Aldi has become one of Europe's most powerful food retailers through its focus on low-cost, no-frills operations and deep discount pricing. Now the question is whether it can accelerate its growth in the United States -- and maintain its momentum in Europe.The company, which is based in Essen, Germany, has been expanding in the United States over the last five years and now has close to 500 stores

Aldi has become one of Europe's most powerful food retailers through its focus on low-cost, no-frills operations and deep discount pricing. Now the question is whether it can accelerate its growth in the United States -- and maintain its momentum in Europe.

The company, which is based in Essen, Germany, has been expanding in the United States over the last five years and now has close to 500 stores under the Aldi banner, with estimated annual sales of about $2.3 billion. Aldi hopes to double its number of U.S. stores over the next five years in the same way it expands in any market -- quietly and steadily.

"Aldi is a long-term player," said Robert Clark, director of consultant Corporate Intelligence, London. "They're very tenacious and a well-enduring operation. People may talk about the possible demise of the deep-discounter, but Aldi will never go away."

But industry observers are beginning to express a thought once unthinkable -- that Aldi might one day decline as it is passed by other deep discounters with more modern formats and a wider product selection. Aldi's core German operations are under pressure from such competitors as Spar's Netto format, while it has basically plateaued in growth terms elsewhere in continental Europe, analysts said. While it's eyeing possible opportunities in Eastern Europe, including Poland, other operators have beaten it to the punch with full-service chains and analysts question whether even Aldi can afford the years of losses it would incur in the region before becoming profitable.

"I'm not optimistic in the long term for Aldi," said David Shriver, an analyst at Credit Suisse First Boston in London. "They've begun experimenting with fresh foods in some stores in Germany, which suggests some degree of weakness. The base of stores in Germany they once considered rock solid now doesn't look so solid anymore."

But Aldi remains a force to be reckoned with, especially with almost 4,000 stores in Europe and the United States and annual sales of more than $18 billion. The privately owned company, which was founded by the brothers Karl and Theo Albrecht in 1948, has operations in Germany, Austria, Belgium, Denmark, France, Italy and the Netherlands in Western Europe, according to IGD Research, Watford, England.

In the U.S., Aldi is parent company of the closely-held specialty foods retailer, Trader Joe Co., Pasadena, Calif., and the Albrechts, through a family foundation, hold about a 12% stake in Albertson's, Boise, Idaho.

Aldi never creates a splash when it enters a new market and its formula remains almost the same wherever it goes. Its executives rarely meet with financial analysts and never talk with the press -- and did not respond to requests for interviews by SN editors. Instead, executives focus simply on expanding the chain until competitors suddenly wake up and discover it has several hundred stores. As one consultant said, "If you don't have an Aldi in your trade area you don't think they exist."

Aldi, with U.S. operations based in Batavia, Ill., has not yet had a big-enough effect in the United States to bother the full-service operators, although such competitors as Save-A-Lot of St. Louis are responding to its threat. Save-A-Lot also plans to double the number of its stores over the next five years from its current 700, although industry observers said there is enough room in the market to accommodate both companies.

The German retailer has opened three distribution centers in the United States over the last 18 months, including one in Ohio and one in Pennsylvania. Four more are planned for the Eastern seaboard, including New York state; Georgia; Charlotte, N.C.; and Virginia, sources said. A major battleground will be New York, where both Aldi and Save-A-Lot plan to expand aggressively.

Aldi is performing very well in the United States, industry sources said, mainly because it has stuck to the formula it has used everywhere. A store in Johnstown, Pa., could have been transplanted directly from Essen, Germany, with few changes in format or product selection. Full pallets are used for displays because that saves the need for stacking shelves. Ceilings are deliberately low and lights are dimmer to save on energy costs. Customers still bag their own groceries, a rarity in the United States.

The main difference is that the U.S. stores are slightly larger, averaging about 10,000 square feet. The U.S. stores also offer more fresh produce, such as lettuce, cauliflower or tomatoes, focusing on what is readily available. As elsewhere, they also sell seasonal items and have special promotions, sources said.

Complicating Aldi's U.S. picture is its ownership of the 90-store Trader Joe's chain as well as its position in Albertson's. Trader Joe's recently began to expand beyond its core area on the West Coast into the Eastern United States. Its stores generally are larger than the Aldi units and carry about 1,500 items, offering discounts of about 50%.

"It's hard to read what they plan to do with Trader Joe's or their holding in Albertson's," Clark of Corporate Intelligence said.

Aldi's global strength derives from its solid base in the price-competitive German market, where the company has almost 2,000 stores. According to IGD Research's recent "European Fact File," Aldi in Germany is split into two halves -- Aldi North, run by Peter Ringleben and Hartmuth Wiesemamm, and Aldi South, run by Ulrich Wolters (which also has responsibility for its U.S. subsidiary). Its German stores average about 4,000 square feet in size and generally are in center-city locations. There are some edge-of-town stores of about 8,000 square feet with car-parking, however.

All its stores worldwide focus on 600 to 700 key items, the majority being private label. ACNielsen in Germany estimates that private-label products account for 17% of the German food retail market -- with Aldi's label alone representing about 10%.

In recent years the chain has expanded beyond canned and dried goods by adding more basic fresh produce. Both Aldi North and Aldi South also have been trying frozen food. Aldi North now has an estimated 15% of the frozen-food market in its area, while Aldi South began trying 50 frozen-food lines last year. Both areas also launched discounted over-the-counter medicines in November 1997.

Aldi further generates traffic by special offers on limited quantities of nonfood merchandise, from personal computers to shoes.

"One of the secrets of Aldi's success is the constant monitoring of the product range," according to a study by IGD Research. "The company is careful to only stock those items that sell well according to seasonal demand."

It focuses on price above everything and drives its operations hard to be able to remain competitive. All of Aldi South's 20 distribution depots have automatic pallet loading, for example, IGD Research said. It owns its entire distribution network and has centralized buying, with buyers responsible for the total product mix. Deliveries are daily to each store, with store managers having significant input into the product mix.

The store format has barely changed in the last five years. Labor and overhead costs are kept to a minimum, while shoppers have to pay for bags they use. None of its European stores have scanning, relying on checkout operators to memorize three-digit price codes. This cuts down on the number of products Aldi can carry and maximizes operating efficiencies, IGD Research said. However, Aldi South is said to be adding new scanning-compatible checkouts to some of its stores, capable of coping with the single European currency and year-2000 compliance needs.

Its emphasis on price is not without controversy, however. Milk producers in Germany have blasted the food retailer, claiming it has stifled the market since Aldi controls 45% of the liquid-milk market and has held the price constant for more than a decade. It also once had trouble with a Belgian trade union and shut three stores rather than compromise in the negotiations.

And its slowness to adapt is causing problems in Germany as new competitors overtake it, analysts said. "Aldi is hugely influential in Germany and makes up most of the 20% share of the market held by hard discounters," Shriver said. "But they are getting hammered by the next generation of hard discounters with stores of 10,000 to 12,000 square feet, car parking and a wider selection. German retailers also are beginning to get the measure of Aldi in terms of pricing."

The company is revamping its German stores as fast as it can to counter the competition, but observers point out that it has a huge base to work its way through. In addition, they said they believe Aldi became too focused on the market in Eastern Germany at the expense of other opportunities. As a result, its chance to dominate throughout Europe may have passed it by.

"They've basically expanded as far as they can in Europe," Shriver said. "Their impact on the market is beginning to level off."

Aldi hasn't been immediately successful in every market it enters, but it rarely gives up. Industry estimates are that Aldi has about 200 stores in Austria, 300 in Belgium, 180 in Denmark, 325 in France, about 100 in Italy, about 330 in the Netherlands and about 200 in the United Kingdom. Aldi took time to find its footing in all these markets, but is now said to be trading successfully in each -- although no one knows just how much profit the company generates.

Its entry into the United Kingdom could serve as a blueprint for its future expansion in the United States. Aldi arrived in the late 1980s in the flood of deep discounters from continental Europe that included Netto of the Netherlands and Lidl of Germany. Some analysts said they believed the United Kingdom's full-service operators were ripe for picking as they focused on quality with constantly escalating profit margins. Analysts predicted deep discounters eventually could snare 15% of the U.K. food retail market, but in the end they've gained only about 6% to 7% as full-service operators have successfully adopted more price-conscious marketing.

Aldi opened its first U.K. store near Birmingham, England, in April 1990. Initially, all its stores were clustered around its headquarters in Atherstone, England, but it eventually expanded to other areas, although it remains concentrated in the North of England and in Scotland.

Almost all the stores are in the same format -- alcohol and edible packaged groceries in the front of the store, chilled products in the back left and toiletries on the back right, according to a recent study of U.K. discounters by Corporate Intelligence. Washing powders and other nonfood products are immediately in front. Shelved products are stored in cut cases, with some fast-moving items left on pallets. Fresh produce generally is prepacked. The size of the stores has gradually increased, however, and now averages about 8,000 square feet.

Aldi's strategy is to open a distribution center in a specific area that can then support 80 stores, said Tony McNeary, an analyst at NatWest Markets in London. It currently has three distribution centers, with a fourth expected to open in the South of England later this year. Aldi is expected to embark on a significant expansion program in Southern England once this center is opened.

"They've stuck to their strategy," McNeary said. "They're intent on opening 20 to 25 stores a year and are plodding along at that pace with the eventual goal of 2,500 stores. But that's a long way off."

The difficulty it faces in the United Kingdom, and perhaps in the United States, is that its stores mature faster than those of its competitors in terms of sales per square foot, observers said. The U.K. stores are profitable and sales are now about $1.1 billion (700 million pounds), but the Corporate Intelligence study said profits probably are below those forecast because of the strong response from the United Kingdom's full-service operators. Aldi's sales per square foot fluctuate about the $820 (500-pound) mark and gross margins are relatively constant at about 17%. However, sales productivity fell in 1996, underlining the competitive nature of British food retailing, Corporate Intelligence said.

But if Aldi is scurrying to adapt to the new Germany, as analysts speculate, its experiences in the United Kingdom and United States are bound to help. While deep discounters are unlikely to disappear in the foreseeable future, analysts said, they must adapt to changing customer demands both in the United States and Europe to survive. That means larger stores, better fixtures, scanning, a larger product assortment and car parking. The response of the United Kingdom's full-service food retailers to the arrival of the deep discounters shows how they can be beaten at their own game. And even deep discounters are no longer quaking at Aldi's arrival in their markets -- Save-A-Lot already has updated its image with a product assortment of about 1,250 items compared with Aldi's 700.

"Aldi takes an almost obsessive and paranoiac interest in how its business develops in other countries," Shriver said. "You can bet they are taking the lessons they are learning in the U.S. and elsewhere and feeding them back in to Germany. They have to."

Aldi Scorecard

The highly secretive German retailer has spread out over a few continents and reportedly maintains ambitious growth plans. Here is a data sheet on the company:

Home Essen,

Base Germany

Areas of United States, Europe

Operation and Australia

Total More than 4,000, including

Stores nearly 500 in the United States

Total More than $18 billion; about $2.3

Sales billion in the United States

Major Limited assortment; average SKUs

Format per store: 600 to 700

U.S. HQ Batavia, Ill.

Other U.S. Owns 90-store Trader Joe Co. and

Properties controls about 12% of Albertson's