Question 1
PEST analysis is used to describe components of the macro environment for strategic planning. It considers the political, economic, social, and technological factors of the external business environment. In context of the paper, several political, economic, social, and technological factors affect Aldi within the retail market.
1. Political
Politically, different governments have different political stability, trade tariffs, trade restrictions, environmental laws, labor laws, and tax policies. Aldi supermarket has presence in three continents, North America, Europe, and Asian Pacific. Government interventions in these regions will affect how it conducts business in the local markets. The interventions within these regions differ greatly. In Europe however, most of the laws are standardized under the provisions of the EU.
a. International trade agreements
International trade agreements within the EU member states make it possible for the companies to begin operations across Europe. They determine the ease of access to open stores within various countries across Europe. In the EU for instance, the trade free trade agreement allows European companies to open stores all across Europe without any major restrictions.
b. Internationally agreed Employment regulations
There are different employment regulations that apply in the retail industry. Some important considerations concerning employment regulations are the minimum wage, health, and safety of employees. Retailing is a relatively unregulated industry but there are several numbers of laws and regulations that apply across Europe. They include laws that govern on recruitment, administrative status, employee advancement, or promotion, working condition of employees, termination of employment, social security benefits, and measures for disciplining employees, addressing grievances and appeals, and pension schemes. The impact of these employment laws and regulations is that it makes planning across borders relatively simple. This is because, there can be local issues, or conflict may arise with trade unions. However, if Aldi considers these rules, the company would have an easier time interacting with local trade unions in the different countries across Europe.
c. Green initiatives or environmental initiatives
There is growing pressure from governments for retailing businesses to operate in a more sustainable manner. Retailing companies will be required to develop environmental friendly operations in order to ensure sustainable development and growth of the industry.
2. Economical
a. Consolidation of the retail industry
Retailing in Europe is consolidated leading to western retailers to expand into Eastern Europe and overseas. Supermarket, discount sales stores, and hypermarkets are the most lucrative segments of the European retail industry. Revenues from these segments account to more than 50 percent of the entire retail industry across Europe. The consolidation comes as a result of more power being wielded by the large retail chains compared to the smaller retailers.
b. Global economic crisis
During the 2009 /2010, European-retailing business was affected by the global financial crisis. Generally, there is an increase in consumer purchasing power across the European continent from east to west and from south to north. The metropolitan areas or the big cities in European nations experienced the highest purchasing power among consumers. The retail market in Europe was on a growing trend until 2008, just before the recession. The company also took advantage of the different economic levels of different countries in Europe. The economic recession of 2008 affected the retail industry. This meant that the Aldi had to re-strategize according to the consumer needs at that moment. During the recession people are generally budget sensitive and reduce consumption of commodities. The per capita GDP of many economies in the world were also brought down because of the recession impact. The EU, which experienced a growing trend in its economies, reduced GDP levels by 4%. The purchasing power also matters in making economic considerations of the external business environment.
3. Societal
a. Increase in discount retailers
There is a growing popularity of discount retailers. Customers or consumers are generally looking for quality products at an affordable price. This implies that the main focus for consumers is the value received from making various purchases of the retail commodities. There is increasing demand for low price but good quality products. The changes in consumer trend are brought about by the need of consumers to buy goods that suit their pockets. The changes are brought about by the global economic crisis where most consumers find themselves having reduced incomes. Generally, consumers would want to get the same value of an item at a cheaper price. The force behind retailing is consumption of essential commodities in the homes. These commodities include electronic gadgets, clothing, and food.
b. Disparity in GDP
Under the new European borders, there is a disparity in gross domestic product (GDP). The western European nations are still more affluent than their eastern counterparts are. This affects the individual or household expenditure on the food and other retail products. In the east, consumers tend to spend more of their income on retailing compared to those in the west.
c. Variation in retail spending levels
Various countries in Europe have different spending levels in retail commodities. This is mainly accounted by the differences in shopping lifestyle, economic development growth, and shopping culture. Germany for example has a larger population than a country like France but their shopping level is relatively the same as that of France because Germans tend save more of their income than spending it. In addition, Great Britain is a consumer society that tends to spend a lot on consumer goods.
4. Technology
a. Promoting prompt services using technology
Concerning technology, the retail industry experiences a lot of dynamism and competition. This is because largely because of two reasons; the technological influence to promote prompt services and the consumption trends in the market. Dynamism comes as a result of the fast and growing changes in technological advancement. This in effect, also changes the way retailers do business. For instance, e-commerce is the emerging trend in the retail industry.
b. E-commerce
Food retailers acknowledge the fact that it is easier to reach a wide range of consumers and potential customers in the online market. Sales on made on online stores have increased in countries such as the US and other developed nations because consumers find it easy to purchase commodities through the internet. On the contrary, sales made on traditional retail stores have shown significant decline. The company therefore has to ensure that it keeps up with such trends and uses the latest innovation in technology to reach out to many clients. This will eventually translate to profitability and growth within the retail industry.
Porter’s five Force
1. Threat of competition
The value of the retail market in Europe is estimated to be about $1.382 trillion. The leading players in Europe retail industry include: Carrefour Europe, Tesco Group, The Metro Group, Aldi Europe, Sainsbury, and ASDA. It can be noted therefore, that the retail market in Europe is massive however; it is dominated by few retail or supermarket chains. The competition in these few supermarket chains is grossly intense. According to the porter model of competitive analysis, when the market competition is intense, issues such as price wars may arise. There also will be lots of marketing effort, lots of industry rivalry and rapid expansion of the industry. All these things are characteristics of the supermarket industry making competition to be very intense.
2. Threat of new entry
This depends with what is meant by new entrants. The likelihood of a new company, starting from scratch, to challenge the big supermarkets is small. However, this can be made possible through merger, acquisitions, and company takeovers. A more aggressive retailer could cause a threat to the more established players in the industry. This force is considered to be weak in the retail industry. This is because of existing barriers that preventing new entrants from growing and establishing themselves within the market. The capital required to establish a retail chain large enough to compete with the existing one is very high. The existing companies in the industry enjoy economies of scale which new entrants may not be able to enjoy. The existing companies have also already built their brands among the customers. This puts them at an advantage against any new entrant into the market.
3. Pressure from substitute product
Substitute for supermarkets include grocery shops, small retail shops. The threat of substitute products already exists although it is slightly weak. The reason for this is the fact that large retailer stores offer convenience, fresh variety of products, and cheaper prices than any other small-scale independent retailers do. These are attributes that most customers prefer. People generally enjoy shopping from a retail stores in which they easily identify with and are willing to be loyal. On the other hand, most people only go shopping because they are generally lazy and a supermarket offers the perfect solution for this habit of laziness. This implies that nothing can stop a consumer from shopping online or shopping at any other place apart from a supermarket.
4. Bargaining power of buyers
The buyers are basically the shoppers and consumers of retail products are looking for value for their money. Individual buyers are considered to have relatively weak power over the retail industry. However, collectively, the buyers have significantly huge power. They can decide to walk away if they are not impressed with goods and services offered in supermarkets. Therefore, customers have a lot of bargaining power in the retail industry. Buyers have the power to play one firm against another, implying that they can choose to shift their loyalty from one retail company to another. They can also bargain for high quality of products and more services. The power of buyers is significantly seen collectively. One buyer may not make a difference, but many buyers can easily make a huge difference. Because of this, many supermarket try to establish some form of contracts to ensure that consumers loyalty over a long period of time. They also engage in brand building exercises.
5. Bargaining power of suppliers
The suppliers are basically the farmers and manufacturers. About farmers, suppliers have relatively weak powers to negotiate their way. According to the porter model, when the suppliers are relatively many than the buyers, the buyer has a lot of power to negotiate deals. There are many farmers who would want to supply their produce to supermarkets. However, the supermarkets can only contract a few of the farmers to supply the goods. This force is also strong on the side of the supermarket. However, this force can be strengthened when suppliers decide to group together to control prices and siphon potion of profits that may be excess. Many governments in Europe and developed countries have regulations in place to control activities of suppliers in order to prevent manipulations.
Summary
The supermarket industry in Europe is intensively competitive but tends to be dominated by companies from northern Europe. These companies include: Carrefour, Aldi, and British retail chains. The case study shows that this is because average GDP tends to increase across Europe from east to west. However, the study also shows some growing opportunities in Eastern Europe that would increase the value and size of retail industry within the region. Although the industry is very competitive, profitability of individual retail chains is not necessary associated with the intensity of the competition. Therefore, the opportunities for Aldi’s expansion based on the two analyses are numerous.
Question 2
Part 1:
Aldi has been able to offer incredible discounts to consumers thus for a long time now. Their business model is low prices business model. They promise to provide customers with a smart experience of shopping. However, there are numerous hidden costs that consumers may fail to realize while shopping at the stores. This is one of the reasons why the company has been able to provide such impressive discounts to its customers. The other reason is the company’s business strategy. Aldi’s business strategy is based on its mission “low prices and limited selection.” The company stores limited brands and the cheapest in the market. According to the case study, a typical grocery store would stock approximately 30000 varieties and brands of food items. However, in Aldi, a single store only stocks around 1400 brands and varieties of food items. There are some products that only have one brand stocked in Aldi’s stores. This strategy has given the company a bargaining power over suppliers and contributed to its rapid expansion.
The manufacturers of the brands stocked in the company simply sell the products cheaply making it possible for the company to purchase in bulk and sell also sell at low prices to the consumers. With the rapid expansion of Aldi, suppliers who placed rigid rules had to reconsider, loosen up, and join the list of Aldi’s suppliers. The company also used a “no advertising” strategy especially in the home market. This lowered its cost of operation and made it possible to reduce prices of its commodities. Other local supermarkets in Germany had to rely on the power of advertising to promote their products as well as their brands. With the advertising cost to consider, rival companies find it difficult to compete with Aldi in terms of prices. These strategies however, were only viable and successful in the home Germany market. In foreign markets, the company had to use strategies such as advertising. However, it still maintained the low price business model.
Part B;
The low price business model proved effective for Aldi. The company grew and expanded at a rapid rate. The business model led to price wars among its rivals forcing them to respond by adopting the same model. Some of its main rivals in the local market began the concept of discount stores to compete with those already established by Aldi. By 2010, the total number of discount grocery outlets in the country a lone had totaled to 16300. A quarter of this number belonged to the company. Most of the leading rivals entered the market with the same strategy or business model of low prices. In addition, the both Aldi and its main competitors had to use strategies that capture not only the budget sensitive consumers, but also those who were willing to spend extra money for quality goods and services.
Question 3
This section seeks to explain how Aldi can still maintain the low cost business model using the Ansoff matrix. According to this matrix, there are four key factors that have to be considered,
market penetration,
product development,
market development, and
Market/product diversification
According to market penetration segment of the Ansoff matrix, the strategy that Aldi can use is to expand within their existing markets. This means that they can get their existing customers to buy more of their products. In order to achieve this, the company could offer more incentives to sale more of their products. They could also identify some of its products, which can be used more than the current rate of consumption among consumers. For instance, the company could advertise some its products in a manner that attracts excessive use of the product in order to allow customers to make frequent purchases. With the global economy recovering from the recession, it is most likely that people would go back to consumerism. One such food product could be cereals. The company can embark on advertisements that aim at promoting increased use of cereals more than the normal rate. In this way, sales of cereals can increase while the company still maintains its customer base.
With regards to market development, the company could open up more stores in various regions and countries. This would build a culture where people generally prefer to purchase commodities for daily use in supermarkets. Considering the response by its rivals, the company is facing stiff competition and therefore needs to come up with a strategy to remain competitive in the discount grocery store market. With the use of the Ansoff matrix, the company is able to gain rival’s customers, which implies that they are able to increase their market share. The strategy will also ensure that the company is non-users of particular product and convince existing clients to use some of the products more.
The other strategy for market penetration is promoting a product among non-users to begin using it. For instance, health conscious consumers would not purchase certain products. The company can identify these products that are highly unlikely to be sold among this group of customers, and repackage them in such a manner that would convince them the products are good for their health. For instance, ensuring that all such products have labels to show how natural and healthy they are.
In addition, the company could also focus on market development by coming up with new products in the same product category. This applies for food retailers especially when it comes to pastries. The company could bake its own bread or any pastry products and sell them cheaper than some of the brands stocked in the stores. The same concept can be applied in dairy products. Such a concept could help the company to produce and sell products directly to the customers without considering any cost of distribution from the supply chain. Moreover, the company can embark on diversification where they have a variety of products in the same line or category. This is one area where the company has decided not to focus on because it offers limited products at low prices. Diversification also implies that the company can begin operating in new markets. It can expand to untapped markets and gradually establish its brand within those markets. For instance, the company could expand to markets in fast growing economies in Africa, Asia, and South America.
