This entire article is a result of collaboration, and I doubt you will find a better single source on Aldi anywhere outside the company. A number of comments included here were sourced from a briefing document prepared by EMR-NAMNEWS and published in their monthly newsletter. These items are referenced as (ref NAMNEWS). A number of "surfers" have provided invaluable insights. There is nothing quite like the comment of a seasoned industry observer who has lived through an Aldi onslaught! If any readers are familiar with Aldi's operations and can offer insights into their likely strategies, please email us so we can share this information. When I first heard that Aldi was planning to open in Australia, I must admit that I was extremely cynical about their chances of making a dramatic change to the food retailing scene in Australia. Read this article and make up your own mind. I have certainly changed my views!

Aldi, the all discount chain

Aldi is a very private German based retail chain. Their 1997 turnover was 24.6 billion Euro. They control 4800 stores, of which about 3314 are in Germany. The rest are in Austria, Belgium, Denmark, France, Luxembourg, Netherlands, UK, USA, Ireland, and now Australia. Their USA turnover was estimated at US$3 billion in 1999.

"Founded in 1960 by brothers Karl and Theo Albrecht with the opening of the first store, the company split in 1961 into Aldi Nord and Aldi Sud, and ever since both companies have been legally and organisationally separate. Today, Aldi Nord is the larger of the two discounters, reaching 54 per cent of German households and operating 2,143 stores, whilst Aldi Sud serves the other 46 per cent and operates 1,171 stores in Germany. Aldi is a privately owned secretive organisation and so it does not publish its financial results. Aldi managers and directors do not grant interviews to the press." (ref NamNews)

"Despite its presence in 8 countries, Aldi is highly dependent on its home market, which in 1998 accounted for 64 per cent of its total business. However, the stagnant German market, with profit margins under pressure due to rising costs and intensified competition, is leading Aldi to add new sources of growth to the business. Aldi has expanded its assortment mainly with frozen foods, but also with fresh meat, dairy products and over the counter pharmacy products. The introduction of frozen foods by Aldi has been responsible for a 20 per cent drop of sales of frozen foods in German supermarkets. Aldi has also extended the stores opening hours as well as increasing the average store size to 1,200 sq. m." (ref NamNews)

A significant number of their customers are very supportive, and talk of saving 50% on their grocery bills. How much you might save is discussed later. It seems Aldi does everything possible in order to reduce costs. For example to use a shopping trolley, you must deposit a coin, which is refunded on return - this means no labour is needed to round up trolleys. (They are the only chain in the USA to require a coin!) Shopping bags are available - but you are charged for them. You can use your own old shopping bag, or use a cardboard carton for free. Bags are not packed - a la Franklins of old. You can only pay by cash. They frequently do not accept credit cards or cheques. Whether they will take EFTPOS remains to be seen, but is probably unlikely. The range appears to be typically between 500 and 1000 lines, and in many/most cases it is only house brands. Stores have unlisted phone numbers - so staff never have to answer the phone. If a complaint is to be heard it is that you can't tell who made the product, but the quality is good to very good. They stock only one variety, in one size. If you want baked beans, you will only have one choice, in one size. Consumer Panel research is used to select sizes that are to be offered.

It seems the pricing strategy is EDLP (Every Day Low Price - not High Low price as we have in Australia) and suppliers do not have to pay co-op, promotional funds or new line fees. (The latter would be a bit over the top for house brands!) Pricing is absolutely fixed even across States. There is no such a thing as competitive stores, and they don't have the distraction of promotional price changes and the need to erect promotional displays! Staffing is cut to the bone - you might even find the store manager or cashier packing. Staff rush around madly in a typical store. There are often only three staff in a 600 sqm store! Aldi strongly resist ticketing items, but have announced they will scan in Australia. They apparently often avoid installing scanners and get their staff to memorise prices. This keeps capital costs down. And it apparently leads to faster checkouts - enabling them to ring up merchandise at a rate of 70 items a minute, versus 20 items per minute at a traditional grocery store. Aldi themselves have put out a press release, to squash rumours of union trouble over their staff having to memorise prices, and advised they will scan. I recall Franklins staff having internal competitions to remember prices some years ago, but I suppose that is quite different!!

A reader suggested looking at Trader Joe's web site in the USA and I must admit that if Aldi is like this, it looks very very professional. (Aldi owns Trader Joe's) If Trader Joe's can offer the assortment listed on the web site in under 1000 SKU's (Stock Keeping Units), it looks like a pretty complete shop to me! Perhaps our view of narrow range is in fact coloured by very bloated ranging of the full line supermarkets. When you think about it, a very full shopping trolley might have 150 items, out of 12,000 to 14,000 in our supermarkets, so it is not surprising that you could get by with 1000 SKUs. The key question is how Australians will react to that, and the answer probably lies in price and quality.

Aldi also like to retain the outer packaging, suggesting something similar to the cut case displays of our Jewel/Franklins stores in years gone by, except Aldi get suppliers to ship with displayable packaging. It is interesting to note that apparently they will pack product in different packaging to reduce cost. And floor stacks are preferred over shelves. They appear to favour wheeling stock in on pallets, and shelving is minimal. Suppliers assist in the preparation and assembly of pallets of stock that can be wheeled into place. Most of the stock is held on the shop floor. Even smaller items like toiletries that are stocked on shelving are displayed in bulk in shelf ready packaging. The only filling up you see going on during trading hours is empty pallets being replaced. Pallets includes many items that are pre packed on 1/2 pallets.

The stores do not have a warehouse as such at the back but there is a small quantity of bulk stock held in the back. The simplicity of operation reduces shrinkage, and as far as is known, stock replenishment appears automated and to require limited or no shelf based checking. An educated guess would be it's automatic from the distribution centre - one can't imagine the store management are involved in any time consuming stock management procedures. Where they are vulnerable is for customer theft due to the very low staff presence. However the store layout is designed to minimise this. Vulnerable items are visible from the checkout area. You can't leave the store via the entrance - there is an 'airlock' style corridor with automatic doors at either end that only open from the entry side. Likewise to leave the store you must queue through one of the long, narrow checkouts.

All the staff are multi-skilled. The cashiers also bring out pallets, decard the store and machine clean the floors at the end of the day. The store manager and his deputy do likewise, as well as receiving deliveries and cash office procedures. All sales are processed by price memory so its not EPOS, in the UK, but will be scanning here. A comment on staffing. Shop staff wages are more than twice the National Minimum Wage in the UK and store Management salaries are exceptionally high. Staff turnover seems very low and obviously a loyal, motivated workforce is a blessing. An Aldi store visited during the middle of a week found it running well with only 2 or 3 staff and a Security Guard. The store manager indicated that the tills take around £1,500 each per hour. As at least one till is always busy, often 2 and sometimes 3. The stores trade about 56 hours per week. Aldi do not trade late nights, Sundays or Bank Holidays, thus they avoid paying overtime rates of pay - and that no doubt also pleases staff. Hourly paid staff are also on a flexible hours part-time contract. This method of operating offers across the board operating cost savings.

Their stock service levels are very high - far better than Australian chains. They can tend to run out of stock towards the end of a busy trading day on popular perishable lines, but are back in stock next morning. Under a narrow range approach, the consumer has no alternative if you are out of stock. This high service level could be something Australian consumers might well appreciate, as it would be something novel. It is very much part of making shopping hassle free - Aldi shoppers tell of getting round the shop very fast, and getting out fast. What you want is in stock, and you know where it is, and you don't have to look at dozens of special tickets to decide what brand to buy. And check-outs are much faster with cash only.

The daily email service of NamNews (very highly recommended!) indicates that Aldi have applied for up to five years of Australian government support. What this means is that they have asked for visas to be made available for their core management staff who will come from Germany. Over and over one gets the impression of a rigid formula, ruthlessly applied. Also reported was Aldi's intention to fund up to ten years of operational losses. It seems this will be a REAL good fight. It has also recently been reported that visas have been applied for some 30 German staff, to add to the existing 15 locally sourced staff. The managing director, Michael Kloeters has taken up residence already.

While Aldi might be a true hard discounter, this should not be taken to mean they lack style in the presentation of their stores. The stores are very bright with an air of efficiency. Much of the stock is palletised, but tidily packed by the manufacturer with the minimum of packaging. The quality without exception is excellent, and superior in many instances to the own label offered by their competition. Their stores will undoubtedly present better than many of the No Frills Franklins stores, Jewel and some Bilo stores. Aldi also do run what might be called theme promotions - where they focus on something like Chinese cooking, Indian cooking or Italian, often offering National brands at very cut prices on these themes. This is something we have never seen in Australia, where the most inventive our chains get are "Back to School" and "Valentines day". For some reason we have not seen chains create a themed promotion in Australia. They tend to use handouts to advertise their range, and whether they use TV is not currently known, but would seem unlikely as an on going strategy, especially if you only have 100 stores in NSW. No doubt they will be a favourite with Choice Magazine.

Is Aldi really cheaper?

"The traditional business criteria for the company is based on staffing costs not exceeding 2 per cent of turnover and an 11.5 per cent gross margin." (ref NamNews) Another USA source states that Aldi's labour costs are just 4% of its sales, versus 9% at a traditional grocer, but this is disputed by a UK source who is certain 2% is about right. On the face of it, this indicates that they will be very very price competitive. Assume they buy at the same price, which is not likely, $1.00 at cost is $1.13 selling price pre tax, and $1.24 inc GST for Aldi against our chains $1.33 pre tax using a 25% gross margin and $1.46 inc GST. That is a huge difference, but Aldi appear to deliver even bigger price differences. This is because they drive costs out of the supply chain, and thus buy far far cheaper.

A number of issues make this gross margin hard to compare. Woolworths has driven down the average margin in dry grocery, as part of their strategy to deal with Franklins. It has been extremely successful, and means that 25% is not an appropriate comparison on dry grocery. However it is also traditional in Australia that the National brand has very low margins, and the house brand and minor brands carry full margin, or you could say, higher than average margin. It is the house brands that are most likely to lose business to Aldi, although all brands will be challenged. Woolworths are trying to rectify this margin imbalance right at the moment, and I must admit I was not sure why they were, but if they don't, they will find it even harder to compete with Aldi. Of course our number one national brands in every category will effectively see price increases under this scenario, and that WILL make them far more sensitive to Aldi's arrival, something that I think has been overlooked.

What are the margin differences? Australian retailers have gross margins in the range of 22% to 25% I believe, but at store level the margins are 11% to 14%. A very large profit contribution is taken at head office via trade spend, rebates, investment buying etc. Aldi do not operate this way. No doubt they will look for genuine net net pricing from Australian suppliers, which will be another novelty. Since it costs Australian suppliers heaps to plan and manage all the price promotional activity, both in terms of direct trade spend and also in terms of people costs, Aldi may strike some good deals from those who go to the trouble to work out their genuine cost structure. What is a bit harder to work out, is how much lower average dry goods margins are. If we guess and say they might be 18% to 20% all up, (i.e. including the head office contributions) Aldi at 11.5% is way in front. Even if they are in the range of 15% to 18% all up, Aldi is going to be very price competitive. Add to that sourcing from all round the world, EDLP with the low costs attendant from a supplier's perspective, and I think we could see ourselves back to the days in the late 80's and early 90's when Franklins (read Aldi!) was the favourite of every supplier. The only problem is that this time it is more likely to be the minor suppliers who fall over themselves to supply house brands, rather than the major branded suppliers who previously benefited at Franklins. An interesting snippet has just emerged from the UK where Kelloggs has agreed to manufacture four or five special varieties for Aldi, under their brand after refusing for years. It is common for the top players to avoid producing house brands, as they see it simply cannibalising their sales, as they are already the biggest players. Equally they question why they should apply their unique manufacturing expertise to someone else's benefit, since pricing of these lines is often only just above or even below full manufacturing cost.

Discussions with knowledgeable people in the industry have indicated that another of Aldi's favourite ploys is to run "one offs" rather than job lots, product they will never stock again. Things like wippersnippers at 50% less than normal. A UK commentator indicated that Aldi has over the last ten years dropped the cost of groceries to all shoppers - i.e. even those who have never set foot in an Aldi, by a significant amount. In the last year alone prices in the UK have dropped about 10%. In this Aldi are absolute price leaders, they will drive prices down relentlessly, and they will not be undersold. It will be very foolish if any of our chains go public with "We will not be undersold". This is a direct threat to Franklins old positioning. To quote a range of examples, over ten years a loaf of white bread has dropped from 49p a loaf to 29p across the market. A house brand tinned peaches is now 9p that used to be 29p, baked beans now 9p versus 25p. This has been repeated across the core of grocery shopping.

Where will they locate?

It is now well known that Aldi is planning to open supermarkets in Sydney. They have the head office in Baulkham Hills, with unlisted phones. It is believed that they will open about 100 sites, although it is not known how they will achieve this. Clearly it could take many years to obtain 100 new sites, particularly in the face of what will be intense competition for retail sites by all existing players. For this reason some have speculated a buy out of Franklins. But it would be a lot cheaper to drive Franklins into the ground first, and the typical No Frills store may not suit Aldi.

While Aldi normally favour free standing sites, some comment has indicated that they are prepared to look at shopping malls in Sydney. Aldi have purchased their first supermarket - they have bought the old Coles supermarket in Fairfield West. It is believed it will open in Easter 2000. Shoalhaven Independent reports negotiations are well advanced on the purchase of property for Aldi fronting both O'Keefe Av and Kinghorn St in Nowra's Central Business District, on the South Coast of NSW. Other reports indicate that Aldi plan a coverage from Newcastle to Woolongong, although Nowra is somewhat south of Wollongong. Rumours in the trade suggest Aldi have lined up about 15 sites. It is confirmed that Aldi will take sites in small centres, with a project in Villawood Town Centre. They are also apparently completing their distribution centre in Minchinbury, in Sydney's West.

Comment from a UK observer indicates that while Aldi are prepared to lease or even buy stores that are less than optimal simply to get a presence in a market and get up to an economic size, long term their sites will all be free standing, purpose built and company owned. They tend to favour the lower socio-economic areas, but only where there is full employment. Other comment indicates that Aldi stores build up trade slowly, often drawing in customers from a very wide area, until the store overtrades, and another one is opened, and goes through the same process, as customers realise there is a closer store. There is certainly a lot of evidence that points to a very loyal customer base.

What are the implications for our existing Chains?

The results in the UK indicate that Aldi has the biggest effect on house brands. To compete successfully, our chains have to introduce budget house brands. In this respect, Franklins has at least something going for it. Woolworths are introducing a generic range. Coles will have to decide whether to move downmarket with Farmland, or introduce another budget house brand. All of this will challenge ranging, and secondary brands are going to find their products discontinued, due to a lack of space in stores. The chains that survived in the UK all were forced to introduce a price oriented own label. In some cases this meant a new label positioned below the existing house brand, in order to avoid cheapening the existing house brand. In most cases these were low quality offerings, but they have served to limit the damage done by Aldi. But margins and supply chain costs will be severly stressed over the next few years. Aldi will force a rethink of many of our practices, much as GST is doing to trading terms.

Franklins are most exposed, as their whole proposition is low price, and they have recently cut their range. Coles will also suffer, particularly on house brand sales. Woolworths will not escape, but must be viewed as best positioned, as they focus on fresh, added value and national brands. On the other hand, it is not inconceivable that Woolworths shoppers with a price motivation might split their shop, buying what they can in Aldi and topping up at Woolworths. That would certainly hurt Woolworths. The only UK chain to be destroyed by Aldi was Kwik Save, also owned by Dairy Farm International (Franklins), so they know the score. All the rest have survived, but life will not be the same. It is possible that Franklins may be forced to vacate the No Frills business, and they have dropped the Franklins name from the Big Fresh stores. Industry watchers are a bit puzzled by a few stores they have closed recently, with no apparent intentions of reopening in the same area.

A vital successful strategy is to match Aldi on budget house brands, which of course will hurt margins, since Aussie chains have traditionally enjoyed very solid margins on house brands, and very tight margins on the number one national brand. This explains Woolworths current desire to get all margins up to the same level. However, when all is said and done, Aldi with a very narrow range of non national brands, will only attract a percentage of the market place. Against that one must rationalise that Franklins once had 50% of Sydney metro - a very big share if the only thing customers were interested is was price. However Franklins does sell national brands. Research has indicated that the majority of consumers are influenced by the image of the national brands. In one study, labels were swopped between national brands and house brands, and the majority of consumers still preferred the national brands. What this means is that provided national brands continue to build their consumer franchise via marketing, there is only a core of customers who will resolutely buy on price. This ultimately will limit Aldi's potential market share, to probably around the 20 or 25% mark.

One of the things that is interesting, is that Pick 'n Pay originally opened with a far narrower range than Coles or Woolworths, as this was their very successful approach in South Africa. However after a year or two of fighting customer complaints in Australia, they had to give up, and carry almost everything, like their competitors. It will be interesting to see how consumers react to an ultra low range approach. In the end the price difference will be what determines their success. It is also interesting to note that Aldi do not enter markets where hypermarkets are dominant. I have never understood why this format was not rolled out across Australia. One heard the comment that Australians don't like big shops, but I always believed that was rubbish, they just haven't had the choice. Maybe Coles strategy to attack Aldi might include rolling out a few hypermarkets?

One of the anomalies in the Australian market is of course the artificially depressed margins on dry grocery, and inflated margins on fresh. This leaves a strategic window of opportunity. It does not take long for an astute retailer to drive his business into a high margin area. Whether new formats will emerge to take advantage of this is not certain, but in the short term it must favour Franklins Big Fresh. The pity is they still have to compete with Aldi on the dry groceries. It may also favour some independent operators, but we are talking about a lot more than just fruit and veg to present a strong fresh offering.

Comments by Dennis Eck of Coles suggest he is expecting a lot of stock to be sourced outside of Australia, and this would appear to be a certainty. This aspect will lead to very strong price competition, as Aldi already have sources of product around the world. It will probably also be very hard to get sales data on Aldi's market share.

What are the implications for our Australian suppliers?

Australian suppliers are going to be placed under intense pressure to assist our Chains to match Aldi. It is not impossible some will be pressured to avoid supplying Aldi, but this is unlikely to cause problems for Aldi, except in the short life areas - perishables. The generic business is likely to grow over the next several years, putting pressure on the major national brands and supplier's profit margins. Any supplier who does bow to pressure to not supply Aldi is likely to regret that decision. Nothing will stop Aldi from trading here. You can choose to be a part of it, but you can't stop it.

The implications are likely to be far reaching. While national brands have fared best in the UK, if the generic business grows it obviously grows at the expense of national brands. The secondary brands are almost certain to lose ranging or facings, in the fight to find facings for new budget house brand ranges to fight Aldi. There will also be a determined effort to source low budget generic lines to compete with Aldi, and some very intense negotiations lie ahead for those manufacturers. No doubt there will be many discusssions along the lines of: "Aldi are selling baked beans for 15c, I want to sell them at that price too, which means you need to sell them to me for 12c!" Convincing the buyer that Aldi is not buying at 12c may be fruitless - as has proved so in the past in arguments about what price Franklins paid, when they decided to put co-op into price. It will be equally important to get our supply chain costs down so that the cost of dealing with the major existing chains is drastically reduced. This is certainly an area where the major suppliers will have to get very serious to keep their own brands price competitive.

The other potential problem is with the chains being forced to increase margins on the top national brands, these will face price increases unless the suppliers reduce their margins. In effect the choice that retailers have made to discount the number one brands over the years, will now come back to haunt them. And the price difference between a top quality Aldi SKU and the number one National brand will widen if margins go back to the correct level. The only solution is to focus on marketing and building brand equity. That will be hard, if profit margins are under pressure, but if it is not done, the national brands will lose a lot of share to Aldi. One does wonder if the brand franchise of our national brands is as strong here in Australia as it is in the UK, given the very significant price promotional activity that has been traditional here. I recently saw figures which indicate that Sainsbury only sells 10% of its volume at a discount - but the writer thought that was a huge amount. While one has to guess what the figure is here in Australia, I suspect 30% to 35% would be close to the mark. One would expect this to impact the degree of brand loyalty - certainly research elsewhere has indicated a direct correlation between promotional frequency and brand loyalty.

It would not surprise me to see the allocation of facings change, as margins are rearranged in the stores, and budget house brands squeezed in. This might mean more facings for the top national brands, since margins will be reduced on house brands, and increased on the national brand. It is possible chains will deliberately under face these budget lines, to encourage out of stocks.

Aldi shakes up Ireland

Leading Irish retailer Dunnes is responding to the threat from the arrival of German discount giant Aldi by cutting prices on everyday items. Dunnes, which holds around 20 per cent of the market, is cutting prices of items such as bread, milk, eggs and chicken by as much as 50 per cent to ensure its products are at least one penny cheaper than Aldi. The trade in Ireland is now waiting to see if Aldi will respond, or if the country's other major player, Tesco, will join in. Aldi currently has just two stores in The Republic but is due to open a third in the next few months. When entering the market the discounter boasted it would cut the average grocery bill by a third. Source EMR-NAMNEWS Dec 1999 This is what they achieve with only two stores!!!

Comment from a recent visitor

I lived in Illinois in the late 1970's. Aldi's first and only USA distribution centre at that time was near Chicago. With the high inflation and hard times then, Aldi made quite a splash. They seemed to be going for a downscale demographic at the time. The quality of their brands (along with all generics during that time, a time when most chains had a designated aisle of generics rather than store brands) was mediocre. They placed their stores in very lower middle class areas, but ones where people did work, not hard core unemployed.

Aldi slowly adds stores in an area. When a store opens, it starts somewhat slowly, then builds over a few months as shoppers find out about, or switches from an overcrowded Aldi to the newer one. Frequency of shopping increases for those that live near a store, because they might have driven 10 miles monthly to go to one Aldi, now they go five miles weekly. On Saturday, by 2:30 pm, many staples such a white bread and bananas will be sold out because of the huge crowds, even though perhaps 2000-3000 loaves were brought in.

Aldi has over the 25 years it has been in the US, expanded to about 10 regions, and I believe distribution centres. Aldi pays very high wages, but expects hard work. Aldi has made some changes recently: scanners in new stores, bathrooms in new stores, acceptance of ATM cards only (because welfare reform in the US has made food stamps electronic in most states, so ATM card access was needed for these customers anyway), more varieties of bread and produce, and more one-time non-food items as is more common in Europe.

I also got to go to a Trader Joe's in Scarsdale by New York City recently. It had carts without the need to insert a coin (Aldi is the only US store to use carts that require a coin to use). It took credit cards, and was located on the fringe of an upscale income area. It had lower milk prices that the regular stores. It had some organic produce, but the fresh produce selection was poor, worse than Aldi's!!! It had a huge variety of fresh baked goods at great prices with many different ethnic varieties. It had a large gourmet frozen food selection with all kinds of things rarely seen in the US. It had a lot of premade food and cheeses. You would never know Aldi owned it. (But the rushing around of employees, low prices, and printed circulars are all Aldi touches). It seemed to have a lot of items that are designed for a consumer to be able to experiment with ethnic themed foods, but it would not be a place that an ethnic immigrant would go to buy food for himself, unless he was experimenting with a different culture. Source:Ted Winter.

Prediction

I think it is time to make a prediction - that Aldi will have 20% of the NSW packaged grocery market within six years - 2006, and that this will lead to the collapse of Franklins, but both Coles and Woolworths will lose some share. If Franklins is is sold to Aldi in this time frame, their combined share will exceed 35% I will await a store opening before predicting anything else. Dated 13th February 2000. I think I might have been a bit generous, but it's cast in concrete - March 11th 2000.

13th February 2000 Update

Woolworths CEO expresses his lack of concern over Aldi - pointing to Aldi's failure to dominate in either the UK or USA (I think I hear Walmart speaking - amid rumours of a close connection between the two.) This is in direct contradiction to a senior grocery buyer from the UK at that time, who indicated that it caused major private consternation, and has reshaped prices in the UK.

by Geoff Cutler, The Professional Assignments Group

Date article published: 11/03/2000

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