Southern California’s grocery battle heats up with the spread of discounter Aldi

Ralphs was the supermarket of choice for Inglewood hairdresser Elise Santos — until grocery chain Aldi arrived in Southern California last year.

Aldi, a German-based discount grocer, opened its first U.S. store in 1976 but reached California only last year. It’s now rapidly expanding and quickly has become Santos’ go-to market.

“I prefer Aldi because it is smaller than grocery stores like Ralphs,” she said, and “the employees are friendlier and more helpful.”

With 38 stores in Southern California, Aldi is just getting a toehold in the local grocery industry. But with the region already one of the most competitive in the nation, Aldi is adding to the pressure on Ralphs, Albertsons, Wal-Mart and other big chains — as well as smaller grocers such as Sprouts — to keep loyal shoppers and avoid losing market share.

“The market is intense already, and when you put another horse in the race the field gets very crowded,” said Ron Johnston, who publishes the industry-tracking Shelby Report.

It’s about to get even more intense now that Amazon.com has agreed to buy Whole Foods Market Inc. for $13.7 billion. Whole Foods, the leader in the natural and organic food sector, has 465 stores including 85 in California. Whole Foods is widely expected to get more affordable under Amazon, which has transformed other retail segments such as books and electronics in part by driving prices much lower.

A few would-be rivals have already flamed out in the cutthroat Southland market. Fresh & Easy and Haggen Inc. both closed their stores in the region after failing to gain a steady following, due in part to operational and pricing missteps.

Undeterred, Aldi – which mostly sells its private-label groceries at low prices – plans to open at least 20 additional stores in Southern California in the next 12 months, said Liz Ruggles, Aldi’s marketing director.

It’s part of the company’s plan to spend $3.4 billion for an additional 900 stores nationwide by the end of 2022 on top of the 1,600 it already operates in the United States. The chain also plans to spend another $1.6 billion to remodel 1,300 of its existing U.S. stores by 2020.

That will further raise the stakes for competitors in Southern California, whose $45 billion in annual grocery sales makes it the largest U.S. grocery market, according to Johnston.

Besides Ralphs, the other players include Albertsons, which also owns Vons and Pavilions; Stater Bros.; Trader Joe’s; and big-box retailers such as Wal-Mart Stores Inc., Costco Wholesale Corp. and Target Corp. that have aggressively expanded their grocery aisles in recent years.

Although Aldi is a newcomer to the area, the family behind the chain already has grocery ties to Southern California: Aldi is controlled by the Albrecht family in Germany; through a family trust, the Albrechts also own Monrovia-based Trader Joe’s.

Albertsons is the biggest operator in Southern California with 20.6% of the market, according to the Shelby Report. Kroger, which also owns Food4Less, is second with 18.7%.

Albertsons said it was prepared to fend off Aldi and any other rivals, including Amazon and others who are trying to expand grocery deliveries.

“Competition in the grocery industry is expected,” Albertsons said in a statement. “Our focus is, and will continue to be, to run great stores throughout Southern California.” Ralphs did not respond to a request for comment.

All grocers battle over price, convenience, service and selection, with prices especially crucial in an industry where the companies scratch out only a penny or two of profit for every dollar of sales.

Indeed, Kroger said this month that lower prices were cutting into its profit margins and said its national same-store sales – that is, sales of stores open at least a year and excluding gasoline – fell for the second straight quarter.

Asked why Aldi would fare better than Fresh & Easy or Haggen in Southern California, Ruggles said “we have four decades of experience in the U.S. and what we’re doing has proven to be a model that’s working.”

And another German-based discount grocer, Lidl, is coming right behind Aldi. Lidl on June 15 opened its first 20 U.S. stores in three Eastern states, and “it’s entirely possible” that Lidl could invade Southern California one day, Johnston said.

Another Inglewood resident, Patricia Foster, said she’s sold on Aldi because “the prices are half of what you would pay at Trader Joe’s, Ralphs or Target.”

Aldi’s stores are smaller and carry fewer items than conventional supermarkets, and they rely on more customer interaction to keep overhead costs down. For instance, customers bag their own groceries and it costs a quarter to use a shopping cart (with the quarter returned when the cart is returned).

The downside is that means it’s sometimes not a one-stop shop.

“I buy everything I can here but they have a limited selection, and I often have to go to another place to buy specific items,” Santos said.

Another shopper, retired schoolteacher Jennifer Baugher, said she didn’t buy produce at the Aldi Inglewood store because “I can get better quality at Trader Joe’s or Ralphs and I’m willing to pay more for that.” But she said Aldi “is very cheap compared to prices at [other] grocery stores in L.A.”

Ruggles said Aldi offers the “majority” of what customers are looking for and that it’s been aggressively expanding its offerings of produce, fresh meat and organic products.

The research firm IBISWorld recently noted that smaller-store formats, such as those operated by Aldi, Trader Joe’s and others, appeal to many consumers because they “allow shoppers to choose between a select number of high-quality products rather than thousands of brand names.”

“More supermarkets will follow this trend in order to appeal to a growing millennial demographic” ages 18 to 34 that prizes “premium private-label brands” in convenient store formats, especially foods aimed at the health-conscious, IBISWorld said.

Whole Foods is aware of that trend and plans at least six smaller stores, called 365 by Whole Foods, in Southern California that are aimed toward millennials. The first one opened in Silver Lake a year ago.

Johnston cautioned that “people are going to try [Aldi] out just out of curiosity and after that, in 60 to 90 days, you find out who your real customers are.” He said to “never discount the loyalty factor” many shoppers have with their longtime supermarkets.

“I would hold my breath before I made any predictions about how successful they’re going to be,” Johnston said of Aldi in Southern California.

For now, Ruggles said, Aldi is confident it can garner a bigger slice of the region’s grocery business, putting Albertsons, Ralphs, Whole Foods and others on notice.

“It’s working in California for us,” she said.

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UPDATES:

10:34 a.m. This article was updated with details of Aldi’s relationship to Trader Joe’s.

This article was originally published at 9:35 a.m.