Aldi: delivering what and only what the customer values

Aldi’s business model is formulated with a very specific customer in mind: someone who evaluates groceries from a utilitarian perspective. Aldi’s customer wants low prices in a quick shopping environment and is willing to make sacrifices on choice and service.

To satisfy this customer segment, Aldi makes it their mission to sell essential grocery products consistently and predictably cheaper than their competitors.

So far, their strategy seems to be working. Aldi’s sales in Britain grew 15.1% last year. In Australia, the company now holds 10% grocery market share on the east coast despite only entering in 2001 into a duopoly market. In the US, Aldi has 1,375 stores and is planning an aggressive expansion. [1]

So how do they deliver their customer promise? There are a few fundamental pillars to their operating model:

 

Don’t waste work

Aldi is religious about minimising store labour in their processes. All of their packaging is shelf-ready which means no time wasted stocking. Cartons are placed directly onto the shelf and in certain cases, straight off the forklift.

Shelf-ready packaging drastically reduces the need for stocking labour [2]

Shopping cart labour is another expense Aldi doesn’t have to contend with. Aldi’s shopping carts require a coin deposit which is refunded to the customer when the cart is returned. This incentivises customers to return carts to their correct positions, something that store employees would’ve otherwise had to do.

Aldi’s checkout process is also famous for its efficiency. Blogs, Youtube videos and even a petition [3] calling for slower checkouts have sprung up over the internet in response to the lightning speed of their checkout staff. Part of the reason they are able to execute this is because checkout operators don’t bag the groceries – that’s for the customers to do themselves.

In any other retail business, these factors may be perceived as poor service. However, because of Aldi’s careful market targeting, their customer is actively willing to engage in this trade-off of service for low prices. In fact, Aldi markets the service concessions that they make to further re-enforce their low-cost image and encourage customers to be contributing agents in their operating model.

Aldi communicates to its customers how their initiatives ultimately reduce product prices, encouraging customers to participate [4]

 

Keep it simple

A typical supermarket will stock over 10,000 SKUs to satisfy customers’ ever-increasing needs. Aldi, in contrast, stocks only the essentials: less than 1,500 SKUs. Choice is strictly limited: there is often only one product for each category and 95% of the products are private label. [5] This helps keep costs low, not only removing the usual overheads associated with branding, but also a) reducing intra-category competition and b) speeding up the customer’s shopping journey. [6]

An example of Aldi’s private label products [2]

Simplicity isn’t just good for Aldi’s operating model – it’s good for their suppliers’ too. Unlike other supermarkets which constantly negotiate with suppliers on shelf space, payment terms and promotional support, Aldi doesn’t mess around with the peripherals. They simply ask for low prices and respectable quality in return for stable (and growing) demand and prompt payment. [7] This predictable volume, combined with minimal SKU count, keeps costs in the supply chain low for everyone involved.

 

Bring customers to you

Aldi knows that the draw of its low prices is enough to offset slight disadvantages in convenience. Consequently, Aldi is able to run shorter opening hours than its competitors, optimising store operating costs. [8] Moreover, they are able to build in 2^nd tier locations. This offers huge advantages not only in cost but also in entering markets where incumbent retailers may have already land-banked the most premium locations.

Because they don’t target the top locations, Aldi doesn’t have to customise their stores to the limited space available. Instead, Aldi operates a greenfield development strategy where they ‘copy-paste’ the same optimised store layout. This results in lower construction costs and a standard (and thus faster) shopping experience for the customer. [9]

 

From the outset, Aldi appears to be a well-run business. Digging deeper, the alignment between their operating model and business model is pure genius. They found a customer who wants essential groceries, cheap and efficiently, and then recognised how the characteristics of this customer are exactly what a business wants in a volume retail environment. Along the way, they made the customer an agent in their operating model, implicitly sending the message: ‘make sacrifices where you don’t care and we will deliver where you do’.

 

[1] http://www.economist.com/news/business/21646224-german-discounters-successful-business-model-only-stretches-so-far-tomorrow-not-quite

[2] Store visits

[3] http://www.ipetitions.com/petition/aldi-checkouts-way-too-fast-for-consumers

[4] https://www.youtube.com/watch?v=LEoUvx5_ZAg; http://beingalison.com/aldis-saved-big-aldisaves

[5] http://www.propertyobserver.com.au/finding/commercial-investment/retail/30766-masters-could-learn-a-lot-from-aldi.html

[6] http://www.forbes.com/sites/thehartmangroup/2015/04/14/aldi-is-a-growing-menace-to-americas-grocery-retailers/

[7] http://www.spiegel.de/international/business/a-secretive-family-s-success-what-makes-the-aldi-discount-empire-tick-a-709937-2.html

[8] https://www.aldi.us/en/new-to-aldi/shopping-at-aldi/

[9] Interviews with retail consultants