Supermarket wars: The ALDI approach

February 28, 2017 10:46 am
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ALDI has been a key point of contention amongst the Australian grocery industry for several years. This is of no surprise, considering ALDI’s Australian market share increased by nearly 7% over the past eight years, with consumer numbers growing five times as quickly as its major competitors. It is estimated that Australian supermarkets give up approximately $6B in sales annually to the discount retailer.

Woolworths and Coles are responding to this changing retail landscape by taking a page from ALDI’s playbook. Prices are being slashed and promotional activity is increasing, cited in numerous ‘price war’ news; private-label ranges are expanding and re-branding with an emphasis on increased quality. Investment in store upgrades to improve the customer experience are also ongoing. Additionally, both major grocers are employing British trained retail executives who can draw upon the Australian and UK supermarket industry parallels, including ALDI’s impact, as recently seen with Woolworth’s hiring of ex-Tesco COO Claire Peters.

Despite competitor efforts, ALDI will continue to aggressively fight in the Australian supermarket war. The discount retailer has plans to grow to 15% market share in the next four years, a $700M program to expand to over 500 stores including major developments in Western Australia and South Australia, and an aim to compete with its rivals in fresh food offerings.

What are the key drivers behind ALDI’s success?

ALDI’s mission is simple, to provide the customer with incredibly high quality at impossibly low prices. In some instances, ALDI’s products are 50% cheaper than those offered by its competitors. A deep dive through ALDI’s supply chain provides an understanding of how the discount retailer can maintain its competitive price advantage:

  • The Products: ALDI exclusive brands account for 90% of their shelf space, driving supply prices down. These exclusive brands often mimic nationally branded products that shoppers know and trust, but retail at a much lower price. They maintain a low number of stock-keeping units (SKUs) carrying 1,350 in a typical store, whist other competitors carry upwards of 20,000 SKUs. This low number of SKUs results in reduced handling costs, increased purchasing power for negotiation on economies of scale, and agility when overhauling product quality, prices, or ranges. This also means that stores can be smaller, requiring less initial investment in footprint of land, building materials, rent, and every day reduced utility usage.
  • The Suppliers: ALDI does not charge suppliers for shelf space or marketing fees. They also maintain that they keep their terms and conditions very simple. Emphasis is placed on maintaining good supplier relationships; in 2016, ALDI announced expansion plans to its suppliers rather than the media. They asked for feedback on how they could manage the inherent production challenges with the expansion. The lack of brands and promotions the store offers also removes the common power struggle between the retailer and supplier.
  • The Operating Model: ALDI maintains a simplified supply chain, with local decentralised operations acting as independent business units. This allows decisions to be made quickly and solutions to be developed and implemented immediately, increasing efficiency. The distribution network is also highly streamlined. Delivery routes are kept short by ensuring each region has its own full service logistics centre and vehicle fleet. This allows them to supply up to 100 stores daily, avoiding stock-outs.
  • The Stores: None of ALDI’s stores are open 24-hours, reducing staffing costs and utility usage. Staffing is simplified; there are no butchers or bakers, and employees are trained to perform all store tasks. Product is packaged so that it can move from the production facility to the truck to the supermarket floor without being unpacked. This reduces shelf stock time. For example, milk is delivered on wheeled units that are pushed in from the rear, ensuring a ‘First In, First Out’ policy.
  • The Checkout Process: Customers are required to bring their own carrier bags, eliminating the cost that other major supermarkets absorb. ALDI also makes money off any forgotten bags, charging customers between $0.15 and $2.49 for re-useable, branded bags. The check-out lines have long belts, capable of holding a large amount of product and thus minimising the number of tills and employees required. Packaging has a barcode on more than one surface, increasing efficiency at the checkout. Customers are also required to pack their goods away from the till point, further speeding up the overall process.

ALDI has built its business through mastering the art of a lean supply chain and has successfully grown its market share around the world by passing on discounts to its consumers. This tactic is what enables the retailer to penetrate and grow in high-margin grocery markets with a few major competitors.

Will ALDI achieve its aggressive Australian growth target?

Whilst ALDI has undoubtedly changed the Australian supermarket scene with their lean tactics, there is debate about whether this strategy is solid enough to maintain their growth trajectory. Several key risks exist that threaten to hinder ALDI’s growth in Australia:

  1. The Australian consumer landscape is shifting, with Millennials and Ethnic Australians projected to comprise the majority of retail spend by 2021. These consumers predominately want healthy, fresh, good quality, and free-from options with on-the-go convenience (eg. online shopping). They are well-informed, globally connected, and willing to pay more for brands that they feel will make a positive impact on society, with a strong preference for sustainable and local production (eg. Thank you company).
  1. Lidl, another discount supermarket chain which operates more stores than ALDI worldwide, has plans to open in Australia. The discounter has applied for Australian trademarks covering thousands of items found in a supermarket. Lidl has the same advantages as ALDI in terms of global buying power, expertise, and experience, but offers even lower prices to consumers.
  1. The Australian grocery industry has a ready-made road map to battle ALDI, taken from its European counterparts. French retailers are cited as the only supermarkets to have successfully fought back and decreased ALDI’s market share, forcing them to close dozens of stores in 2013. They did this by expanding their budget product lines, offering fewer complex promotions, simplifying own brand ranges, working with suppliers to cut the cost of branded items, rolling out convenience stores, and increasing their presence online. And it’s paid off; they’ve managed to come in 13% cheaper on own brand goods than ALDI and only 5% more expensive on branded products. The UK has followed suit, with Tesco matching ALDI on 200 of its core own-label products, a key factor in the slump of ALDI’s UK sales growth in 2016.

In addition to these risks, traditional retailers offer unique selling points such as hypermarkets, online shopping and delivery, as well as fresher product selection which ALDI stores have traditionally avoided. Woolworths and Coles are taking steps in the right direction to battle the discount retailer, and are doing so at a faster pace than ALDI’s European competition. If ALDI wants to reach its aggressive market share goal, it will need to build a strategic plan that relies less heavily on rampant store-opening across the country. The supermarket war is far from over.

Written by Karen Starr, Coriolis Consulting Pty Ltd