Our website uses cookies

Cookies enable us to provide the best experience possible and help us understand how visitors use our website. By browsing Essential Retail Magazine, you agree to our use of cookies.

Okay, I understand Learn more

Comment: How the four As are changing retail - Aldi

German dominance on the football field is nothing new, but the strength of the German retailers, especially when playing away, is something to behold.

Aldi is the first of our 4 As. We'll be looking at why it has become such a force to be reckoned with and how it is changing the face of retail.

First some history, Aldi's current success wasn't always the way. Its foray onto these shores in the 1990s was a disaster. A new way of presenting merchandise is one thing, odd foreign-sounding was quite another and a step too far. Aldi's biggest success in its new incarnation has been to be a German retailer that successfully becomes more British.

The phantom brands remain, but they now sound much closer to home. British staple items lie in easy reach of price conscious consumers – don't worry, you can still buy your cheddar, crumpets and custard here. For Aldi's genius has been to banish the class card in the notoriously class-sensitive British grocery market.

Aldi excels at bringing costs down, keeping prices low for its customers and keeping operating costs to a minimum. This relentless focus on cost has resulted in Aldi UK's year-on-year sales growth of 20% followed by 35.3% sales growth in the 12 weeks to 30 March 2014 (Source: Kantar Worldpanel).

This stunning performance reflects a long-term growth trend by the discounter rather than anything temporary. We expect the rapid growth rate of Aldi and Lidl (Aldi's closest discounter rival) to continue to disrupt the UK grocery market in the medium term and then continue stealing market share so that over the next 30 years their combined market share will have doubled.

The rapid growth of the market share of both convenience and eCommerce (9.1% CAGR), alongside the discounters, is likely to squeeze the market shares of the traditional 'big box' formats (hypermarkets, supermarkets and superstores), dominated by the multiples, from 66% to 45% (see below). We expect discounters, convenience and eCommerce to cannabalise £7.6 billion sales from the major multiples in the next five years.

Over the past few years, the big four grocers have chosen not to talk about the threat from Aldi, perhaps in an attempt to starve the discounter of the oxygen of public scrutiny. Dalton Phillips, CEO of Morrisons, has dramatically broken the cosy consensus of the oligopoly and announced a price cut campaign aimed squarely at the discounters.

Tesco and Asda have similarly announced price campaigns and we all expect, as customers, to benefit from the inevitable price war. Is Phillips correct in his assessment that the discounters are a significant threat to Morrisons' market share? The simple answer is yes. Will the price initiative work? Perhaps temporarily, but over the long term absolutely not.

Unless the shareholders of the big four can accept a structurally lower profitability over the long term (good luck with that conversation!), then these price initiatives can only be temporary measures that will not slow the growth of the discounters.

Aldi's value proposition is a simple one: it stocks a private label range of limited lines of the highest quality at consistently the lowest price in the market. The business is able to deliver on this promise as a result of their global buying power per product (wholesale prices can be lower due to the very high volumes shipped per product as a result of the limited range) and a relentless focus on reducing operating expenditure over the long term.

The target audience is the mass market value-conscious customer (whether affluent or not) who will buy a large proportion of their weekly shop from a single visit to the discount store. These customers are comfortable with the no-frills atmosphere and service and Aldi are happy about them topping up at other retailers. Profitability is achieved through high volume and relentlessly bearing down on costs through operational excellence.

Aldi would be unable to achieve this operational excellence without its key resource: a highly experienced workforce working within a culture of continuous improvement. Its business model, predicated on low prices and operational excellence, is absolutely clear and is understood by customers, employees, suppliers and the owners alike. This clarity is fundamental to Aldi's success, allowing the business to focus on outstanding execution.

Aldi's real advantage is that it has patiently improved its operating model to consistently execute the proposition. For a competitor to replicate its success they cannot simply open up a set of similar looking stores and expect the magic to happen.

This is what makes Aldi such a difficult organisation to compete against – not only does its proposition increasingly resonate with the customer, its operation is very difficult to mimic. It is useful to understand how the business operates because this explains how it is able to reduce operating costs beyond the wildest dreams of its competition.

The operating model is built around some key principles: standardisation, simplicity and continuous improvement. As much as possible the platform on which the business operates is standardised and implemented down to the smallest detail. There are exceptions, but all the stores have the same design, serviced by the same sized trucks, with products delivered on standard pallets that have been aggregated at regional warehouses of a standard design. This has enabled the development of uniform processes and therefore systems. A consistent approach to doing things is the key first step to driving out complexity: a key ingredient of spiralling operating costs.

The knowledge of 'how things are done round here' is embedded to the finest detail in processes and in the heads of the employees.

Continuous improvement in both the design of the operating model and in the performance of individuals, teams and products is the daily business of every individual.

The lessons to be learned from Aldi are not about cost. The lessons are about clarity, consistency, value to the customer and a focus on execution. Major grocers would be well advised to invest similarly in developing a sustainable proposition to the marketplace, really understanding the customer journey(s), design the operation accordingly and focus all the organisation's energy on execution.

Paul Martin is managing director of Boxwood Insights at management consulting firm Boxwood. Find out about the other three As which are significantly impacting retail, in his regular Essential Retail column over the coming months.

Click below to find out more:

Paul.martin@boxwood.com

Boxwood

What’s Hot on Essential Retail?