Over the past two weeks, there has been a lot of discussion about Aldi and its expansion plans, including reports that Aldi intends to open 100 new locations this year (which is in addition to the 400 Winn-Dixie and Harveys locations that it acquired, which we wrote about here), compared to the 109 locations that were added in 2023. By the end of 2028, Aldi plans to invest $9B to open another 400 new locations, bringing its store count to 3,200 locations (on top of the 2,400 it currently operates and the 400 Winn-Dixie/Harveys locations acquired). According to the company, the new stores will expand its presence in the Northeast and Midwest, adding nearly 330 stores across both regions by the end of 2028. (At nearly 900 locations today, the Midwest is already a large region for Aldi). The grocer will also grow its presence in the West by adding more stores in Southern California and Phoenix and by entering new cities such as Las Vegas.
What is emboldening Aldi to undertake such a large expansion in a highly competitive market with low margins? Two things: (1) strong success and (2) growing opportunity. How does Placer measure “strong success”? In addition to the ability to fund substantial expansion that we’ve highlighted over the past several years, we measure success by the strong traffic gains that the retailer has produced. As shown below in the table, Aldi's visit share (as we are defining the grocery category) for 2023 is up 30 basis points compared to 2019 and represents 58% of the visits that the Kroger banner sees (by sales volume, Kroger is the largest grocer banner in the U.S.)
Looking at one of Aldi’s larger markets–Florida, where it currently has 216 locations--the table below shows that Aldi has been able to hold onto its visits per venue productivity, despite adding 50% more locations. By contrast, Sprouts Farmers Market visit per venue productivity meaningfully declined when it tripled its units. (Also impacting Sprouts was the marketing/merchandising decision to discontinue hot promotions, a decision that also affected Sprouts nationwide visits per venue, which declined -31% over the corresponding time periods.)
Finally, the chart below shows the newer store location cohorts in Florida versus the chainwide average. Chainwide visits per location improved by +9% during 2023, reflecting market share capture as households shifted into the brand seeking out its lower prices and value. During the year, the Aldi 2021 Florida cohort improved from 91% of that average to 98%, with visits per venue up +18%, or two times the nationwide average. The 2022 cohort improved from 84% to 89%, or nearly the starting point of the 2021 cohort when it entered Year 2. To conclude, Aldi has had strong success with its new store program in Florida, which for context is a highly competitive market with many large and strong grocer brands. Said differently, Aldi is outperforming on an incredibly difficult and competitive playing field.
Why does Aldi see “growing opportunity"? The biggest driver is the high level of food inflation both in the food-at-home (grocery) and the food-away-from-home (restaurant) channels that has driven consumers into the value grocery channel. We show what that inflation looks like in the table below. While real spending (calories and mix) are up about 10% from 2019, prices are up nearly 30%. Moreover, the higher rate of prices for going out to eat is now pushing more consumption to at-home, a dynamic that we expect to worsen in 2024 given the step up in wages for restaurant workers in California and elsewhere. As such, this has been a very good period of time to be a value grocer brand with a disruptive merchandise and price strategy.
On a related note, we’ve seen minimal evidence that traditional grocers are holding the line on manufacturers pushing through higher prices. For example, the Producer Price Index (PPI) to grocers continues to climb despite manufacturers seeing a flattening in their input costs since early 2022. We also see evidence of this in the manufacturers’ financial results. As we’ve previously discussed, most of the inflation is in center-store categories like cereals, snacks, chips, etc. Produce has been flat to down over the past two years, having peaked in spring of 2022, which is visible in the chart below.
The increases for the manufacturers peaked in the summer of 2022, as shown below.
Aldi carries produce and its own center-store brands; as such, it’s exposed to commodity prices but not branded manufacturer price increases. This allows Aldi to really amplify its savings messaging to consumers as it offers disruptive price points on cereals, snacks, etc. For example, a can of Pringles is $3.20 on Instacart whereas the Aldi’s brand Clancy’s is $2.00. Being able to offer disruptive pricing is akin to “growing opportunity".
For a grocery to successfully serve a market, it needs a robust supply chain to demonstrate quality, highly fresh, produce. And so, a larger number of locations in a market makes providing high-quality produce less costly (including supplying, refrigeration, shrinkage, etc. and turns is proportional to freshness). Returning to the Florida market, Aldi has 107K residents per location (using 2023 Census estimate) and these locations are doing well as we demonstrated above. Illinois is a more established market for Aldi with 207 locations, a number that has been relatively stable since 2019. Aldi has a similar number of locations in Florida and Illinois, but Florida has nearly twice the population. Despite a much higher penetration rate in Illinois and a different demographic/psychographic customer mix, Illinois performs at a similar level to Florida (i.e., there has yet to be any evidence of saturation).
In the table below, we show Experian Mosaic indexed at the state level and highlight some of the more striking differences. What this analysis demonstrates to us is that the Aldi offering resonates well with different customer segments. As such, with high quality fresh and disruptive value, it should do well in its expansion markets and the rising awareness of those attributes creates expanding opportunities for Aldi.
Who are these households that Aldi is luring and capturing? Looking at Illinois, where the number of locations has been relatively fixed, we see that the captured market (100%) median household income decreased from $64.7K in 2019 (using Census 2019) to $63.0K in 2023. This makes intuitive sense as less affluent households are more pressured by inflation, but more affluent households have also traded into Aldi. Visitors with income over $100K are up 15% to 2019 and they now represent just shy of 30% of Aldi’s Illinois visitors. If we assume that these visitors spend 65% more than the remaining 70% (as the BLS Consumer Expenditure Survey shows overall spending on food-at-home), these visitors would be nearly 50% of Aldi Illinois’ sales. When we contrast the two period with Experian Mosaic, we see large increases with Singles & Starters, Cultural Connections, and Power Elite. That’s an eclectic mix and it points to the broad appeal of Aldi’s offering.
What’s provocative is that Aldi has the potential to reach a comparable level of penetration in Florida as Illinois. As a grocery market, Florida is twice the size of Illinois. If we were to apply the population per store figure of 60K in Illinois to other large U.S. markets, there could be over 1,350 new locations in the five largest potential markets available, as shown in the table below. Many of which line up with the states mentioned in Aldi's recent press releases. Excluding Illinois, there are also 44 potential expansion markets beyond those 1,350 stores. To conclude, Aldi is seeing “growing opportunity.”
