If there’s one name that comes to mind when we think about large corporations threatening the very existence of small businesses—that name is Walmart. The corporate behemoth has been steadily out-competing small businesses throughout the country as they drive down their prices.
A former grocer from North Carolina went as far as to say, “They’ve ruined our lives.” Indeed, according to a Time article, Renee Ireland Smith, formerly of a local Town n’ Country market, insisted, “They came in here with their experiment, and they ruined us.”
Because stories like Smith’s are common across the country, Walmart will always be the go-to name to blame when trying to understand how economies of scale are a primary risk for small businesses. Nonetheless, a new name in supermarkets is competing for this widespread infamy.
A New Giant in the Mix
German supermarket chain giant Aldi has announced its plans to get even bigger. Reuters reports that the firm will spend a projected $5 billion this year to increase and improve its presence within the U.S. Of this investment, $3.4 billion would go toward expansion, with plans to increase their locations across the U.S. from 1,600 to 2,000 before 2019 and to 2,500 by 2022. The remaining $1.6 billion of this hefty sum will be dedicated toward renovating already existing Aldi locations.
This expenditure signals a massive expansion of not only Aldi’s brand within the U.S. but also of the market of giant, ubiquitous grocery chains within the country in general. And this can certainly cause some nail biting for small business owners across the country.
This expansion isn’t an auspicious sign for locally owned grocers. It’s nearly impossible to compete with the ever-plunging prices that huge chains like Aldi are able to boast simply because of their reach and size.
However, even with this threat of an eventual 900 new giants cropping up across the country within the next five years, small businesses continue to remain the backbone of local economies across the country.
According to the 2012 U.S. Census (seen above), of the 35,241 “supermarkets and other grocery stores” within the country that operated the entire year, 34,993 had a net 500 employees or less—the employment threshold that the SBA names in its definition of a small business.
These numbers tell us that a little more than 99% of supermarkets and grocery stores around the country were small businesses. Meanwhile, in 2012, only 134 of the supermarket companies operated with 1,000 employees or more. That’s a mere 0.4%.
Nonetheless, according to Aldi’s head of corporate buying Scott Patton, “As [they] continue to expand and grow, [their] purchasing power continues to increase and allows [them] to bring products at better prices for consumers.” Clearly, this 4% sect of huge supermarket companies is controlling a disproportionate amount of the industry. Their ability to lower prices as they grow simply isn’t an option for small, local supermarkets.
Purchasing Power Makes the Difference
These economies of scale that are pushing against small businesses work a bit like buying in bulk. When you buy a massive box of cereal containing the equivalent amount of cereal as two normal-sized boxes, you’re ultimately paying less for the same amount of cereal. Because the one bigger box requires less packaging, processing, and shipping than the two small ones, it will save you money.
This is what supermarket chain giants like Aldi are doing—they’re achieving this bulk-buying effect that small businesses like mom-and-pop grocery stores simply can’t manage. Small businesses just don’t go through enough cereal to be able to do it. Because of this, they’re not able to join in the price-slashing wars that continue to ensue between Walmart, Aldi, et al.
In fact, as Reuters shares in the previously mentioned report, Walmart projects to spend $6 billion on ensuring that their stores offer consumers the lowest prices out there. Meanwhile, Aldi’s chief executive Jason Hart insists that Aldi’s prices undercut those of traditional grocery stores’ by 50%. This statement came right after a newfangled competitor, Lidl, opened the first of its 100 U.S. branches with a statement that it would price its products at 50% of their competitors’ prices. And huge supermarket firms aren’t worried about being subtle about these price-slashing wars—these mirrored statements and one-upping budgets make it clear that their top priority is having the lowest prices.
What Should Small Businesses Do?
So, what does this mean for the small business that a new local Aldi branch would threaten? It’s easy to assume that a small, local business doesn’t quite have the $6 billion that Walmart does to go on a price-slashing rampage. But, with the right mindset, they shouldn’t need it.
This massive expansion of Aldi will be an opportunity to flaunt the upsides of supporting small businesses. When forming your plan for facing a giant chain competitor, think about why you believe in small business. Even more, pinpoint the reason you started your own business and emphasize it. Whether it be customer service, personalized product, or local involvement, know that whatever your business offers that a big chain can’t is worth your customers’ patronage, and move confidently forward.
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from Fundera Ledger https://www.fundera.com/blog/aldi-expansion