The budget business model is proving mightily successful in the UK. Today we take a case study approach to Aldi – the fifth biggest supermarket here in Blighty – to see what’s the secret recipe to the German company’s success.
Waning Power of ‘The Big Four’
The domination of the big-four (no, not Ernst & Young, PWC, KPMG, and Deloitte) is slowly fading, as competitors such as Aldi and Lidl win shoppers over from rivals like Tesco and Asda. But how is Aldi delivering such low costs to consumers while still retaining relatively healthy profits?
Timing is Everything
Aldi’s success is, in part, down to timing. The economic stars aligned, and Aldi cashed in; the 2008 recession meant big changes were about to hit the consumer market, and businesses that prioritised low cost, like Easyjet and Ryanair, used the economic downturn to their advantage.
Global management consulting firm McKinsey & Company said that the recession may have “fundamentally altered the behaviour of US consumers.” Consumer insights company Crimson Hexagon confirmed this trend was present on both sides of the Atlantic in a report where value for money (pdf) was found to be a driving force behind UK consumer behaviour in the post-recession marketplace.
Aldi was perfectly positioned in relation to this emerging consumer attitude and duly leveraged on their products’ comparable quality to the brands stocked in the higher priced ‘big-four’ supermarkets; Aldi used the opportunity of a new economic landscape to grow their business and have perhaps changed the landscape for good. As Management Today comments: “the Germans have permanently changed the dynamics of the grocery market by forcing down margins.”
Aldi – A Life in Numbers
We’ve spent some time talking Aldi up, but, in business, numbers speak louder than words. The German food retailer established its first store in the UK in the mid-90s in Birmingham. Until 2008, the store existed in relative obscurity. During that year it expanded from a variety store into a supermarket with enough lines to serve a full weekly shop. Importantly, Aldi did not attempt to directly compete with the big four supermarkets and their 20,000 + lines of products. Instead, the brand reduced choice by limiting lines to around 1,700 per store.
Sales for the company have grown year-on-year, 13.5% in 2016, and culminated in hitting the £10bn profit mark for the first time in 2017 (6.2% of the market share). Profit margins, however, have dropped as Aldi invest in upgrading existing stores and improving their infrastructure. But the supermarket remains committed to keeping prices low; UK chief executive Matthew Barnes explained to the BBC:
“We invested a huge amount to keeping our prices the lowest in the sector. We view that position of having the lowest price in the market as the contract we have with our customers.”
The supply chain also forms an important part of the company’s success. Due to Aldi’s limited lines, the chain has established an excellent strategic alignment between supply and demand that closely tracks and predicts when and where products will be needed. By creating an underlying demand pattern, Aldi saves money, which is then passed onto the consumer.
What’s the Secret Sauce in Aldi’s Recipe?
We’ve already established that the supermarket rode the wave of 2008’s economic uncertainty, but the reason for their success goes beyond a vaguely opportunistic strategy.
Efficiency and frugality are built into the company’s DNA; there are no unprofitable 24-hour opening times, and the packaging is created to be suitable for both shipping and display. Aldi has also utilised the ‘warehouse-as-store’ mentality by minimising the need for storage space in the store, thereby reducing another typical overhead incurred by large supermarkets.
Staff – Multi-taskers who are Paid Better than Rivals
Another important aspect of Aldi’s success is its in-store staff. Aldi tops the charts for best-paying supermarkets in the UK. The nature of the store means that “no two days are the same” and each member of staff will know how to fulfil a variety of roles around each store. Stores run on relatively small teams, which again reduces overheads and means more savings for customers.
Marketing – No Frills Doesn’t Mean No Quality
Marketing has also played an important part in establishing the brand as an alternative to mainstream choices. The “Like Brands only Cheaper” campaign tapped into the post-recession zeitgeist: consumers want value for money. With the campaign, Aldi laid out a challenge to supermarkets and brands alike by delivering comparable products for a cheaper price, and that challenge clearly had an impact. Tesco became the first of the big four to directly address their loss of the market share of shoppers’ by creating budget competitor ‘Jacks’. The new budget store appears to be copying the most successful parts of the Aldi business model.
Continuing with this theme of value, Aldi’s next marketing campaign leveraged on the unexpected, everyday quality Aldi offers at such a reasonable price: “Some people are still amazed by what you can find in Aldi; for others, well, it’s every day.”
Ironically, the no-frills marketing message shares similarities with Tesco Mobile campaigns from 2009. At the heart of both campaigns is an honest relationship with customers; Aldi will not provide a luxury customer service, it will not give customers 20 different washing up liquids to choose from, and they won’t be open at 4 am, but it will deliver a consistently lower cost than the big four supermarkets. As Aldi’s chief executive said – it’s their contract with the customer.
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