Aldi’s Crusade Against Costs
The success of Aldi’s operating and business models is causing a stir in grocery store markets around the world.
German grocery chain Aldi continues to impress in its success and international growth, with considerable market share gains in recent years in the UK and Australian markets. Aldi is now the world’s biggest discount grocer, and its success can be attributed to a tight integration between its operating and business models. By innovating throughout all areas of its operations, Aldi is able to realize incremental savings and pass these onto its consumers.
Private Label Pride
90% of Aldi’s aisles are stocked with private label products exclusive to Aldi. The company is selective in the products it offers, selecting only one or two brands per product and offering only the most common size.
It also works closely with its suppliers to control the look of its products. Rather than the plain, no-frills packaging we’re used to for private labels, these products are colorful, attractive, and often bear more than a slight resemblance to their more popular consumer-packaged goods counterparts.
In doing so, Aldi simplifies the shopping experience for its customers by removing the burden of selecting brands and sizes. It also appeals to its target consumer – the brand-agnostic customer who is motivated mainly by product quality and price.
The downstream effect of its product selection strategy is a dramatic reduction in the number of products it needs to stock and manage in its supply chain. A typical Aldi store will stock 1,500 product lines, compared with 30,000 for a supermarket and over 100,000 for a superstore such as Costco. This translates to decreased costs for the firm, which are passed onto its consumers in the form of lower grocery prices.
Store Size
Aldi’s stores are smaller in floor size compared to its competitors. It works hard to select its sites, and is able to partner with local land and property owners to establish its stores. The smaller store sizes also help to minimize disruption from traffic and parking infrastructure on its local communities. These strategies have helped Aldi, a business headquartered in Germany, to open a store in New York quicker than Walmart.
Small store sizes also help with the customer experience by minimizing both the number of aisles required and the walking a consumer needs to do to complete his/her shopping.
Stocking Shelves is for Losers
Aldi is also clever in managing its labor costs. Walk through any supermarket late at night and you’ll see an army of people breaking open boxes and restocking shelves. Aldi eliminates this costly exercise by working with its suppliers to develop shipping boxes and cartons that are fit for display. Products in an Aldi aisle remains in their original cartons, and are sometimes moved into place in store on the very pallets they arrive in.
By keeping its products in their shipping configuration, Aldi gains the added benefit of maximizing the use of shelf space. It also actively manages away “ullage” – the practice used by many grocery suppliers where its packaging remains partially unfilled or has excess air. In these ways, it maximizes space efficiency throughout its supply chain. Products take up the smallest volume possible in both their shipping and display configurations which also supports the chain’s small retail store format.
Do it Yourself (And Don’t Steal Our Trolleys)
Everything in an Aldi store is self-service, with no counter service or staff for any of its products. The store keeps standard business hours to minimize its overhead costs. Customers are expected to bring their own grocery bags and to bag their own groceries (bags are offered for separate purchase if required) at the checkout lane. Until very recently, Aldi stores also did not offer debit or credit card services to minimize additional transaction costs.
Aldi also values its trolleys dearly. All Aldi trolleys require a coin to use, which is returned to the user when the trolley is returned. This minimizes the costs for Aldi to find and/or replace its trolleys.
These strategies have paid off handsomely for Aldi and the firm continues to grow, with double digit growth in its European and Australian markets last year. It also has plans to expand its presence in the U.S., with a recent announcement to spend $3 billion to add 650 Aldi stores. Walmart, watch this space.
Sources
- Where Wal-Mart Failed, Aldi Suceeds, http://www.nytimes.com/2011/03/30/business/30aldi.html?_r=0
- Tomorrow, not quite the world, The Economist; http://www.economist.com/news/business/21646224-german-discounters-successful-business-model-only-stretches-so-far-tomorrow-not-quite
- How Aldi’s price plan shook up Tesco, Morrison’s, Asda and Sainsbury’s; http://www.theguardian.com/business/2014/sep/29/how-aldi-price-plan-shook-up-tesco-morrisons-asda-sainsburys
- Aldi – Our Philosophy; http://aldiuscareers.com/about-aldi/our-philosophy
- Aldi’s Love Affair with Suppliers is Killing Coles and Woolies; http://www.businessspectator.com.au/article/2015/9/2/retail/aldis-love-affair-suppliers-killing-coles-and-woolies
- ALDI Is a Growing Menace to America’s Grocery Retailers; http://www.forbes.com/sites/thehartmangroup/2015/04/14/aldi-is-a-growing-menace-to-americas-grocery-retailers/
Great post and interesting store concept! Aldi definitely seems to have stream-lined and simplified every aspect of their operational model. I’m guessing the cost-savings offset most consumer complaints regarding the potential lack of service with self-bagging and paid-for trolleys. It makes complete sense to display products in the pallets they are shipped in – displays don’t add any value to the groceries we purchase!
I’m curious about the lack of pushback regarding the exclusively private label branding. U.S. consumers seem to get very attached to food brands and I’m wondering if this model would be as successful here. The Aldi packaging does make their private labels look equally as appealing, something I’ve yet to see with private labeling here in the U.S.
Nice job outlining the business / operating models! The graphics also really helped me visualize each point you discussed.
I was a loyal ALDI customer when I lived in London and was on a tight budget and I remember that I was happy to buy cereals, bread, eggs and milk at ALDI, but was hesitant to buy higher priced items like meats. I would be curious if you came across anything that broke down the percent of sales by product type to see how they compare to more traditional grocers.
Similar to Heather, I wonder how this specific business model will translate into the U.S. Tesco tried to launch a chain of grocery stores here under the Fresh & Easy name, but their business / operating models did not translate well and Tesco subsequently shut down the operation.
Great job outlining Aldi’s business model. The Reese Group has called on Aldi stores in the U.S. for a few years now and they continue to be successful despite the atypical business model described.
My biggest concern with Aldi is their position to negotiate with manufacturers on package sizes and custom shipping containers. Typically, manufacturers who are able to drive costs down due to some sourcing advantage do not make large capital expenditures in customizable packaging. Many supermarkets and dollar stores are starting to meet or exceed Aldi’s low cost proposition by more successfully negotiating costs within the manufacturer’s current production capability.
Another concern is the lack of trialability of Aldi stores for U.S. consumers. Typically, an Aldi consumer needs to shop a few times at the store before they appreciate the simplicity of the process, but U.S. consumers are more reluctant to try these new methods of grocery shopping when supermarkets with comparable prices offer a more pleasant shopping experience.
Aldi with definitely continue to have an impact in the U.S. as consumers get used to their format, but I don’t think it will have the reach that it does abroad.
I really enjoyed this post, thanks a lot for all the info. I think the Aldi business model and operating model are a perfect example of effective alignment. I used to live in the UK and am well aware of the troubles they have caused for competition like Tesco and Morrisons.
I do however wonder whether there is a structural limit to discounter penetration and whether we have approached that limit already. The relatively plain shopping experience will deter the upper-middle class from shopping at their stores. Also I am worried that the limited number of SKUs they have might make it impossible for Aldi to be a one-stop shop for groceries. Lastly, I think they need to develop a strong online presence in order to keep growing as they have been in the past.