MÜLHEIM AN DER RUHR, Germany--Dim lighting bounces off brownish-tiled floors. The shelves are sparsely filled with cardboard boxes. Checkout lines stretch to oblivion.
There is nothing super about these stores.
Yet their owner, German discounter Aldi, is betting billions it can win over spoiled American shoppers. How? By offering them fewer choices--way fewer--than rival retailers.
The unlikely proposition has worked nearly everywhere Aldi has set foot. The company that started from a simple suburban grocery store in Germany's industrial northwest is now one of the biggest retail groups in the world with more than 10,000 locations, businesses in 18 countries and annual revenues approaching [euro]70 billion, or $83 billion.
This summer, Aldi opened a new chapter in this seemingly unstoppable expansion, announcing a $3.4 billion investment to boost its U.S. presence by nearly 50% to 2,500 stores by the end of 2022. This puts the company on a pace to become America's third-biggest grocery retailer by locations behind Wal-Mart Stores Inc. and Kroger Co. The land grab closely followed its decision to invest $1.6 billion in renovating the bulk of its existing 1,700-plus U.S. stores, some of which have been around since the 1970s.
The American grocery market, one of the largest and most competitive in the world, is on the cusp of dramatic change since Amazon.com Inc. acquired Whole Foods Market Inc. this summer and Google struck a partnership with Wal-Mart. But the Germans have a plan, forged in the rubble of World War II.
The strategy "is simple," said Aldi spokesman Florian Scholbeck, sitting in the darkened break room of a prototype store in the company's home state. "But it's not easy."
Even in Germany, not much is known about how Aldi operates. It does little media advertising, doesn't publish financial statements, and its top executives don't give interviews.
The Wall Street Journal figured out Aldi's idiosyncratic playbook through internal documents, the company's rare public filings, and interviews with past and present managers.
It offers a deliberately pared-down selection, sometimes a tiny fraction of the number of items sold by rivals, which helps Aldi cut costs to levels U.S. grocers can only dream of. Among other benefits, fewer items means faster turnover, smaller stores, less rent, lower energy costs and fewer staff to stock the shelves. That parsimony enabled Aldi to establish itself in Europe and then launch into the U.S.
About 70 years ago, brothers Karl and Theo Albrecht, fresh from military service in World War II, took over their family's store in Schonnebeck, a mining neighborhood of the bombed-out industrial city of Essen. In the early 1950s, they began rolling out their ascetic concept to other branches throughout the region.
Back then, their stores offered just 250 items, the essentials miners' and steelworkers' families needed to survive--flour, sugar, coffee, butter, bacon, peas and condensed milk.
In the 1950s and '60s, Germany's economic miracle took off, and a wave of glitzy supermarkets selling thousands of items sprouted up to serve the newly affluent middle class. Aldi didn't flinch.
In his only known public remarks on Aldi's business model, Karl Albrecht said in a 1952 speech that the brothers had once toyed with the idea of following the supermarket trend.
In the end, they decided to keep their limited selection after realizing it gave them an edge: "We had much lower expenses," Mr. Albrecht said.
By keeping costs low, the Spartan assortment allowed the founders to sell their inventory for less and turn it over at lightning speed, boosting profit margins, according to former executives.
"Speed wins, speed kills," said Craig Johnson, president of the Connecticut-based retail consultancy Customer Growth Partners.
In 1961, the brothers divided their growing empire into two kingdoms, Aldi Nord and Aldi Süd (the shared name came from a contraction of the words "Albrecht" and "discount"). They organized each part as a Gleichordnungskonzern, a legal structure under which a fleet of legally independent companies swear loyalty to each other while reporting to a central board.
The arcane structure had one crucial advantage: It meant the group never triggered financial reporting requirements imposed on other businesses of its size. German companies must publish earnings reports if they check two out of three boxes: more than [euro]65 million in assets, over [euro]130 million in annual sales, or more than 5,000 employees.
Broken up into small parts, Aldi's armada of companies didn't cross these thresholds. Under their cloak of secrecy, the brothers could hide their colossal and rapidly rising sales volume from competitors.
After the split, the twin dynasties continued to keep their selection in check, pool market intelligence and avoid direct competition.
By then, Aldi Süd was selling 400 items per store in its Southern German fief, its inventories arranged on wooden pallets on the floor. In the north, Aldi Nord's markets were selling about 450. Today, the brothers are deceased and power lies with the empire's collective leadership. But Aldi has stayed true to the concept. Most Aldi stores stock between 1,300 and 1,600 items, depending on the country.
By comparison, Wal-Mart's Supercenters have in recent years carried around 120,000 items. Average supermarkets in the countries where Aldi operates now carry between 20,000 and 50,000 items, experts say.
Aldi has always been focused on "making everything as simple, as standardized and as streamlined as possible," said Matthias Queck, an Aldi expert at the German grocery consultancy LZ Retailytics.
Crucially, Aldi limits its stock of brand-name items, so it is often easier to negotiate low prices from its suppliers. Even Wal-Mart, famous for extracting concessions from its suppliers , can sometimes only go so far because premium consumer-goods companies have to bear costs such as advertising.
On a basket of 30 typical household items, Aldi's prices are on average almost 17% lower than Wal-Mart's, according to research conducted by Mr. Johnson of Customer Growth Partners.
"It's a system of 1,000 details all made against the backdrop of costs," said Dieter Brandes, who sat on Aldi Nord's board of directors with Theo Albrecht until 1985. "Nobody needs 50 different types of toilet paper," he said.
With its limited assortment, Aldi's biggest problem, according to Eberhard Fedtke, who managed Aldi Nord stores in the flagship region in Essen in the 1970s, was "where to get enough stock, and where to put all the cash we were making."
His region of around 40 Aldi stores rang up sales of about 1.2 million deutsche marks, or roughly $3 million at the time, every day. His stores sold out of goods so quickly, in about eight days, that he would order inventory twice in the time it took suppliers to bill him once.
While becoming the first to scale the hard-discount model in Germany, Theo Albrecht of Aldi Nord found a kindred spirit in the U.S., buying the California-based franchise Trader Joe's in 1979 from its founder, Joe Coulombe.
Trader Joe's had concocted a similar model based on limited selection, keeping inventory back then to 1,100 items. In Mr. Albrecht's obituary, the only comments from the family on the acquisition, Trader Joe's is described as a "premium discounter."
Other American brands also developed a concept based on curbing selection, including Costco Wholesale Corp., which these days limits its stock in U.S. stores to 3,800 items to boost turnover speed.
Aldi is gambling it is more in tune with the American tastes, rolling out small, nimble stores instead of sprawling warehouses and supermarkets that take longer to navigate.
The expansion of the German hard-discount model in the U.S. "comes at a time when shoppers are, more than ever, seeing the appeal in a small format, quick-trip-type store that offers low prices and high quality," said Mike Paglia, director of retail insights at the Kantar Retail consultancy in America.
"The typical 40,000 square-foot supermarket is a dinosaur, and it's extinct," said Phil Lempert, an American grocery retail expert. "Those stores need to die."
An Aldi store in Greenville, N.C., this summer featured a private brand of diet soda in boxes of 12 for $2.25 and a cup of Greek yogurt for 69 cents. In the parking lot, Latonya Edwards, 44, a nurse, said she comes to Aldi to stock up on staples for her pantry such as canned goods, a signature of the brand since the Albrecht brothers entered business after the war. "You have to know how to shop," said Ms. Edwards, who was pushing a full cart toward her car.
Theo Albrecht of Aldi Nord approached cutting waste at the company with religious fervor, according to Mr. Fedtke, who attended Catholic church with the brothers at St. Markus in Essen-Bredeney, a neighborhood of industrialist estates.
The younger Mr. Albrecht asked employees to turn the lights off when the sun was out, took notes on scrap paper and asked store managers to set bathroom hand dryers not to blow for one second too long.
Former executives say he saw every cent of waste in a single store as an existential threat that, if multiplied across his growing empire, could put his fortune at risk.
One of Aldi's strengths that has eluded many discounters is its ability to draw middle-class shoppers--those with more money to spend--despite its limited array of goods. It did this by cultivating the image of a company focused on quality rather than pinching pennies.
"Poor people need us, rich people love us," Theo Albrecht used to tell executives, according to Mr. Brandes, the former board member.
There too, executives say, the limited assortment played a central role. The small number of items ensured that staff could carefully choose, taste-test and quality-control each item.
The ground floor of Aldi Süd's headquarters in Mülheim has a test kitchen where every day from 8:30 a.m. to 2:30 p.m. the company's executives and buyers constantly sample food sold in its stores and conduct blind tastings to see if it beats the competition. One test involves sampling spoonfuls of olive oil.
Mr. Scholbeck, who became Aldi Nord's first ever communication director this year, said a [euro]4.99 bottle of Spanish Grenache red wine recently on sale in the company's German stores scored 93 out of 100 points on the American wine expert Robert Parker's rating system, making it an "outstanding wine of exceptional complexity."
"You should see what kind of cars were out there!" he said. "The Porsche drivers were buying 6-packs. Because the quality is on point."
After the introduction of the euro fueled rising prices, the discounter asserted itself as a mainstay in the vast majority of German households, according to analysts.
A Forsa Institute poll in 2002 found that 95% of blue-collar workers and 88% of white-collar workers in Germany shopped at Aldi.
"Aldi is like a lighthouse," said Michael Lohse, spokesman for Germany's Farmer's Association. If its prices move, other retailers "have to follow them."