I recommend this recent piece in The Guardian – The Aldi effect: how one discount supermarket transformed the way Britain shops. It’s top shelf journalism.
The article is about the three decades of investment that lead to the ‘overnight’ success of the German cut price food retailer in the UK. It’s a story we’ve seen replicated by Aldi here in Australia, as well as Ireland and non-Germanic parts of continental Europe.
It covers all the now obvious factors that contributed to Aldi’s competitive advantage. The limited range, small footprint stores, focus on private label and bare bones pricing.
More than bargain prices
But it also covers more nuanced factors. Think of the combination of four barcodes on most products, and the pack-your-own-bags process. All about efficiency, right? Well that’s only part of it. By accident or design, the process is now also about psychology.
The assistant shuffles your groceries into the tiny packaging area at warp speed. You fling them into a bag or trolley, all the while wondering how you’ll keep up. That mild stress is known as the “Aldi panic”. It heightens your awareness when you later receive the “thrill at the till”, a trolley full of goods for less than you’d pay elsewhere. A stronger association is formed in your brain. Later on, as your heart beat slows, it also solidifies the idea that you have spent less time shopping here than you would at Tesco.
What about the idea of paying store employees above market wages? Sure, it’s the way to get the best staff in the industry. But there’s also proactive and highly counter-intuitive strategy behind it:
“Paying well obviously helps attract and retain staff, who might otherwise go to chains where the pace of work is slower. But it also serves to drive up wages across the industry, which, because of Aldi’s lower overall employee costs, hurts its competitors more.”
Even the “Aisle of Shite”, the ever changing middle aisle of merchandise, gets some study. The one-off nature of the offering means Aldi can fill it with whatever is currently available at good prices, like a mini Costco. You may not find anything you want. But if you do, it will be a good deal. Psychology probably also comes into play here. Sporadic payoffs are more exciting than chronic. It injects the thrill of the hunt for those who might otherwise get bored with buying the same tomato sauce, mince and frozen fish every week.
Retail is competitive. Often very competitive. As the Aldi tagline in Australia suggests, you need to be good and you need to be different. To succeed as an upstart, those differences need to address some customer segment much better than what already exists, be it on range, location, layout or price. That’s the starting point. Aldi was different from inception.
But to be wildly successful, you also need a long runway with no or limited competitive response. Almost by default, that means the incumbents you compete against cannot replicate your offering. Either it’s too different from what currently makes them successful or they are completely dismissive of the threat you pose. Ideally, both.
How could Tesco, which defined itself by its massive selection of 25,000 different products, obliterate an upstart that was selling less than 1,000 – merely one of everything? It couldn’t. Aldi had small stores in poorer regions and a pack-your-own bags mentality. Did Tesco, with its big box layout, great presentation and full service, even view it as a competitor, let alone threat? You can almost hear the boardroom discussion – let them eat nutoka.
Even with the benefit of hindsight, I’m not sure Tesco did the wrong thing by milking its 6% profit margins for an extra 15 years rather than confront Aldi at the onset.
Other Good Different approaches
The most successful retailers that come to mind were very different from the incumbents that preceded them. That’s precisely why they weren’t squashed the moment they came to market. Like with Aldi, many of what we today think of as their most successful attributes are the same characteristics competitors once laughed at.
In the first half of the 20th century, traditional department stores in the US were located downtown and were big on service, from seamstresses to elevator operators. Along comes Sears with a mail order catalogue focused on underserved and generally poorer rural customers. Would the department store operators even notice? And when Sears started opening stores, they focused on working class and new suburban neighbourhoods developing after World War II. It was a completely different category to the traditional downtown department store.
Time moved on, and a few decades later Sears was too comfortable in its success to care when Walmart started opening really large footprint stores in surprisingly small towns. The economics of such a huge range at sharp pricing simply couldn’t be economical outside of major suburban areas, the Sears board probably told themselves.
Walmart had an uninterrupted runway for decades and built a fortune. But that’s changing too.
How does Walmart confront a retailer like Costco? Even bigger footprint stores, often in semi-industrial suburban areas. There are only a handful of stores in each large city. For customers, it’s not so much popping into the shops as taking a half day excursion. The range is wide but sporadic. One week they’ve got a fantastic deal on flat screen televisions, the next there are no televisions. And you’ll need to pay an annual membership to shop there, so the economics for customers only work if they spend plenty. What they get in return is great value. Costco’s average markup (the premium its customers pay over what Costco pays suppliers) is less than 15%. At Walmart the markup is more than double that.
Meanwhile, Dollar General focuses on even smaller and poorer towns. Everyday consumables everyone needs, saving customers the drive to the Walmart two towns over.
Around the world, furniture retailers felt little threat when IKEA first came to town. No frills Scandinavian design? Boring. Who wants to collect their own furniture in flat-pack form, transport it home (or pay for delivery) and then spend four hours putting the damned thing together. Nobody, I’m sure they said.
And of course there’s Amazon. Sure they can have an unparalleled range being online only. But that comes with a long, long tail of low volume products that are extremely hard to sell profitably. Free delivery, even same day delivery if you pay an annual membership fee? Sounds costly. You’re going to lose money for decades. And what’s this about allowing competitors to sell on your ecosystem via Marketplace, talk about playing with fire. I don’t know Bob, they’ll go bankrupt well before they hurt our business.
Aldi’s story reminds us of a key lesson for upstart retailers. You need to be sufficiently “Good Different” so your main competitors can’t copy you until it’s almost too late. And ideally, you want them to laugh at you too.
The cost of being listed
Another part of the article that really caught my attention was the nature of Aldi’s competition. Back when the rest of the UK market considered Aldi a joke, company insiders considered its prospects a “racing certainty” because a few important conditions were in place. One of those conditions was that all four major supermarket incumbents in the UK were listed on the stock exchange. Public shareholders simply don’t have the stomach for the fight.
“The best way to fight Aldi early on is to slash prices, but few bosses of public companies are happy to accept lower profits, and thus lower bonuses, by pursuing long-term strategies.”
Being listed can cause crippling myopia. It’s something we see all the time. And something we’ll write more about in an upcoming post.
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4 thoughts on “Aldi: Good Different”
I have read recently, not sure where, that in France, that the discounters (Aldi & Lidl) are either in retreat or not expanding. This is because the likes of Carrefour have finally figured out how to combat them. The answer seemed to be by increasing their own range of ‘home brand’ items.
The French are very patriotic about Carrefour and I’ve heard first hand from customers they’re willing to bypass the convenience of Amazon and price of Lidl/Aldi on this basis. Sure small sample size (3 ppl) but interesting nonetheless
Part of the problem is that the incumbents allowed Aldi to spin that Aldi products were as good an name brands. If they are the same quality then why pay up for the name brands?
I don’t have an issue with the larger supermarkets having their own “home brand” products which compete on price with Aldi products, but they should differentiate the quality e.g “home brand” are budget products, name brand are premium products. Let the Aldi customers know that Aldi products are acceptable budget products, not premium as Aldi has been spinning.
Aldi has copied the packaging of many name brands, but most of their products are simply not as good; i.e they are mutton disguised as lamb.
I spent a few months shopping at Aldi, then went back to the major brands because you could taste the difference.
There is certainly a place for Aldi in the market and their cheaper prices over the main brands are of great benefit to welfare recipients, the working poor, single parents, large families and the bargain hunters, but they are not as good as the more expensive main brands.
Excellent ,well presented article of sector changes and why