Aldi is pushing to become the third-largest grocery retailer in the U.S., but instead of e-commerce, its path to scale is hinged on an aggressive private-label strategy and physical store expansion.

Despite a limited e-commerce presence (it’s currently limited to an Instacart delivery partnership), Aldi’s approach to building out its owned brands gives the grocer a chance of gaining ground among a younger, middle-income target audience. It’s a shift in strategy for the German-based retailer, which has traditionally focused on the budget-conscious consumer market. And although Aldi currently operates in two-thirds of the country, it’s aiming to go coast to coast as part of an effort to expand its store count to 2,500 by 2022, putting it just behind Walmart and Kroger.

“They’re moving more into upper-middle-class areas of the country with higher wages and demographics — it used to be they would put up a store in average and mid- to lower-income areas,” said Phil Lempert, grocery analyst and founder of SupermarketGuru.com.

To achieve this, Aldi is making major investments in its 1,600 stores $5 billion to remodel and expand its store count. Today, Aldi has stores in 35 states, according to the company. Aldi is moving upmarket with its private-label offerings, including a greater selection of organic meat products; expanded produce selection, including organic products; and growth in vegan and vegetarian categories. It has also rolled out a private-label wine line, along with more gluten-free and prepared meal options.

“Ten years ago, they only had one kind of olive oil, and now they have four,” said Lempert. “They have one that comes from a very specific part of Sicily, the crème de la crème of olive oils — so if I love a product from Aldi; I can’t get it anywhere else, and you’re locking in your customer.”

Private-label strategies help retailers grow a loyal following, keep customers in the retailer’s ecosystem and protect margin, a strategy that’s working well for Amazon, Walmart and Target, which are increasingly focusing on their owned brands as differentiators. Going private label also appeals to customers who want sustainable, quality products but are also price conscious, typical of millennial and Generation Z demographics, Lempert said. 

Moreover, perceptions around private-label grocery brands are changing.

“People used to think of private label in a certain type of way — an in-store cheap alternative, but that’s not the case anymore; we see millennials at a higher clip willing to experiment with private label on par with big-name multinational brands,” said Evan Mack, research specialist at Gartner L2.

Cara Brosius, grocery analyst at The Fredonia Group, said Aldi is increasingly catering to niche diets in an effort to appeal to higher-income, younger customers. Among the company’s premium private-label food brands, Aldi’s offerings include Earth Grown (vegetarian and vegan); Never Any! (meat free from antibiotics, hormones and preservatives) and SimplyNature (organic and non-GMO).

In expanding its store footprint and increasing private-label options, Aldi still isn’t exactly taking on Amazon. A recent report suggests that at $13.5 billion in revenue in 2017, Aldi captured just 2 percent of the U.S. grocery market — well behind Kroger, which made $97 billion in 2017. Aldi’s vulnerabilities, according to Mack, include a store layout that emphasizes utility over experience, and its scant attention to e-commerce and delivery. Aldi’s e-commerce footprint is restricted to a delivery partnership it launched with Instacart in September 2018.

The company’s e-commerce delivery moves, said Lempert, are more based on the fear of missing out rather than a coordinated approach to take on those channels. Regardless, the chain’s premium but affordable private-label offerings, combined with a smaller-format store than most big-box chains (averaging 22,000 square feet, in comparison to 179,000 square feet for an average Walmart Supercenter) could help it win, he said.

“They’re careful in curating things — if you look at their wine selection, it’s inexpensive but gets high scores, and besides private label, they’re increasing their produce selection,” he said. “[And] having a smaller store does well for them because the average person spends 22 minutes shopping.”

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