Aldi - A Low-cost Retail

Giant’s DistinctiveBusiness Practices

About Aldi• Global discount supermarket chain• Established in Germany in 1913.• Two separate groups:– Aldi Nord– Aldi Sud

• About 9235 stores throughout the world i.e. in Australia, Europe and USA.

• 40% market share among grocery retailers.

German Retail Market• Valued at about $390 billion or $496

billion.• Third largest retail market.• Dominated by hard discounters.• Biggest Retailers:

• Despite huge size of the market – very low growth rate in early 2000s – almost 1%.

Reasons for slow growth..

• Market Saturation – large no. of stores

• Low retail spending• Extremely price conscious consumers• Restrained consumer spending - 58%

of consumers shopped regularly at hard discount stores.

• Sector accounted for one in four business failures.

Exit Of Wal-mart• German market – major challenge for

foreign retailers.• Seven global retailers, including Wal-mart

were forced out – inability to adapt to the market.

• Main Reasons – Hard discounting and cultural roadblocks

• Other retailers include Gap Inc., Laura Ashley Holdings Plc, Marks and Spencers, HMV Group, Gruppo Coin etc.

Aldi - History

1920/1922 1945 1948 1960 1961 1990 2000 2006

Born to a miner in East

Germany. Mother owned a grocery Store

Took over the store.

Expanded business rapidly.

Incorporated Albrecht Discount

Company with 13 stores in

Germany

300 discount Stores in Germany.International expansion in

Europe, Australia and USA

First supermarket store called Aldi.

Split between two brothers to Aldi Nord and Aldi Sud

Diversified to textiles, hard

goods and electronics.

3000 stores in Germany.

Became one biggest business

enterprises in Europe

7000 stores.Featured into

World’s Richest People.

Accounted for 40% of grocery sales.

Aldi’s Business Strategies

Aldi’s Way of Working

• Business model based on simplicity and efficiency.

• Motto – “ Top quality at incredibly low prices – guaranteed.”

• Both companies followed same strategies and operated on same business model.

• Business model aimed at keeping costs low.

Secrets of Aldi’s Success• Keep it simple• Strive to earn your customer’s trust.• Set your goals and follow them rigorously.• Improve details daily.• Don’t optimize, maximize.• Know where you stand, but don’t waste time on

budgets and figures.• Test now, perfect later.• Be fair to your suppliers and help them improve

their business.• Practice management by trust and control.• Talk in terms that people can understand.• Stay thrifty and frugal.

Product Strategy• Stores carried limited variety of FMCG

products.• Specialized in staple products – food,

beverages, household supplies etc.

• Better control on price and quality of each product.

Aldi700

products

Walmart150,000 products

Traditiona

l Retai

ler25,000

products

Procuring Products

• Floated tenders for each product• Allowed suppliers to bid for them. • One size to simplify shipping and operations. • Buy products in bulk from suppliers reducing

costs.• Carried products easy to handle in operational

terms – save additional operating cost.• Sold only prepackaged meat and bakery

products – avoided selling fresh.

Aldi’s Private Labels• Relied heavily on private labels

– 90% of the products – priced 30% lower than regular brands,

• Private label manufacturers were suppliers to regular brands.

• No spending on fancy packaging.

• Shoppers found little quality difference between regular brands and Aldi’s private labels.

• Good value for money.

• Did not carry more than 2 different brands of 2 products – one size.

• Stock turnover high.• Simplified billing process.• Offered double guarantee on all its

products – refund as well as free replacement.

• Low prices not perceived as low quality.

Weekly Special Buys• Special sales – two days of the

week.• Sold products not usually

available – Appliances, clothes, toys, computers etc.

• Products changed every week and were sold in limited quantities.

• Publicized through fliers and website.

• Strategic alliance with Medion AG.

• Median benefitted from Aldi’s market reach and Aldi freed from complex product development.

Small Stores• Limited assortment required

small sales area.• Small stores of 15,000

square feet.• Retail space expensive in

Germany – limited variety and small stores, a success.

• Located at shopping centers and retail properties.

• Same size and similar layout increased familiarity.

• Due to small size, Aldi’s sales per square meter were around €8,650, against an average of €4,000 for traditional supermarkets.

• Aldi incurred lower staffing and maintenance costs

• Customers liked the small size of the stores - could get in and out much faster than large stores.

No Frills Setup• No unecessary decorations.• No fancy layouts or product

displays.• Saved time-consuming

activities of setting up product displays and stacking shelves.

• Easier to replenish stock. • Food products like flour,

fruits, and vegetables were sold loose.

• Did not provide grocery bags to customers.

• Aldi did not employ greeters and baggers at its stores

• Low-cost way to manage the use of shopping carts.

• Limited store hours.• No listed complaint or query number.• All complaints and enquiries had to

be made in person to the manager on duty at the store.

No Advertising• Minimum advertising• Communication through weekly newsletter –

distributed in stores or through direct mails.• Newspaper advertisements.• In UK & US,–Weekly newspaper inserts and TV ads.– Reference to products that won awards in group

test by popular magazines like Women’s Own etc.

• In Australia,– Ads in local newpapers and distribution of

leaflet, direct mails etc.

Newspaper Ads

Newsletters

Social media or online ads

Simplified Operations

Personnel Planning

• Simple operational setup – minimum employees - low wage bill.

• Average three employees per store – 1 store manager and 2 assistants

• Multitasking required – Unloading stock, keeping store clean, attending customers, billing etc.

• Average salary twice than other supermarkets.• Personnel costs – 3% of sales.• Limited working hours.

Billing Process

• Limited assortment – easier billing process.

• Before barcodes were introduced – memorized prices or would look up in price registers

• Introduction of barcodes - longer ones – easy to scan.

• Cashiers kept change to be returned while the customer is still taking out money

Organization Structure

• Aldi’s organization structure helped control operational costs.

• Aldi’s flat structure meant that operational complications were eliminated.

• Managing directors were familiar with the nuances of the business and could take effective decisions.

Regions

Managing Director

Board of Directors

Stores

Geographic area – 50

to 80 stores

Takes important decisions

concerning region.

Decisions about

company’s future

strategy and growth.

Organization structure

Inventory Management• Aldi had ‘bare bones’ approach to inventory

management. • High inventory turnover rate, supported by a well-

developed logistics system. • Regional logistics centers, in regular contact with the

vendors to ensure that stocks were replenished at the right time.

• Regional center supplied to all the stores within a 50 kilometer radius.

• Shipping expenses up to the distribution centers borne by the suppliers.

• About 5% of the goods were shipped directly to the stores by suppliers.

• Rest to distribution centers - immediately cross-docked to lower inventory holding costs.

Vendor Management

• Took care in selecting vendors, developing and maintaining close ties with them.

• No multiple vendors for any product.• Entered into a strategic alliance with that

vendor to procure the required stocks at considerably reduced prices.

• Aldi’s careful attention to costs worked to the company’s advantage.

• Operating margin – 9.3%; Walmart – 5.9%

International Expansion

• Aldi entered overseas markets in 1967.• It purchased the Hofer chain of supermarkets in

Austria. • Expanded rapidly across Europe, as well as to

Australia and the US. • Expansion was mostly financed from internal cash

accruals, thus Aldi reportedly had very low debt.• Aldi Süd - Australia, UK, Slovenia, Switzerland, US• Aldi Nord - Belgium, Denmark, France,

Luxembourg, Netherlands, Portugal, Spain. • Both companies operated in Germany with

territorial demarcations.

• Aldi followed the same strategy as its German operations in its international markets with some minor differences.

• It was forced to stock certain brands due to its popularity and demand.

• In Australia, Aldi had to stock the Vegemite23 sandwich spread and Nescafe, which was very popular in the country.

• In Australia, the UK, and the US, Aldi sold pre-packaged fruits and vegetables, which made it easy to pick them.

Aldi’s Failures

• Aldi’s discount model was not a uniform success in all the countries.

• Failed in Ireland as consumers did not like its no-frills business model.

• Irish customers were reportedly:– not as price conscious as their counterparts in

other countries – preferred stores which offered a wide selection

of products– Stores with the merchandise attractively laid

out.

Future Plans• Aldi’s growth has slowed down –

saturation of German market.• More than 80% Germans live within

20 minutes of an Aldi store.• Low scope for exploring new

segments.• Competitors expanding rapidly in

Europe.• Global retail industry trend –

complete shopping experience to customers.

Thank You….