Abstract
Launched in 1948 in Germany, the success of German food retailer Aldi was unexpected by many. The franchise started as a cost-conscious grocery seller and is now among the 10 largest global retailers. After its success in Europe as a discounter, Aldi also opened stores in the US, where it faces strong competition from the incumbent Wal-Mart. This paper is looking at the strategy of Aldi, in the light of competition with Wal-Mart. Moreover, it also analyzes the competitive advantages of the franchise following Porter’s five forces model.
Keywords: food retail, Aldi, Walmart, discounter, grocery, retailer
Aldi’s strategy is the one of a hard-discounter: its goal is to appeal to cost-conscious customers by having a simple offering with the lowest possible prices. On a company level, this translates into limiting any type of avoidable overhead, unneeded costs and rethinking existing business models to be able to function with as few expenses as possible. This is deeply ingrained in Aldi’s culture, instilled by the founding brothers Theo and Karl Albrecht, as the case exemplifies. In detail, this strategy is put in place by offering private label products, which constitute a large part of the total product offering (more than 90% in the US – yet some variations can be observed between countries). The question of whether Aldi should avoid locating its stores close to Wal-Mart stores is context-dependent. Intuitively, one could say that it should not be the case, because Wal-Mart operations are highly efficient, and doing so would spark an intense price competition. However, some points should be taken into account. Most obviously, the country should weight importantly in this decision: Wal-Mart does not enjoy the same competitive advantages in Germany as it does in the US, where the possibility for Aldi to compete is lower. Secondly, while Wal-Mart is also a discounter, their offering differ in noticeable ways: Aldi offers almost exclusively private label products (>90% versus <40% for Wal-Mart). Wal-Mart offers a much broader product range (SKUs 100k versus 1.4k for Aldi) and stores are thus much larger (182k square feet versus 17k for Aldi). Therefore, it could be possible for Aldi to locate stores close to Wal-Mart if it allows the firm to capture customers looking for savings and small product offering (it will mostly be the case for low-income families). This strategy makes sense as Wal-Mart and Aldi’s value propositions do differ, even though they can both be considered discounters.
Porter’s five forces model applied to Aldi
The five forces of Porter to analyze the competitive advantages of businesses are competitive rivalry within an industry, bargaining power of suppliers, bargaining power of customers, threat of new entrants and threat of substitute products. When looking at competitive rivalry within an industry, we can say that this force is high because retailing is a very competitive industry, where competitors usually deliver a merciless fight: the goal is to remain efficient and profitable at all costs. This can be seen by the low operating margins of Wal-Mart and Aldi (6% and 5% in the US, respectively) and the fact that the war with Aldi drove Kwik Save into bankruptcy. Secondly, bargaining power of suppliers is low: since Aldi has scale, suppliers greatly benefit from its network each year as sales grow. Moreover, suppliers also get value from the fact that Aldi has a set pricing. As the case states: “Aldi’s private labels suppliers reportedly appreciated the company’s reputation for reliability [] this unique loyalty has helped some suppliers grow with Aldi over the years”. The bargaining power of customers is low because Aldi’s value offering is very important to the customers. If a customer wants low-priced groceries and Aldi offers the lowest price with its private label products, the consumer has no choice but to shop at Aldi. Finally, the threat of new entrants is low: matching Aldi’s scale, efficiency of operations and private label products portfolio is highly capital intensive and time-consuming. An incoming competitor would have to go through an extended period of losses to try to compete with Aldi.
References
Brandes, D. & Brandes, N. (.). Bare essentials: The Aldi Way to Retail Success, 2nd edition, (p.12).
Van Den Steen, E., & Lane, D. (2014). Aldi: The Dark Horse Discounter. Harvard Business Review, (9-714-474).
Wells, J. & Haglock, T. (2008). The Rise of Wal-Mart Stores Inc. Harvard Business Press.
