,” said UFCW Local 1776 President Wendell Young IV. “This fight is far from over, but today’s victory is an important step forward. We are ready to bring Whole Foods to the bargaining table to negotiate a fair first contract that reflects the workers’ needs and priorities.”

UFCW Local 1776 stated they are committed to supporting these workers as they move forward in their efforts to secure better wages, benefits, and working conditions. This landmark union victory sends a clear message: workers everywhere deserve respect, dignity, and a voice in their workplace.

5. Tunes.

This week’s Tune is selected by Sage Epstein and is timely, considering the new administration and the history they invoke to justify their plans. It’s going to be a long few years. Hang in there, folks.

peace.

(Perspectives are 100% our own and do not reflect those of our sponsors).