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How Aldi is beating Walmart in the grocery aisle

Walmart (WMT) has marketed itself as the low-price leader ever since the late Sam Walton founded it in 1962. But don't tell that to Aldi. The German retailer, which has doubled its U.S. presence over the past decade, has Walmart on its heels in the grocery business.

Aldi's prices are roughly 35 percent to 40 percent below what a typical supermarket charges, while Walmart's prices are about 13 percent to 15 percent below the traditional chains, according to Jim Hertel of WillardBishop, a consultancy to the food retailing business. Howard Davidowitz, the head of retail consultancy and investment bank Davidowitz & Associates, goes further, estimating that Aldi's prices are about 30 percent lower than Walmart's.

The secret of Aldi's success lies in its no-frills business model, which requires customers to bag their orders and charges them a 25 cent deposit to use a shopping cart. The stores carry about 2,500 items, less than 10 percent of the 40,000 to 50,000 assortment found at most grocers. At Aldi, merchandise is sometimes displayed in the boxes in which they were delivered.

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Its stores are about 10,000 to 11,000 square feet, far smaller than rivals, making them much cheaper to operate. They're also bare-bones regarding decor, lacking the huge displays seen in big-box stores and larger grocery chains. Other things missing from Aldi are lots of national brands and a wide product selection. Customers can save big bucks thanks to the company's low-price private labels.

"For example, rather than carrying 20 versions of everything, we offer only the best of customers' must-have groceries, including fresh produce and organics, dairy, gluten-free foods, USDA Choice beef and bakery item," according to an Aldi statement. "This helps ensure our customers can save up to 50 percent on their grocery bill while filling their pantries with high-quality products."

The no-frills concept appears to be taking hold. Aldi currently operates 1,500 stores in 32 states and plans to invest $3 billion through 2018 to open 500 additional locations, creating 10,000 new jobs. It plans on opening 45 new stores in California alone this year. Aldi also is the parent company of high-end grocery chain Trader Joe's.

"It's one of the most successful food concepts in the U.S., and it's been growing for the past 20 years," Davidowitz said.

Added Neil Stern, senior partner with retail consultants McMillanDoolittle: "They are able to leverage unmatched global expertise in private-brand procurement and logistics with great buying power. This enables them to offer the lowest-priced item in a category while still having high quality."

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Of course, Walmart begs to differ. Speaking at a recent conference sponsored by Raymond James, Walmart Chief Merchandising Officer Steve Bratspies, argued that customers who buy private-label brands make more trips to Walmart and spend more when they're in the store. Chief Financial Officer Brett Biggs noted in a separate conference that Walmart plans to invest billions over the next few years in making goods cheaper. A spokesman for Bentonville, Arkansas-based Walmart referred questions about pricing to the comments of the executives.

Walmart shares have slumped more than 16 percent over the past year, underperforming rivals in the grocery business such as Kroger (KR) and Safeway (SFY), which have barely budged. But the stock has been on the move lately -- rising 11 percent so far in 2016 -- as many on Wall Street are growing optimistic that CEO Douglas McMillon will be able to shed its recent lackluster performance.

Of course, that hardly matters to the shoppers who are increasingly flocking to Aldi to get the best deals on their groceries.

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