{"id":1794,"date":"2015-12-06T13:46:33","date_gmt":"2015-12-06T18:46:33","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/aldi-driving-transformation-of-the-uk-grocery-industry\/"},"modified":"2015-12-09T16:16:11","modified_gmt":"2015-12-09T21:16:11","slug":"aldi-driving-transformation-of-the-uk-grocery-industry","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/aldi-driving-transformation-of-the-uk-grocery-industry\/","title":{"rendered":"Aldi \u2013 driving transformation of the UK grocery industry"},"content":{"rendered":"

The UK grocery market has seen much transformation in recent years. As the recession hit, consumers became increasingly value-conscious with many turning their backs on the Big 4 supermarkets and their sprawling, branded ranges. Amongst those who remained loyal to the Big 4, many cross-shopped at discounters.<\/p>\n

As the economy picked up, it became apparent that this shift to \u201csavvy shopping\u201d was in fact here to stay. Even with extra money in their pockets, consumers continued to shop at discounters. Aldi and Lidl had succeeded in redefining value for many. It was possible to save money without<\/em> compromising on quality. Customers no longer hid their Aldi and Lidl shopping bags; they brandished them with pride.<\/p>\n

Aldi\u2019s business model is centered on providing high quality groceries at the lowest possible prices. This would not be possible without their tightly aligned, innovative and efficient\u00a0operating model. As a private company,\u00a0their financial information is closely guarded, but it is known that the grocer boasted an operating margin of c.5% in 2013\/14. Whilst Big 4 players such as Tesco and Sainsbury\u2019s invested in price at the expense of their margins, the discounters have been pushing their quality message.<\/p>\n

\"Grocery<\/a><\/p>\n

Source: Annual reports; Press 性视界<\/em><\/p>\n

Aldi\u2019s quality focus\u00a0is evident in their most recent Christmas campaign, where they take on high-end grocer Waitrose in price comparison adverts. High-income shoppers are an increasingly important segment for the grocer; their adverts seek to capture a larger share of their Christmas shopping baskets.<\/p>\n

https:\/\/www.youtube.com\/watch?v=eZwvm6ckUqA<\/a><\/p>\n

 <\/p>\n

Scale is not the only way to gain a cost advantage<\/strong>
\nGiven the greater scale of many competitors, how can Aldi\u00a0maintain a margin advantage?<\/em><\/p>\n

One of the key levers at the gross margin level is Aldi\u2019s high private label penetration. More than 90% of their products are exclusive brands \u2013 each is produced to meet or exceed the quality of national brand names. Private label products are backed by a Double Guarantee, which replaces the product and refunds the customer if they are not completely satisfied.\u00a0Their private label strategy\u00a0enables them to maintain a cost advantage \u2013 they don\u2019t have to pass on the hidden marketing and advertising costs associated with national brands.<\/p>\n

On the purchasing front, whilst Aldi does not have the same sales as its Big 4 peers in the UK, what is interesting about their model is their limited SKUs. Whereas Tesco stocks c.60,000 SKUs, Aldi stores typically stock just c.1,350 SKUs, resulting in more concentrated buying power.<\/p>\n

 <\/p>\n

Efficiencies below the gross profit line are just as important<\/strong>
\nAldi’s\u00a0store network enables them to reap operating efficiencies that are unrivalled by Big 4 peers.\u00a0Their\u00a0uniform store size increases the speed and cost at which store fit-outs and refits can take place. Planograms for store space and\u00a0ranging decisions do not have to be made at a store level, but rather, at an estate level. This\u00a0saves time and effort at Head Office.<\/p>\n

Within the stores, flooring, shelf and light fittings are basic; there is limited investment in merchandising. Products are transported in specially designed boxes that double as product displays. This saves time and money on the labor typically associated with restocking\u00a0shelves. The ease at which restocking takes place also removes the need to operate 24 hours, saving energy and labor costs.<\/p>\n

On the distribution front,\u00a0an interesting efficiency is that stores have limited warehouse space. Product is delivered to a holding bay, and then moved directly onto the shop floor. Conversely, most larger supermarkets have sizeable in-store storage areas\u00a0where product can be held for some time.<\/p>\n

Even Aldi’s\u00a0trolley system is designed with efficiency in mind. Unlike many of our local stores here in Cambridge (Whole Foods, Trader Joes), shopping trolleys are coin-operated. Incentivizing the return of the\u00a0trolley reduces labor time spent retrieving trolleys from throughout the car park.<\/p>\n

 <\/p>\n

The Big 4 are pulling numerous levers to win back share, the most visible of which is price. But is price investment at the expense of margins really sustainable, particularly when their back-end has not been designed with low cost in mind?<\/strong><\/p>\n

I think the Aldi advantage is here to stay. Whilst competitors may seek to replicate the more tactical efficiencies such as innovative packaging that doubles as shelf display, or coin-operated trolleys, where they will struggle to compete is on the optimization of their store estate. The Big 4 have sizeable exposure to oversized stores, many of which are held on long leases.<\/p>\n

They will therefore struggle to replicate the uniformity of store size and the focused range that makes the discounters’ operating model so unique. Unless investors are happy with a longer-term margin reset, the Big 4 will have to rely on levers other than price, such as superior customer service or\u00a0in-store concessions, to differentiate themselves from the discounters.<\/p>\n

 <\/p>\n

Notes:<\/strong>
\n1. Tesco UK’s overall trading profit margin has been used; this measures the performance before profits\/losses arising on property related items. Sainsbury’s underling retail operating margin has been used, and is based on retail sales excluding Value Added Tax, including fuel, excluding Sainsbury\u2019s Bank. Morrisons underlying profit margin has been used; Aldi’s pretax profit margin is as per filed accounts for UK & Ireland, reported in September 2014 press.<\/p>\n

 <\/p>\n

Sources:<\/strong>
\n– http:\/\/aldiuscareers.com\/
\n– http:\/\/www.theguardian.com\/business\/2014\/sep\/29\/aldi-vows-to-fight-on-in-supermarket-price-war-as-uk-profits-leap-65
\n– http:\/\/www.bbc.com\/news\/business-29406085
\n– http:\/\/www.theguardian.com\/business\/2015\/jan\/30\/tesco-cuts-range-products
\n– http:\/\/www.kantarworldpanel.com\/global\/News\/Aldi-and-Lidl-reach-10-per-cent-share-of-the-British-grocer
\n– Company annual reports for Sainsbury\u2019s, Tesco and Morrisons<\/p>\n","protected":false},"excerpt":{"rendered":"

Aldi's business model is supported by an incredibly efficient operating model. The UK's Big4 grocers have responded to Aldi's growth with price cuts, but is this really a sustainable response?<\/p>\n","protected":false},"author":841,"featured_media":1795,"comment_status":"open","ping_status":"closed","template":"","categories":[358,365,363,56,366,359,362,361,360,578,364],"class_list":["post-1794","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-aldi","category-big-4-grocers","category-discounters","category-grocery","category-grocery-price-war","category-lidl","category-morrisons","category-sainsburys","category-tesco","category-tom-winner","category-uk-grocery"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/the-tom-challenge-tom-winners-and-losers-assignment\/","yoast_head":"\nAldi \u2013 driving transformation of the UK grocery industry - Technology and Operations Management<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/aldi-driving-transformation-of-the-uk-grocery-industry\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Aldi \u2013 driving transformation of the UK grocery industry - Technology and Operations Management\" \/>\n<meta property=\"og:description\" content=\"Aldi's business model is supported by an incredibly efficient operating model. 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