The ‘Aldi Effect’ On Supermarket Delis

For decades the growth of the service deli has served as a signpost marking the growth of a sophisticated food retailing sector. Supermarkets saw the move to service departments as both a move into a higher margin enterprise and as a differentiating factor from the growing warehouse club and supercenter sector. Firms, such as Wegmans, were on the cutting edge of retailing and were the type of company every foreign retailer wanted to see when they visited America, precisely because they had made a large and varied service deli the centerpiece of their offer to consumers.

Indeed back in 1996 Deli Business magazine itself was established partially because service delis had spread across America, and what was once a coastal institution had gone decidedly mainstream. In fact, a service deli was so associated with a proper supermarket that some retailers may have made incorrect decisions in choosing to include service delis. Wal-Mart, for example, after a great internal debate, decided to implement and maintain service delis with the thought that this was one of the few points of human interactions between customers and Wal-Mart staff. Still, this leaves open the question of whether investing in service wasn’t a distraction from Wal-Mart’s key task of offering low prices.

This epoch went beyond deli. It also included incredible scratch bakeries, a cornucopia of specialty produce items, fresh meat and seafood and, of course, the big move beyond slicing meats and cheese into a variety of foodservice options, such as sushi, wing bars, pasta stations, wok stations, taco bars, pizza programs, rotisserie chicken and more.

Yet now the industry is on the verge of changing, and this service culture may yet be transformed. If you look at the United Kingdom, you see a market where deep discount concepts – notably Aldi and Lidl – have exceeded 10 percent of market share. Perhaps more important is that the rapid growth of these concepts has led the conventional chains to place a new priority on being price-competitive.

In the U.S., the fastest growing supermarket chain is Aldi. Lidl is about to enter the market, and Supervalu has announced its interest in spinning off its deep discount Save-A-Lot concept so it can compete more effectively. This all suggests the rapid growth among the deep discounters will lead conventional chains in America to become deeply concerned about being price-competitive to avoid marketshare loss to the discounters.

In the UK, the mainstream retailers have not found a very effective way to compete with the discounters. As the discounters’ market share rose and as the discounters adjusted their product lines and shop presentation, a sort of psychological tipping point was reached where it suddenly became acceptable for consumers of all income classifications to shop at Aldi.

The mainstream retailers have tried to compete with the discounters by offering bottom ranges in their private label lines. The problem is that they offer these ranges in a way that makes clear there are better product choices available and, in fact, they work hard to not allow the packaging to be attractive because they don’t want consumers to trade down from higher margin lines.

The shopping experience is very different at an Aldi. Most items are private-labeled specifically for Aldi and are branded as if they were produced by a distinctive, upscale manufacturer. There is no social stigma of a cart filled with Aldi’s generic products, as everyone in the store buys the same product.

But the “secret sauce” of offering quality products at low prices in acceptable surroundings is difficult to decipher. That is why in the UK Tesco and Sainsbury’s have not created chains of Aldi killers. The secret sauce involves flexible procurement – if the apple harvest is running toward larger apples, Aldi can flex toward selling that size when most retailers won’t. The secret sauce also involves supply chain discipline and, among many other things, avoiding the expense of service in the stores.

One can imagine a bifurcation in the market. Those retailers intent on competing on price – including Wal-Mart – can decide to eliminate service delis to cut out whatever expenses they can, while other retailers can decide to no longer compete on price but, instead, to hitch their wagons to service and forget about competing on price.

Yet this seems an increasingly untenable position. Much as Costco has become the largest retailer of many specialty cheeses, and Whole Foods has been scrambling to deal with the appearance of organic goods in mainstream and discount retailers, it seems unlikely that service alone will be enough to protect a large mainstream business, especially in an age when manufacturing techniques provide many high-quality offerings in packaged foods.

This columnist was brought up going to the deli counter with his parents and directing the thickness of the slice and sampling each item, asking if they had any lox wings — fleagles we called them — and watching as they scooped salads into containers before our eyes. The deli man — back then it was always a man — cut the nova nice and thin and told us what was good and what was not and how the lady down the street was doing.

The deep discounter influence may nudge the industry toward cheaper options. That is a gain for the consumer, but a loss as well.