SHANGHAI/HAMBURG, Germany -- The Aldi supermarket in Shanghai's Jing'an district draws a fair crowd of homemakers and office workers during a weekday lunch hour.
The store offers a mix of local fare, such as cold noodles, and imports from the discount grocery chain's home country of Germany.
"The stuff here is good and cheap," said office worker Wang, who was lunching on a sandwich and a bottle of Oettinger beer in the store's dining corner.
The store represents a foothold by one of the newest Western supermarket chains seeking to make inroads in China, a vast market that has proved difficult for other multinational retailers to operate profitably in at scale.
Aldi in early June opened its first two locations in China after selling to the country's consumers through Alibaba Group Holding's Tmall Global e-commerce platform since 2017. U.S.-based Costco Wholesale, which has had a Tmall presence since 2014, is set to open its first brick-and-mortar store in China at the end of August.
Netherlands-based grocery chain Spar in May announced plans to expand its Chinese footprint to around 1 million sq. meters.
The newcomers have indicated they are testing the waters rather than making a big splash in a country where incomes are rising and internet-savvy consumers are growing accustomed to delivery services. Aldi and Costco will face competition from homegrown chains including Alibaba's Hema stores, which offer a hybrid of online and offline shopping.
"China is a very complex market, so we will make sure that our first mortar-and-brick store in China operates well before we continue with the several others that are in the pipeline," Costco's Richard Chang, senior vice president for Asia, told the Nikkei Asian Review in an interview.
An Aldi China spokeswoman stressed that its first locations are meant as pilot stores. Both companies declined to give estimates of planned Chinese investments and store openings.
These moves follow an exodus of Western players from China's retail market. Britain's Tesco left in 2013, and Aldi's German rival Lidl closed its three Chinese e-commerce stores in April after less than two years.
In June, French retailer Carrefour sold 80% of its equity interest in its local unit to Chinese retailer Suning.com for 4.8 billion yuan ($698 million) after several years of losses. German food wholesaler Metro is in the final stages of selling its China stores, with local names Wumart Stores and Yonghui Superstores among the bidders.
These struggles have not deterred the new arrivals.
"Our optimism is based on the very high disposable income in Shanghai, and our catchment area of roughly a 45-minute-drive radius being home to around 7 million people," Costco's Chang said.
Based on the assumption that most of Costco's Chinese customers are affluent enough to own a car, the Shanghai store will offer 1,250 parking spaces, a number Chang described as "extremely large." The product lineup will focus on imports in packaging sizes geared for families and small businesses, but also will include high-quality domestic produce such as strawberries and watermelons, he said.
Aldi China has also weighed its entry points carefully.
"When we were scouting for locations, we wanted to ensure that the stores were within close proximity to both residential districts and office areas to supplement customers' lives on their way to and from work with our ready-to-eat, ready-to-cook and fresh produce categories," the spokeswoman said.
She added that "customers who live within 3 kilometers of our stores will get to enjoy instant delivery services."
Unconfirmed German media reports said Aldi plans 10 more openings in China this year, with a medium-term target of 50 to 100 locations.
Aldi China is heavy on imports. It sells beef and fresh milk from Australia, where Aldi has built a mature supply chain through over 500 stores since market entry in 2001. In homage to its German heritage, Aldi China also offers pork knuckle with sauerkraut and roast potatoes. The ready-to-eat category includes localized products, such as fusion Sichuan-style spicy crayfish salad as well as the Berliner Bao, a dish of German sausage with sauerkraut in a traditional Chinese steam bun.
A food retail analyst in Germany noted the significance of Aldi debuting in China with only two stores.
"This is in defiance of the textbook expansion strategy, which entails beginning with a large network of stores to make logistics and warehousing feasible, while maximizing the advertisement impact," said Matthias Queck, research director at LZ Retailytics.
Foreign hypermarkets and supermarkets in China delivered a sound performance in 2018, with profit margins reaching an average of 23.2%, higher than the sector's average of 21.5%, data by Hong Kong-based Fung Business Intelligence shows.
But analysts said the fortunes of foreign retailers in China depend on their ability to adapt to local consumer preferences.
At first glance, the difference between the Shanghai stores for Aldi and Carrefour is striking. The former offer features catering to modern urban shoppers, such as dining corners, instant delivery and scan-and-go checkouts using WeChat Pay. The latter suffer from wasted space and goods that are difficult to find.
Teresa Lam, vice president of Fung Business Intelligence, said poor differentiation is a common problem facing hypermarket and supermarket operators in China, with some retailers struggling to stand out in terms of product design, pricing and other aspects.
To win over Chinese consumers, foreign retailers "must use the right channels, especially online to offline, to connect and engage with them," Lam said.
"Social media is a must in China nowadays, and Aldi takes the lead to offer customized and tailored products and services in China," she said, a sign that the German retailer "is willing to adapt to the China market."
Lam said that Costco carries a natural advantage in terms of brand awareness, especially among Chinese who have traveled abroad.
When China first opened up to the likes of Lidl, Metro and Carrefour, the retail market was far below the level of saturation it has reached now, said Roger Shi, a research analyst with Mintel China Reports. But these foreign players struggled to adapt to the changes wrought by the rise of e-commerce, he said.
This is particularly true for Carrefour, which missed the opportunity to digitize its business from the bottom up before e-commerce giants like Alibaba, Tencent Holdings and JD.com gained a huge influence on consumers' purchasing behaviors, Shi said.
Carrefour also fell victim to the market entry of many rivals, including Walmart and RT-Mart. They all sell similar products, so price wars were inevitable.
"By contrast, Aldi bets on the upgraded purchasing behavior of the Chinese middle class by selling good-quality food in stores with an interior design mimicking the likes of Alibaba's Hema and providing delivery and self-checkout services," Shi said.
Meanwhile, "Costco is targeting customers who are generally married with kids and willing to travel just a bit during the weekends to purchase larger amounts of imported produce," he added.
Walmart, on the other hand, invested in online grocery store Yihaodian in 2011 and began working closely with JD.com in 2016, Shi said, so the American retailer's current business model in China is seen as successful because it understands the value of integrating online with offline.
As for Tesco, the failure in China was attributed largely to its disappointing results caused by the lack of localization.
Lidl, which made a troubled foray into the U.S. last year, apparently lost the appetite for another risky step from online to bricks-and-mortar retail in China. The company instead is focusing on expansion within the European Union, particularly in Poland.
When Metro closed its MyMart convenience stores in China in 2017, it cited skyrocketing rents in big cities. Analysts then noted that the company faced fierce competition against the likes of 7-Eleven, Alibaba and JD.com.
Wang, the German-educated Aldi shopper, is perhaps more representative of today's international-minded Chinese consumers, who have no shortage of shopping choices.
"I will visit the store again, as I like the atmosphere," he said.