Aldi Grows While Bucking Grocers’ Trend Toward Card Acceptance

Dozens of U.S. grocery-store chains added credit card acceptance in the 1990s, when consumers began asking to use the cards and merchant acquirers saw a ripe new market. Grocers acquiesced to keep their customers happy and because the payment card networks offered interchange breaks or other incentives. But not Aldi, the fast-growing discount chain owned by Germany-based Aldi Süd. Aldi's U.S. operation, based in Batavia, Ill., has about 1,000 stores in 29 states and ranks 25th among the U.S. grocery chains by sales, according to the Supermarket News trade publication. The stores accept cash and PIN-based debit cards. But only 49 stores, all in Oklahoma, accept a credit card. And that one is Discover, for which customers pay a 25-cent transaction charge that Aldi vice president Mark Bersted calls a “convenience fee.” Aldi still refers to the Discover acceptance as a test although the Oklahoma stores have accepted Discover for nearly three years. “We have no plans to expand that,” Bersted tells Digital Transactions News. He says Aldi picked the stores in Oklahoma, which is part of Aldi's Kansas City division, for the test because the chances were fairly low that customers might shop at a store in a different division with different card policies, making for possible confusion. Bersted wouldn't disclose Aldi's transaction volume on Discover at the Oklahoma stores. The company's refusal to embrace credit cards is a cost-control measure that arises from its market position as a low-price seller. Credit cards cost merchants more than signature or PIN-debit cards to accept, and Aldi would need to reflect those costs in all of its products, according to Bersted, who works in Aldi's Olathe, Kan., division. “People not using credit cards would be paying for people who do want to use them,” he says. “Because of the very high fees with credit cards, we would be unable to keep our prices as low as they are.” Aldi claims its prices are 25% to 50% lower than the competition's. The vast majority of products on Aldi's shelves are private-label, which enables the company to limit its store size and lower its operational costs. Customers also bring their own bags and pay a deposit to use a shopping cart. While all of the credit card networks have rules intended to prevent merchants from discriminating against cardholders, especially at the physical point of sale, Discover and American Express Co. over the years have been somewhat more flexible than Visa Inc. and MasterCard Inc. in making exceptions for some merchants that want to surcharge. And Discover, at least in the past, has been regarded as slightly less expensive than the bank card brands to accept. Aldi's card policies don't seem to be hurting its growth prospects, especially at a time of economic distress when consumers are looking for savings. The company, which opened its first U.S. store in 1976, opened 100 stores in 2008 and plans to add 75 more this year, according to its Web site. Next year, Aldi plans to open stores in Texas. Aldi also refuses to accept checks. Returns are an issue, but transaction speed is the chief reason for not accepting that payment form. “It slows down our front-end efficiencies,” says Bersted. Last November Aldi began accepting Visa- and MasterCard-branded signature-debit cards in Minnesota, Oklahoma, and Florida even though those cards typically cost merchants more to accept than PIN-debit cards. The main reason is an underdeveloped PIN-debit merchant base, especially in Minnesota and Oklahoma, according to Bersted. He adds that customers in those states have not mistakenly begun to assume they can use Visa and MasterCard credit cards because they can use their signature-debit cards. “That has not been a problem for us,” Bersted says. Aldi's credit card policies put the grocery chain in league with just a few other national merchants, notably the warehouse stores, that won't take the cards in order to hold down prices, notes Adil Moussa, an analyst with Boston-based Aite Group LLC. Costco Wholesale Corp., for example, accepts AmEx cards, but not the other credit cards, in its stores. Moussa notes that because of its low-price policies, Aldi may attract a large number of cash-oriented underbanked or unbanked consumers who don't have credit cards. And the appeal of low prices may resonate with many other consumers. “People will pay cash if they know they'll get a good deal,” he says.