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Aldi

German discounter Aldi, went from being a small-town supermarket to threaten some of the major players in the UK industry. Founded in 1961 in Germany this relatively small and unknown discount chain supermarket over the decades has grown to spectacular proportions, owning over 10,000 stores spread across 20 countries and generates an estimated turnover of more than €50 billon.

Opening its first store in the UK in 1990, enjoying a steady growth with a market share of 1’7% ten years ago and currently has a 7’6% can be translated in an increase of 300% of the market share in the last decade, generating over €10 billion in sales in 2017.

With changes both social and economic changes playing important factors, discount chains such as Aldi has used strategies to their advantage. Rising inflation, sluggish wage growths made customers a lot more conscious of pricing in the supermarkets, with customers looking for overall value, Aldi’s strategy consisted on prioritising on price, before value, but keeping a good balance between both has given Aldi a competitive advantage. With another close competitor Lidl who operates a similar discount model have increased dramatically their market shares threatening the named “Big four” supermarkets, with both Tesco and Sainsbury performing the worst in recent years, were not ready for the price war against the two Geman discounters.

VRIO analysis

Resource sourcing

Cost leadership strategy

Customer satisfaction

|  VALUE |  RARE |  INIMITABILITY |  ORG SUPPORT |  COMPETIVINESS
|  YES. High value for money when comparing the product, price, leading to satisfied customers |  No. Aldi uses its resources and capabilities better than the competition, however others using similar strategies |  Maybe. Other competitors with a strong market share are trying to imitate the model, although may not succeed to compete with Aldi |  Yes. Aldi is strongly organised to exploit their resources and capabilities to keep to their cost leadership strategy. |  Temporary competitive advantage. Various competitors offering the same strategy, although for the time being Aldi is still the market leader on their business strategy

Aldi’s resources & capabilities

The long-term success of any business is based on a company’s distinctiveness of resources and capabilities. Aldi goes to great lengths on these measures. All resources are sourced in a sustainable way and cause the lowest negative environmental impact possible, putting a vast amount of input into purchasing its resources. However, the companies resourced based view to gain a competitive advantage and a superior performance than its competitors not only is from distinctive resources, but to the company’s distinctive capabilities to provide the highest value possible to customers and make it as difficult as possible for competitors to imitate.

The companies core competency is its focus on low pricing, purchasing resources on large scale from a reduced number of clients, using their own branding. Maintaining costs down are not only the capabilities ensuring Aldi is a step ahead of the competition. Efficiency on what is know as “lean production” which is basically getting more from less, by reducing its costs and waste, holding the adequate amount of stock (less is better than more), close relationship with suppliers and core values which are passed on to staff are clearly working for Aldi as its performance has been superior in recent years to all other competitors in the market giving a clear competitive advantage.

Conclusion & recommendation

This cost leadership organisation is offering the best price, quality in the industry. While it is obvious from the previous data that Aldi is visibly the fastest growing supermarket in the industry, using its resources and capabilities in the best way possible. It has to ensure it keeps improving and being as innovative as possible, with the “big four” still having a substantially higher % of the market share and fighting fiercely to keep hold of it, other organisations in the industry have quickly taken up on cost leadership strategies, with a clear example of Tesco purchasing the new discount chain Jacks to compete with the rising threats of the low cost supermarkets. Changes in customer habits, online purchasing, appearance of more independent and convenience stores are only some of the various threats that Aldi will have to face in the future.

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Industry definition

The food retail industry englobes various types of establishments that offer food to be purchased by the public to be consumed offsite. This industry is formed by many establishments that offer the mentioned service, bakeries, butchers, fishmongers, meat markets, supermarkets are only some of the establishments within this industry. This case study is focusing on the UK supermarket industry.

Supermarkets are self service establishments that offer a wide variety of products organised in different aisles within the establishment. These products vary from all type of fresh food such as meat, fish, vegetables… to non-perishable food items canned and packaged goods. Other products are also on offer such as household, cleaning, pharmacy among many others in the contemporary supermarket.

History

During the 1800 all the way until around 1950 shopping was a time-consuming activity carried out on a daily basis which involved various trips to different establishments purchase all the products needed, with shop assistant serving customers directly and on an individual basis.

Self-service shopping was a huge innovation that was born in America in 1916 in Memphis, Tennessee, this revolutionary creation was a hugely successful model that allowed customers to gather their own products and gave way to cutting costs and lowering prices. This new model was adopted in Britain further ahead, with the first supermarket opening in on the 12th January 1948 and this is how the modern supermarket industry was born in the UK.

The rise of the supermarket

Today’s supermarkets are incomparable with the old and antiquated “supermarkets of the past” there have been huge changes in the last decades, with a turning point in 1990 with customer surge in supermarket shopping led to supermarkets dictating what must be supplied rather than purchasing what was on offer. There has been a steady transition over the last decades, with small corner shops or supermarkets purchasing goods from a wholesaler paying for goods mainly at asking price. Changes such as affiliation between supermarkets led to price reduction when sourcing from suppliers, food processing and product branding started to take place, before moving to the low-cost era. Low government intervention, high competition for market share and customer loyalty are only some of the factors that have led to the current competitive and cut-throat supermarket industry in the UK.

Todays supermarkets

The grocery sector in the UK is one of the most sophisticated in the world, with 86,332 grocery stores located in the UK, recording the strongest growth in the whole of the retail sector. In 2018 the sector was worth £190.3 billion, with a 1,3 percent increase on the previous year. Groceries are the third largest expenditure within households after housing and transport, accounting for an expenditure of 9% of our income. With the expectation of a consistent growth in the coming years it is estimated that by 2023 the sector will be worth 218.5 billion with a forecasted growth of over 14’8%.

Breaking down the market and gaining an insight into the different businesses that operate and compete within we can see that the following businesses account for the market share:

Hypermarkets and supermarkets 40%

Small supermarkets 20%

Convenience stores 21%

Discounters 13%

Online sales 5%

Other independent 6%

The named “big 4 “supermarkets chains have dominated the market for the last decade, however there is an expected increase on online sales in the coming years and as we will see further ahead the low cost supermarkets are also gaining a high percent of the market share.

PESTLE

Various external factors affect this industry, below a brief breakdown can be seen via a pestle analysis

Opportunities

P

E   Recovering economy, increase in average income, reduced unemployment

S  Tradition, changing buying habits

T  Innovation, online shopping and delivery, social media

L

E

Threats

P       Brexit could lead to instability due to leaving the EU trade zone, tariffs

E      Fall of the pound, food price inflation

S      CSR, changing buying habits

T

L

E     Weather affecting supplier produce

Porters 5 forces

Threat of new entrants

When speaking about the threats of new competitors entering the industry, it is essential to analyse form various angles, as it depends on different factors. There are few restrictions to enter the industry meaning the barriers of entry are low. However, the barriers are high when it comes to gaining part of the market share, as competition is extremely fierce. A clear example of this are the discounter supermarkets such as Lidl and Aldi, who even though benefiting from a huge growth in recent years, still represent a very small part of the market share in comparison to the leading Tesco or Sainsbury’s.

Coming in at big scale requires a high investment, while at a small scale tough competition from the well-established supermarkets benefiting from location, price differentiation, high economies of scale and a well-established brand reputation both for customers and suppliers. Analysing this leads to the conclusion that while the possibility of threat of new entrants is high, the chances of success are relatively low, meaning this force can be considered as benign, with the competition mainly established with existing premium, major and cost leadership supermarkets in the industry.

The best possibility for new entries as a niche in the industry, bearing in mind customer switching costs are low, this can allow new entries to have somewhat more of a possibility, in comparison to other industries.

Threat of substitutes

There are various other establishments that offer similar products, farmer markets, organic shops, corner shops, independent stores, food specialists, butchers, bakers, fishmongers…while offering a more limited range of products there is a higher personal customer service. Other supermarkets offering either physical or online shopping are also substitutes, especially when shopping online, proximity is not a factor taking into consideration. Restaurants, pubs and take-aways also represent another food industry that to a lesser extent can be a substitute to the supermarket industry. With no or extremely low switching costs for customers it can clearly be said that that this is an intense force with plenty of substitutes to choose form.

Supplier power

With a great number of suppliers for the different products, not being of rare input the products mainly offered in supermarkets, and low switching costs on behalf of the supermarkets means that the supplier power is low. This offers the supermarket and especially the major players in the industry a greater bargaining power over their suppliers to ensure products are purchased at the lowest price possible to maximise their revenue on the them. However, this does not necessary apply to products from a specific well know brand, as the manufacturers can charge the supermarket higher prices as “popular brands” example “Kellogg’s”

Buyer power

On an individual customer basis it can be said that the buyer power is low, however as previously mentioned low switching costs and social factors: changes in buying habits, CSR, economic, technological: online shopping, factors can lead to collective changes in buyer power that can have major high impact, a clear example is the increase in online shopping, or purchasing from discounters, which can lead to customers going to the competition.

Competitive rivalry

With an industry growth rate of around 14’8% in the next five years, there is very intense competition within the industry, with the supermarkets have relatively low product differentiation, having to compete on price reduction, advertising battles and brand match schemes, also on the services provided such as insurances, currency conversion, loyalty cars, with the intention of incentivising customers to shop at their establishments. Another factor to be considered is this industry has high exit barriers, as supermarkets have a high amount of money invested in their business, with many of the larger scale establishments owning the majority of their establishments as free holds, makes it immensely difficult to withdraw without suffering losses.

Conclusion

The UK supermarket industry is one of the most sophisticated in the world, with major changes over the years, it has become extremely successful, with a continuous current and forecasted future growth. There are various macro factors that have a substantial influence over this industry, is currently changing the way in which the industry is operating. While there are major differences in the type business that operate within this industry, the competition involved is huge, this is leading to the different businesses having not only to adapt, but also become extremely innovative to the future changes. With online shopping predicted to grow around 26% in 2016 and a continuous forecasted growth over the next years, there has been a huge input into improve this service, a clear example is the deal by Kroger Co with Ocado, due to Ocado’s technological advances in online platform. The appearance of cost leadership supermarkets and their substantial growth in market share has been a clear indicator to other business the need to changes working patterns.

Recommendations

While the main threats seem to be the competitive rivalry with the existing businesses within the industry, the threat of substitutes from either other large supermarkets, or smaller niche businesses, or even farm markets, bakers…changes in buyer habits and the low cost of potential customers switching to purchase from competitors means this “cut throat” industry will need to constantly come up with ingenious ideas to be one step ahead of the competition to gain the competitive advantage.