The discount chain is about to make a major move into Southern California, in the aftermath of spectacular flops here by Fresh & Easy and Haggen. Aldi might be better positioned to succeed here than those two retailers were, but it can still learn from their mistakes, analysts say.
At first glance, this would not appear to be a good time for a grocery store chain to be entering the Southern California market, as the Germany-based Aldi chain plans to do starting next year.
Two such entities have tried recently, and things didn’t exactly go according to plan.
Fresh & Easy began opening stores in the western United States in late 2007 amid much fanfare and skepticism in some quarters regarding what niche the company was trying to fill and whether it really understood the workings of the Southern California grocery industry.
As it turned out, the skeptics were right.
The chain of small neighborhood grocery stores owned by Tesco, the retailer sometimes called the Walmart of the United Kingdom, stumbled almost from the day it opened its local stores.
Fresh & Easy struggled to find an identity and soon announced a moratorium on new stores so it could reorganize and reassess its market strategy. Ultimately, it filed for bankruptcy last month, it’s second filing in two years.
Even billionaire supermarket magnate Ron Burkle, who bought Fresh & Easy in 2013, wasn’t able to revive the chain, which was similar to Trader Joe’s in its size and inventory.
Last April, Fresh & Easy announced it was closing or liquidating its remaining 100 Southern California stores, including its locations in Riverside and San Bernardino counties.
Next came Haggen, the Bellingham, Wash.-based chain that had a strong presence in the Pacific Northwest but was virtually unheard of everywhere else.
Early this year, Haggen agreed to purchase 146 stores, including 83 in California, that were previously part of the Vons, Albertsons, Pavilions and Safeway chains. Analysts estimated that the company paid more than $1.4 billion for those properties.
That was a massive expansion – Haggen up to that time was limited to 37 stores in Washington and Oregon – and it turned out to be a costly one. Business never took off at most of those locations, and in August Haggen announced it was shutting down 27 stores, including 16 in California.
One month late, the retailer made a second announcement: it was filing Chapter 11 and closing all of its stores in California and Nevada. More than 100 stores were affected, including 67 in California, according to published reports.
Even with the economy on the mend and unemployment declining, some grocery store chains that are already established in the Inland Empire are struggling.
After six years of profitability, Whole Foods plans to cut an estimated 2,000 jobs in an effort to reduce costs. The high-end chain recently reported its first quarter of declining profits since 2009, and said it doesn’t expect things to get better until next year.
Now, Aldi is about to take a stab at the Southern California housing market.
The discount chain, which operates an estimated 10,000 stores in 18 countries, plans to open 45 stores in Riverside, San Bernardino, Los Angeles and Orange counties by the end of next year, creating about 1,000 jobs in the process.
So what lessons can Aldi draw from the failures of Fresh & Easy and Haggen, and the more recent struggles of Whole Foods? Quite a few, according to several economists and retail analysts who follow the local grocery industry.
“The first thing they should learn is that Southern California is a complicated market that is extremely competitive and difficult to succeed in,” said Chris Thornberg, founder and principal of Beacon Economics in Los Angeles. “They can’t come in here and do things their way, same old same old, be overpriced and expect to succeed. If they do, they’ll get their backsides kicked.”
Thornberg was obviously referring to Fresh & Easy, whose mistakes in the Southern California market have by now been well-documented: their prices were too high, they didn’t understand the U.S. market, they tried to apply their European model here.
“There are a lot of grocery stores in this market and the competition is absolutely furious,” Thornberg said. “Aldi can’t just come in here with the same-old same-old and expect to pick up any sales.”
Aldi officials did not return calls seeking comment for this story.
To succeed in Southern California, Aldi will have to do the same thing every other grocery does: find something it does better than everyone else, preferably something that can’t be copied easily, said Jay Prag, professor of economics and finance at the Drucker School of Management at the Claremont Colleges.
Aldi must also develop its own identity, beyond being a discount house with global reach, Prag said.
“I went into a Haggen store and it wasn’t a lot different than an Albertsons,” Prag said. “They went into a lot of former Alberstons sites, and I think that was a terrible mistake. They also expanded way too fast. But the real lesson to be learned is that this is an extremely competitive market, and you enter it at your own peril.”
Aldi might have a better chance of succeeding in Southern California than Fresh & Easy or Haggen, said Craig Rosenblum, analyst and retail specialist with the independent consulting firm Willard Bishop in Barrington, Ill.
“What they should do is what they know works, which is to put quality products on the shelf at a value-driven price,” Rosenblum said. “That’s what they are, and I’m sure they’ll stick with it. They’re a strong company.”
Aldi’s prices are generally 30 to 50 percent lower than other grocery stores, and their inventory is more limited, about 1,400 items per location. Those two factors alone should help Aldi distinguish itself from its competition, according to Rosenblum.
“They have a single model they’re going to roll out, and they’re looking for areas with a median household income of $75,000,” Rosenblum said. “They should do very well, especially in the Inland Empire.”