aldi in australia

CASE STUDY 8 •

Aldi in Australia

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Aldi in Australia

By Ingrid Bonn, Graduate School of Management, Griffith University

Background

In 1948, the brothers Theo and Karl Albrecht openedthe grocery store ‘Albrecht Discounts’ (Aldi) in Essen(Ruhr Valley), Germany. The store had a simplelayout and offered a restricted number of products ata low price. The company grew rapidly, owning 13stores in 1950 and about 300 stores in 1961 acrossGermany.

In 1961, Theo and Karl divided the company intoAldi North (run by Theo) and Aldi South (run byKarl). The reasons for this division, according toDieter Brandes, a former managing director of Aldi inSchleswig-Holstein, Germany, were different viewsabout how to develop the business. However, thebrothers regularly exchanged information about arange of issues such as performance and cost figures,current and potential suppliers and they also con-ducted joint negotiations with suppliers.

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In 2003,Theo and Karl stepped down as CEOs. Theo’s son,Theo Albrecht Jr, now runs Aldi North, and JuergenKroll and Norbert Podschlapp run Aldi South.

By the end of 2003, Aldi had become one of theworld’s biggest global food retailers with over 7000stores worldwide and estimated annual turnover of36.2 billion euro.

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Aldi’s main market is Germany,which accounts for about two-thirds of sales and whereAldi has a 40 per cent share of the grocery market.

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Today, Aldi still operates in two divisions. Aldi

North, based in Essen, manages operations in northernGermany, Belgium, Denmark, France, Luxembourg,Netherlands and Spain. Aldi South, based in Muelheim,manages operations in southern Germany, Austria,Great Britain, Ireland, Switzerland, USA and Australia.

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In Australia, the first Aldi store opened in Sydney inJanuary 2001. The company came with $750 million in

paid-up capital and plans to invest profits in furthergrowth.

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This all-cash approach to expansion keepsAldi’s risk levels low. In 2004, Aldi owned 44 stores inNew South Wales, 20 stores in Victoria and eight storesin Queensland. With these stores, Aldi captured almost5 per cent of total packaged grocery expenditure inNew South Wales, 2.5 per cent in Victoria and 1.4 percent in Queensland.

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According to AC Nielsen, Aldicould own over 300 stores and capture 10 per cent ofthe Australian packaged grocery dollar market by 2010,if it achieves its planned store rollout program.

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Aldi’s business strategy

Aldi is a typical ‘hard discounter’, pursuing a cost-leadership strategy (see figure 1 for characteristics ofhard discounters). Its approach is to offer a limitednumber of good quality products at low prices. Aldistores stock about 700 products of the most populareveryday grocery and household items.

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Such a limitednumber of items is in stark contrast to a standardsupermarket which carries between 25 000 and 30 000products. Aldi’s products include frozen food, meat anddairy products, canned food, bakery products, house-hold supplies, health and beauty products, nappies,cleaning products and a selection of fresh fruit and veg-etables. In addition to household staples, Aldi alsooffers a selection of ‘surprise buys’, which change everyweek and are only available as long as the stocks last.These items include highly discounted hardware, elec-trical items, clothing, sports equipment and toys.

Aldi stocks a few national brands such as Vegemite,Kellogg’s breakfast cereals, Milo and Nescafé, however,95 per cent of the products are Aldi’s own brands. Morethan 80 per cent of its products are Australian madeand many of its home brand products are produced by

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well-known brand manufacturers. However, manufac-turers seem reluctant to be openly associated with Aldi,fearing that they may jeopardise their relationship withother retailers. According to Walker, it is believed thatAldi’s suppliers include George Weston’s Tip TopBakers, Arnotts, Goodman Fielder, Green’s Foods,Kellogg Australia, Cadbury Schweppes’ Cottees divi-sion, San Remo, Murray Goulburn, Golden Circle,Berri, Peats Ridge and Carter Holt Harvey.

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The Aldi website states that they focus on their own

brands in order to remain independent, enabling themto avoid high marketing costs often associated withnational brands and to set their own price, product andquality policies.

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According to Shoebridge, however,house brands are attractive for grocery retailers becausethey cost 5–20 per cent less than national brands,depending on the category. In addition, a retailer’sprofit margin on house brands is about two percentagepoints higher than the margins on a national brand.

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Figure 1:

Characteristics of ‘hard discounters’

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Source:

www.igd.com/cir.asp?cirid=463&search=1 (accessed 6/1/2005).

The limited number of products enables Aldi toleverage its impressive buying power and to control thecost of its products by buying in large quantities.According to Brandes, Aldi has 30 to 100 times thebuying power of Wal-Mart.

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Fewer products also meanthat warehouses can be smaller, that shipping and han-dling is easier, and that the quality of the products can becontrolled more rigorously. Aldi’s products are tested andsampled on a regular basis, both in-house and in inde-pendent food laboratories. The in-house tests involveblind tests by managers who compare their own productswith those of leading brands. Aldi’s website states thatthey would withdraw any product immediately if therewere the slightest cause for concerns.

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Minimising costs at all levels in the value chain is thekey to Aldi’s business strategy. Aldi stores are usually

1200 square metres in size, the biggest Coles super-markets, by comparison, are about 5000 squaremetres.

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The small size of the stores makes new sitescheaper and easier to find, compared to other super-markets with their jumbo-sized stores. Aldi usuallystarts with locations in lower middle-class suburbs thathave full employment. Once a store is profitable andattracts many customers, Aldi tends to open anotherstore close by. Stores in Australia are either stand-aloneor located in shopping centres, as opposed to Aldi’sEuropean stores, which are mostly stand-alone.

Aldi stores typically have only four or five employeesper shop, compared with about 15 at a standard super-market. They do not employ specialists such as bakersor butchers, because these products come prepacked.According to Michael Kloeters, group managingdirector Australia, Aldi pays store assistants $19.10 anhour plus bonuses, compared with the industry awardrate of about $15 per hour. Employees are permanentfull time or part time and have signed Australian work-place agreements. There are no casual staff or juniorrates of pay.

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However, despite the above average payrates, the smaller number of staff results in Aldi’slabour costs being about 6 per cent of revenue,compared with about 12 to 16 per cent at a standardsupermarket.

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Contributing to Aldi’s relatively low labour costs are

its restricted opening hours. Aldi in Labrador, Queens-land, for example, had the following opening hours inJanuary 2005: Monday to Wednesday 9 am–6 pm,Thursday 9 am–9 pm, Friday, 9 am–7 pm, Saturday8.30 am–5 pm, and Sunday 10 am–4 pm. In contrast,Woolworths, Coles, Bi-Lo and Action all had the fol-lowing opening hours: Monday to Friday 8 am–9 pm,Saturday 8 am–5.30 pm, and Sunday 9 am–6 pm.Hence, Aldi’s stores are open for 19 hours less per weekthan the other supermarkets, which equates to a signif-icant saving in labour costs.

The design of Aldi stores is simple and practical andall stores share similar layout and product presentations.The stores are usually bright, modern and have wideaisles. The products are displayed in specially designedcartons that can be stocked directly on to shelves orwheeled into place by using pallets. The placement of thepallets is based on logistic considerations, namely toimprove workflow and productivity. Using pallets makesit easy to restock items, staff simply remove the old palletand replace it with a new one. This approach helps tosave on labour costs to stock shelves.

Aldi also saves costs by not providing free shoppingbags. Customers are encouraged to bring their own

Less than 1200 linesFocus on dry grocery, although new categories are being addedFocus on own brands and ‘exclusive’ labelsLimited national brand presenceStrict focus on priceLimited in-store fixtures, product often bulk stacked on pallets


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bags or cardboard boxes. Alternatively, they can pur-chase new shopping bags at the checkout. Bags are notpacked and payment with credit cards attracts a 1 percent surcharge to cover additional costs. Further, theuse of a shopping trolley requires a $2 coin deposit,which is refunded when the customer returns thetrolley to one of the designated trolley bays. Again, thisapproach saves costs because Aldi does not need toemploy people to collect and return trolleys.

Marketing is another area where Aldi saves costs. Aldihas no marketing department and its marketing budgetis about 0.3 per cent of revenue.

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Advertising is min-imal, relying on catalogues, local press advertising andweb updates. It focuses on product-oriented messages,predominantly about price and new ‘surprise buys’. Aldiusually does not employ advertising agencies and doesnot spend money on market research. Instead, Aldiemployees and managers explore what customers mayneed and stock them on a trial basis in three stores. Aldi’sprices are uniform across each country, no matter wherethe stores are located. The prices for the ‘surprise buys’are available on the Aldi website each week.

Despite minimal marketing, however, a study on‘best brands’ by the ‘Gesellschaft fuer Konsumfors-chung’ in 2004 showed that Aldi was the third mostrespected corporate brand in Germany, just behindelectronics giant Siemens and car maker BMW (tableC8.1). About 89 per cent of German householdsshopped at least once at Aldi in 2003.

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■

Source:

http://www.gfk.de/index.php?lang=de&contentpath=http %3A//www.gfk.de/presse/pressemeldung/contentdetail.php%3Fid% 3D543 (accessed 7/1/2005).

In addition to minimal marketing, Aldi spends zeroon public relations. Managers are usually discouragedfrom conducting interviews relating to Aldi themes. Arare public statement was made by Theo Albrecht in1971, when he was released by kidnappers after threeweeks in captivity and payment of $13 millionransom.

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At that time, it was the highest ransom everpaid in Germany.

Aldi does not use consultants and spends very littlemoney on the development of sophisticated statisticsand reports. Only the most important data are preparedfor the internal control and information systems. Inaddition, there are no budgets or annual planning cal-culations.

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This scrupulous attention to minimisingcosts, according to McKinsey and Co., has helped Aldito achieve an operating margin of as high as 9.3 percent in some regions of Germany.

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Aldi’s business strategy is based upon an idea by

Theo, which was developed into a successful businessconcept over a number of years. It has changed verylittle since its inception, except for a number of minoradjustments based upon the changing internal andexternal conditions. Some of these changes involvethe inclusion of milk and frozen products, the intro-duction of fresh fruit and vegetables and the additionof some non-food action articles. The introduction ofnew items, however, did not mean an extension of itsproduct range. For example, when Aldi introduced 25new frozen products, it eliminated 25 products, whichwere considered as being ‘weak’, meaning that theylacked demand or did not fit into the product port-folio anymore. This approach ensures that Aldi stayswith its concept of a limited product range, but adaptsto the changing demands by modernising its productofferings.

Aldi’s vision and guiding principles

Aldi has a clear business philosophy and a number ofguiding principles. The business philosophy can be sum-marised by the following statement: ‘Top quality atincredibly low prices — guaranteed’.

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In its advertising,Aldi elaborates on this philosophy by stating five mainprinciples, namely (1) huge savings, (2) excellent quality,(3) outstanding value, (4) superb special buys, and (5)buy with confidence (see figure 2).

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Table C8.1:

Best corporate brands in Germany in 2004

Rank Best corporate brands

1 Siemens

2 BMW

3 Aldi

4 VW

5 Adidas–Salomon

6 DaimlerChrysler

7 Bayer

8 Deutsche Telekom

9 Sparkasse

10 Allianz


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Figure 2:

Aldi’s pledge

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Source:

Advertising flyer by Aldi, ‘Specials from 27 January [2005]’.

Aldi’s pledge outlines its key philosophy and prin-ciples, namely to offer their customers high qualityproducts at low prices. This is achieved by being cost-conscious in every aspect of the organisation’s valuechain as outlined in the previous section. The approachis simple and clear, and it is well known throughoutthe organisation.

The second part of Aldi’s key philosophy centresaround a strong customer orientation. This involvesfocusing on meeting the basic needs of its customers byproviding high quality products. Brandes argues thatbeing credible to the customer is a key issue for Aldi. Inhis view, credibility involves ‘walking the talk’, whichmeans that there needs to be a strong alignmentbetween verbal messages, action and reality in order togain the trust of the customers.

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Dealing with com-plaints, for example, is one way in which to reinforceAldi’s message. If customers are unhappy with any ofthe products they have bought or if the products do notmeet the required quality standards, Aldi refunds themoney or provides customers with a substitute.

The third area in Aldi’s philosophy involves the estab-lishment of fair relationships with suppliers. Aldi guar-antees payment terms of 30 days net and does not requiresuppliers to fund rebates or discounts, or to pay listingallowances. There are no negotiations after the deals havebeen made and Aldi does not have annual talks withsuppliers, instead issues are dealt with on a needs-basis.

Suppliers have access to Aldi’s international network,which potentially enables them to take their products toa global market.

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To ensure fair dealings, Aldi managersare not allowed to accept gifts from suppliers. To ensurefair dealings, Aldi managers are not allowed to acceptgifts from suppliers.

Aldi’s organisational culture

Aldi’s culture has been strongly influenced by itsfounders. The cultural values and rules clearly reflectthe organisation’s philosophy, guiding principles andbusiness strategy. Brandes describes Aldi’s culture asone of ‘simplicity’.

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The Aldi model, which is based ona simple concept, namely the provision of high qualityproducts at low prices, is clearly understood byemployees, managers and customers. Employees andmanagers at all levels of the organisation are very costconscious and pay particular attention to economic effi-ciency. Waste is not tolerated. The aim is to avoidunnecessary costs wherever possible. For example,Theo is said to personally have switched off lights inoffices when there was enough daylight from outside.The concept of ‘cost-watching’ extends into all areas ofthe value chain, including the development of newtechniques for warehouse management or for the trans-port of goods.

The strong focus on economic efficiency is accompa-nied by a passion for detail. The aim is to find smallimprovements in all areas and to develop pleasure inachieving small successes. This culture of continualimprovement is accompanied by a strong focus on thedevelopment and implementation of solutions. Aldipeople, according to Brandes, are practitioners.

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Newideas and solutions are tried, rather than being exposedto detailed analyses. If they prove to be successful, theyare implemented quickly. New products, for example,are not subjected to elaborate market analyses, but aretested in three shops. If they are successful, meaningthat they achieve a fast, pre-determined minimum turn-over, they are introduced in all other shops.

In addition to its focus on economic efficiency andcontinuous improvement, the organisational culture isalso characterised by determination and persistence. Asoutlined in the previous sections, there have been veryfew changes in Aldi’s business approach since itsfoundation. Aldi has consequently pursued its business

Huge savings: Our grocery prices are set low and stay low every day. So you pay less on your weekly shopping.Excellent quality: We ensure that our quality is as good, if not better, than the leading brands and own brands.Outstanding value: When we combine incredibly low prices with the best quality products, you know that there is no better value grocery store.Superb special buys: Every Thursday we introduce an exciting selection of ‘special buys’. These are always extremely popular, and of course amazing value.Buy with confidence: We are so confident in the quality of our products, that every store offers a ‘total satisfaction or your money back’ guarantee.


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concept and has resisted temptations such asexpanding the number of products, diversifying intoother areas or changing its cost-leadership strategy.This is an important trait of its organisational culture,namely to continue doing what they do best.

The organisational culture is reinforced by Aldi’sselection and recruitment approach. Aldi tends to care-fully select, develop and promote managerial talentfrom inside the organisation. Important qualities forpotential managers are a focus on economic efficiency,fairness towards others, including suppliers, modesty,and reservation towards the public and the press. Thesebehavioural characteristics are reinforced by jobdescriptions outlining clear goals and competencies.Aldi managers have usually been employed in differentparts of the organisation, including the shops and thewarehouse. They know how Aldi operates and haveingested the organisational culture. Area managers, forexample, go through a 12-month training program inwhich they learn about the structural and proceduralelements of retail management, including store opera-tions and trading rights, administration, logistics andproperty management. An important part of this pro-gram centres on Aldi’s management system, includingits focus on economic efficiency. The first part of thetraining takes place in a store where future area man-agers take over the role of a store manager for severalmonths. This ‘hands on’ approach aims to acquaintthem with Aldi’s operations, but also its business phi-losophy and core values. During the second part of thetraining, future area managers work alongside experi-enced colleagues and learn about their role and respon-sibilities. This includes the tasks of recruitment,planning and organisation of the stores.

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Aldi’s organisation structure

Aldi’s business concept is supported by a decentralisedorganisation structure. The first, and probably mostimportant decision to decentralise was when Aldi wasdivided into Aldi North (run by Theo) and Aldi South(run by Karl) in 1961. This decentralisation createdtwo independent and autonomous organisations andenabled the brothers to pursue their own strategicideas, rather than trying to compromise. The result ofthis decentralisation was that, for example, Aldi Northstocked about 600 products, whereas Aldi South had

only 450 products. Aldi North offered frozen products,but Aldi South waited to see whether frozen productswere successful in Aldi North before they includedthem in their own shops.

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Decentralisation enabledthe brothers to exchange experience, compare methodsand results and to implement the most successfulapproaches that the other Aldi had tested.

Adhering to the principle of decentralisation, an Aldicorporation looks after between 60 and 80 shops. If thisnumber of shops is reached within one region, a new Aldicorporation is founded. In 2004, for example, there were65 autonomous regional entities in Germany — 35 in theAldi North area and 30 in the Aldi South area.

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Aldi’s organisation structure is flat and lean. For

example, Aldi’s headquarters in Germany employs lessthan 150 staff.

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Aldi has no planning department andno central functions such as marketing, humanresources, controlling, information systems or publicrelations. The responsibility lies with people in linefunctions who work on practical solutions and who areresponsible for their implementation as well as theresults. Staff positions do not exist.

The principle of decentralisation is accompanied by afocus on delegation. It is based upon the so-called‘Harzburger Modell’, a concept developed by ProfessorReinhard Hoehn from the ‘Fuehrungsakademie derWirtschaft’ in Bad Harzburg, Germany. This model out-lines three issues that should be delegated, namely thetask, the necessary competencies to enable task imple-mentation, and the responsibility for implementationand results. Tasks that are delegated are those that (1)can be fulfilled in a better and more cost-effective wayby others, (2) make the workplace more interesting foremployees, (3) include responsibility, (4) are chal-lenging and contribute to employees’ professionaldevelopment, and (5) relieve superiors and allow themto concentrate on core tasks.

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Aldi delegates to the managers who are in charge ofimplementation. All managers have clearly defined jobdescriptions specifying the goals, responsibilities andauthority of their positions. Control is exercised byrandom spot checks and by evaluating the results. Thecontrol system is also set up to provide informationabout whether managers comply with the culturalvalues of the organisation and whether they pass on thevalues and rules to their subordinates.

Aldi’s principles of decentralisation and delegation,according to Brandes, mean that there is less bureaucracyand conflict due to the small size. Problems can be dealtwith quicker and knowledge about the local marketcan be used to improve Aldi’s approach. In addition,


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employees are more involved in the development of theorganisation and they have greater potential for careeradvancement. Finally, the individual Aldi corporationscan compete with each other in a healthy fashion.

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Aldi’s competitive environment in Australia

The main players in Australia’s food retail industry areWoolworths and Coles Myer. In 2004, Woolworths’supermarkets division, trading as Woolworths andSafeway, was Australia’s leading food retailer with 708stores nationwide. Woolworths operating revenue for itssupermarket segment at the end of the 2004 financialyear was $24 193 million, its earnings before interest andtaxes $960 million. In comparison, the food, liquor andfuel segment of Coles Myer contributed $21 279 millionto its operating revenue and $678 million to its net profitbefore interest and tax during the same period.

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Wool-worths has about 37 per cent of Australia’s $66 billiongrocery and retail alcohol market, Coles has a marketshare of about 32 per cent.

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Woolworths supermarket division comprises food,

liquor and petrol. It also operates Internet foodretailing via Homeshop (in Sydney, Melbourne andCanberra) and GreenGrocer (in Sydney and Mel-bourne). In 2004, the liquor operations included 536Dan Murphy’s, BWS (Beer, Wine, Spirits), First Estateand Woolworths/Safeway attached liquor stores. Inaddition, Woolworths owned 50 per cent of the MGWliquor business (a joint venture with the BruceMathieson Group) which has 31 hotels and 110 liquorstores. The petrol division comprised 359 petrol sitesincluding 44 Woolworths/Caltex sites.

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Woolworths general merchandise division consists ofBig W discount department stores and the consumerelectronic outlets Dick Smith Electronics, Dick SmithElectronics PowerHouse and Tandy. Other operationsinclude Ezy-Banking, which offers banking productswith backing from the Commonwealth Bank of Aus-tralia.

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Woolworths also publishes three magazines,

Australian Good Taste

,

Woolworths Fresh

, and

Wool-worths Australian Parents

.

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Woolworths has positioned itself as the ‘The FreshFood People’, aiming to provide a wide range of freshproduce in addition to dry groceries and other merchan-dise. Many farmers in Australia grow their productsexclusively for Woolworths, adhering to strict quality,

food hygiene and safety standards. The ‘Fresh FoodPeople’ strategy has been an important way of differenti-ating themselves from major competitors, such as Coles.Woolworths actively advertises through magazines,newspapers, television and distributed leaflets, aiming toproject an image of providing fresh, healthy and highquality products at a reasonable price. The second pur-pose of its advertising campaigns is to communicate aseries of price specials. Woolworths (similar to othermajor chains) often promotes ‘loss leader’ specials toattract customers to the store. Prices are not uniformacross Australia, but depend on the location and on thepresence of competitors in the specific markets.

Woolworths’ product range includes the ‘Fresh Food’offer, well-established national brands, as well as its‘Homebrand’ range, which according to the company’sannual report in 2004, is Australia’s largest supermarketgrocery brand by sales.

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In 1999 Woolworths launched ‘Project Refresh’, an

Australian-wide program that aimed to improve effi-ciency and to reduce costs by restructuring the com-pany’s supply chain, by adopting new technology andby introducing the new ‘Every Day Low Price (EDLP)’strategy into its supermarkets. EDLP involved reducingprices for many national brands, pushing manufac-turers to cut their prices. Level 1 of ‘Project Refresh’ hasbeen completed and has resulted in an accumulatedcost savings of 2.85 per cent of sales over the last fiveyears. In dollar terms, this means a cumulative savingsof $2.5 billion.

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The second stage of ‘Project Refresh’ is expected todeliver more cost savings over the next five years, in par-ticular through improvements to its end-to-end supplychain program. This program aims to address storesupply chain costs, the number, location and operationof distribution centres, transport management, processimprovements and the development of integrated sys-tems. For example, Woolworths plans to reduce itssupermarket distribution centres from 31 distributioncentres to nine regional distribution centres and twonational distribution centres, aiming to reduce costs andstock levels and to optimise network efficiencies.

In addition to the strategies outlined above, Wool-worths has also diversified into new sectors, such aspetrol retailing and credit cards. Woolworths opened itsfirst petrol outlet in Dubbo, New South Wales, in 1996.Customers who spend more than $30 dollars in onetransaction at a Woolworths store receive a discountvoucher of 4 cents per litre petrol. This approach hasbeen very successful; Woolworths had 359 petrol sitesacross Australia by the end of the 2004 financial year.


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Its banking service ‘Ezy-banking’, a joint project withthe Commonwealth Bank of Australia, was launched in1999.

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Coles Myer’s largest division is also its food, liquorand fuel segment. The food division includes Coles andBi-Lo. In 2004, Coles, a full service supermarket, oper-ated about 500 stores throughout Australia; Bi-Lo, adiscount supermarket retailer had about 209 stores.

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Coles also has an online shopping facility, ColesOnline, which was available in Victoria and New SouthWales in 2004.

Coles Myer’s liquor business includes 626 Liquor-land, Vintage Cellars and Theo’s stores. Coles Express,a commercial alliance between Coles Myer and Shell,was Australia’s largest fuel and convenience retail oper-ation in 2004, with a national network of 598 stores.

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Coles Myer’s general merchandise and apparel brandscomprise (1) Kmart, a discount department store, (2)Officeworks, a retailer of office and technology products,(3) Myer, a department store offering apparel, accesso-ries, footwear, cosmetics, gifts and homewares, (4) Mega-mart, an electrical, furniture and homewares store, and(5) Target, a low-margin, high-volume retailer.

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Similar to Woolworths, Coles also is a full-service

supermarket, offering fresh produce, dry groceries andother merchandise. Its strategy, however, is less suc-cinct than Woolworths ‘Fresh Food People’ strategy. InMarch 2002, Coles announced a major restructuringprogram, aiming to cut costs by improving its supplychain management, implementing changes to its infor-mation technology, and trying to achieve better syner-gies with the other segments in the Coles MyerCorporation. The supply chain changes includerestructuring its distribution centre network and sim-plifying operations and processes in its stores and dis-tribution centres. In addition, Coles planned toimprove its loyalty programs.

Coles’ 2004 Annual Report states three major goals,namely ‘Being the Best Team so that we can Delight ourCustomers and Grow Shareholder Value’.

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Delightingcustomers means ensuring that (1) shelves are fullystocked, (2) most wanted products are available, (3) staffcan focus on customer needs, and (4) customers receivemore information on product range and special offers.

Similar to Woolworths, Coles’ product rangeincludes fresh food, an area that has been improvedover the last few years, well-established nationalbrands, as well as house brands. Coles aims to concen-trate more on the development of house brands and hasset a target of increasing them to about 30 per cent.

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Coles also aims to provide customers with more value

for their money through competitive everyday pricesand the promotion of price specials. Unlike Wool-worths EDLP strategy for national brands, Coles pro-motes some products (mainly own brands) as EDLP,but still relies largely on its high-low pricing strategyfor national brands. Prices at Coles vary across Aus-tralia, depending upon the location and on the pres-ence of competitors in the specific markets.

In May 2003 Coles Myer formed an alliance with Shellto match the Woolworths petrol strategy. Similar toWoolworths, customers receive a 4 cent discount per litrepetrol if they spend more than $30 dollars in one trans-action at a Coles or Bi-Lo store. By the end of the 2004financial year, there was a national network of 598 stores,branded both Coles Express and Shell. Coles Myer alsoformed an alliance with the National Australia Bank toinclude a credit card facility and revamped the company’slong-running FlyBuys reward program.

Bi-Lo, a discount supermarket retailer that is ownedby Coles Myer, also aims to delight its customers. Theiroffer comprises fresh food, national brands and anextensive Bi-Lo house brand range. Their target cus-tomers are those who want value for money and Bi-Lotries to satisfy this segment by offering products at lowprices. Bi-Lo’s marketing included a ‘Why Pay More?’campaign and the use of promotional initiatives such as‘Red Hot Sale’.

In addition to the major national chains Woolworthsand Coles Myer, there are also a number of smallerregional players in the Australian food retail industry,namely Action supermarkets (owned by FoodlandAssociated), IGA and Franklins.

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Foodland Associated

Foodland Associated is a retailer and wholesaler of gro-ceries in Western Australia, Queensland, northern NewSouth Wales and New Zealand. Foodland’s largest divi-sion is its supermarket segment which operated 230supermarkets by the end of the 2004 financial year. Themajority of these supermarkets, namely 149, are inNew Zealand. In Australia, Foodland runs 81 ‘Action’supermarkets, situated in Queensland and northernNew South Wales (43) and Western Australia (38).Foodland’s operating revenue at the end of the 2004financial year for its Australian supermarket segmentwas $1329.9 million, its earnings before interest andtaxes $39.1 million.

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Foodland’s second division is its franchise and supplysegment. Foodland is a grocery wholesaler to Western


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Australian independent supermarket operators includingits own franchise banner groups Dewsons, Supa Valu,Foodland and Four Square. Foodland also operates threeCash & Carry branches and ‘Foodlink’, Western Aus-tralia’s largest food service operator, supplying caterers,hotels, restaurants, cafes, institutions, schools and minesites. In Australia, the franchise and supply divisionachieved operating revenue of $1000.9 million and earn-ings before interest and taxes of $45 million at the endof the 2004 financial year.

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Foodland’s main strategies are to satisfy changing

consumer demands by combining innovation withvalue and to reduce costs through greater efficiency andbetter use of technology. To achieve these strategiesAction supermarkets have upgraded their fresh fooddepartments and continued to develop their own housebrands. They have refurbished many of their existingsupermarkets, tested new store formats and acquirednew sites. In addition, Action has launched a customerloyalty program in Western Australia in November2003. In Queensland, Action has entered into arrange-ments that will allow customers of 27 Action super-markets access to petrol discount offers. Foodland hasalso agreed to purchase 16 Mobil service stations in thePerth, Western Australia, metropolitan area. In 2005,Foodland aims to continue improving their fresh fooddepartments, their innovation in store design and theirdevelopment of exclusive house brand ranges. In addi-tion, the company plans to improve supply chain effi-ciencies, to make more effective and profitable use ofstore space and to better use new technologies, both atstore and corporate level. Unlike Woolworths andColes who are centralising their distribution, Actionaims to strengthen its ties with regional producers andwholesalers who are close to the regional retail centresand who can provide good quality products at lowprices. The purpose of this approach is to save on dis-tribution costs required for long distances and to getquickly to the market with products that are very fresh.

◗

IGA

IGA is another supermarket organisation with aregional presence in Australia. It has a market share ofabout 13.5 per cent.

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IGA stands for Independent Gro-cers of Australia and was brought to Australia byDavids Holdings in 1988. IGA was originally foundedin the US in 1926 and represents an alliance betweenwholesalers, retailers and manufacturers. By the end ofthe 2004 financial year, there were 1138 IGA store in

Australia, located in Queensland, New South Wales,Victoria and South Australia. Davids name has changedto Metcash Trading Limited and the distribution side ofthe business is called IGA Distribution.

49

All IGA stores are independently owned and operated.The IGA network unites formerly independent retailersthat traded under many different names under onebrand. This has led to better economies of scale andscope, better buying power and consistency in mar-keting, merchandising, information technology, and storedesign. There are three types of IGA stores: Supa IGA;IGA and IGA Everyday; IGA X-press and Friendly GrocerIGA. Supa IGAs are full-service supermarkets, catering tocustomers who want to purchase all groceries and freshfood in one location. IGA and IGA Everyday aremedium-format stores with a mid-sized supermarketrange. IGA X-press and Friendly Grocer IGA are small-format stores, that attract a convenience market.

50

The IGA Distribution business, owned by Metcash

Trading, supplies the IGA stores as well as more than3300 other independent grocers. Major achievements forIGA Distribution by the end of the 2004 financial yearwere sales of $3.96 billion and earnings before interestand tax of $131 million. In addition, IGA Distributionimproved its customer service levels, reduced the costsof doing business and developed an innovative ‘reverse’fuel offer.

51

Motorists can fill up at a petrol station of theirchoice and are reimbursed 4 cents per litre when theyshop at an IGA store. IGA Distribution plans to under-take further cost reductions over the next few years byoverhauling supply chain, distribution and technologyarrangements. One key supply chain project for Metcashis setting up mega distribution centres in each capitalcity. Previously, Metcash had separate warehouses forliquor, dry groceries and perishables in three differentsuburbs. Central distribution centres will enable Metcashto take advantage of asset and labour sharing and isexpected to result in substantial cost savings. Anothermajor initiative is called ‘Project Collaboration’ andinvolves improving and streamlining Metcash’s relation-ship with manufacturers, again with the aim of cuttingcosts. Finally, Metcash is in the process of implementinga freight movement efficiency program which aims to filltransport vehicles to 95 per cent of capacity by consoli-dating orders, decreasing turnaround times and bettermanaging delivery schedules.

52

At the time of writing,Metcash has launched a takeover bid for the Australiansection of Foodland Associated. If successful, this acqui-sition would create Australia’s third largest food andliquor chain with an annual wholesale and retail sales of$18.2 billion.

53


CASE STUDY 8 •

Aldi in Australia

C9


◗

Franklins

The third regional player in the Australian retailindustry is Franklins, a discount supermarket chain,that was founded in 1941 by Frank Lindstrom. In1954 Franklins was acquired by Harold Cornock andNorman Tieck and in the late 1970s it was sold toHong Kong company Dairy Farm International. InMay 2001, Dairy Farm International exited the busi-ness and many of the stores were sold to otherretailers and wholesalers. Pick ’n’ Pay, a South Africanretailer, purchased 50 stores and the rights to theFranklins and No Frills brands. Pick ’n’ Packrelaunched the Franklins chain in May 2002. In thebeginning of 2005, there were 77 Franklins supermar-kets across New South Wales and in ACT. Franklinsstrategy concentrates on providing value for money,quality, friendly service, speedy checkouts and a goodoverall shopping experience.

54

Like all the othersupermarkets, Franklins also aims to improve supplyvalue chain management and update administrationsystems.

The above discussion has shown the competitiveenvironment in which Aldi operates. It is characterisedby two major national chains, Woolworths and Coles,both full-service supermarkets that are trying to differ-entiate their product offerings and to provide morevalue for their customers by adding new retail servicessuch as access to discounted petrol and to bankingfacilities. They offer house brands as a cheaper alterna-tive to national brands and are aiming to increase thenumber of products they sell under brand names theyown. Both Woolworths and Coles are in the process ofoverhauling their supply chain management, ware-house and distribution systems in an aggressive bid tocut costs. Price is an important issue and both claim toprovide customers with competitive prices and morevalue for money.

The regional retail operators Action, IGA and Frank-lins pursue a similar approach. They are in the processof addressing supply chain efficiencies and improvinglogistic arrangements, also with the aim of cuttingcosts. Similar to Woolworths and Coles, all threeregional operators offer house brands and are likely toincrease their number over the next few years. Price isalso a major issue for the regional supermarkets andthey all state that their prices are competitive and thatthey provide value for money.

Aldi’s challenges

Since its entry into the Australian market in 2001, Aldihas been very successful. They have established 72 storesin NSW, Victoria and Queensland and are in the processof opening more stores in these states. Aldi’s strategy ofcost leadership seems to resonate with customers andsupermarkets in close proximity to Aldi have tried tomatch their low prices for basic commodity-type itemssuch as milk, flour, sugar and butter. The prices for more‘luxury’ items, such as free-range eggs or bananas, how-ever, were not matched, and Aldi was clearly cheaper(e.g. 12 extra large free range eggs cost $3.99 at Aldi,$5.09 at Coles and $5.65 at Woolworths; 1 kilogrambananas cost $1.69 at Aldi, $2.75 at Coles and $1.98 atWoolworths).

55

Since other supermarkets have taken upthe price challenge, it is important for Aldi to ensure thatits prices are lower or at least equal to the ones of its com-petitors and that its products develop a reputation forhigh quality. This is particularly important consideringthat the competition in the food retailing industry islikely to increase, due to a number of economic factorsthat may influence consumer confidence and consumerspending over the next few years. These factors includehigh levels of household debt, a low national rate ofsaving, falling house prices, high oil prices and possibleincreases in unemployment and interest rates. These fac-tors are likely to have a negative impact on consumerspending and hence the competition for the consumerdollar is likely to become more intense.

A possible second challenge is the entry of otherglobal players into the Australian market. According tointernational experts on global retailing, an entry ofinternational players is unlikely in the short term; how-ever, they predict that in the medium term, interna-tional players such as Wal-Mart (US’s largest retailer) orTesco (UK’s largest retailer) might decide to move intoAustralia.

56

In addition, it is also possible that Aldi’smajor competitor in Europe, Lidl, decides to followAldi to Australia. Lidl, which belongs to the SchwarzGroup, has copied the Aldi approach in many aspects.It also offers high-quality products at low prices, placesgreat emphasis on economic efficiency and has mini-mised costs at all levels of the value chain. Apart fromGermany, Lidl currently is present in the UK, Ireland,France, Portugal, Spain, Netherlands, Belgium, Fin-land, Poland, Czech Republic, Austria, Italy andGreece.

57

Due to the similarity of its approach, an entryof Lidl into Australia would clearly present a majorchallenge to Aldi.


C10 WEB CASE STUDY


1. D. Brandes,

Konsequent einfach: Die ALDI-Erfolgsstory

,

3rdedn, Campus Verlag, Frankfurt, 1998.

2. http://english.lz-net.de/retailers/rankings/pages/show.prl?id=83.

3. ALDI group, http://www.hoovers.com/aldi/--ID__54910--/free-co-factsheet.xhtml (accessed 21.12.2004).

4. Welcome to ALDI Australia, http://australia.aldi.com(accessed 20.12.2004).

5. J. Walker, ‘Inside Aldi’,

Business Review Weekly

, July 17–232003, pp. 41–45.

6. ACNielsen,

Grocery Report

, 2004, www.acnielsen.com.au/files/GroRptCon04.pdf (accessed 20.12.2004).

7. Ibid.

8. Welcome to ALDI Australia, op. cit.

9. Walker 2003, op. cit.


11. N. Shoebridge, ‘House-brand horrors’,

Business Review Weekly

, 28 October–November 3, 2004, p. 59.

12. L. Hamson, ‘Inside Aldi’,

The Grocer

, 29 November, 2003, pp. 28–30.



15. Ibid.

16. E. White and S. Ray, ‘Leadership (A special report); Bare-Bones shopping: Germany’s discount retailers are among the world’s most successful; Here’s how one does it’,

Wall Street Journal

, 10 May, 2004. p. R6.

17. Brandes 1998, op. cit.

18. J. Ewing, A. Zammert, W. Zellner, R. Tiplady, E. Groves and M. Eidam, ‘The next Wal-Mart? Like the US-based giant, Germany’s Aldi boasts awesome margins and huge clout’,

Business Week

, 26 April, 2004, p. 60.



21. Ewing et. al. 2004, op. cit.

22. Advertising flyer by Aldi, ‘Specials for 27 January [2005]’.


24. Welcome to Aldi Australia, op. cit.


26. Ibid.

27. Area manager, http://uk.aldi.com/recruitment/recruitment _2.html (accessed 6.1.2005).


29. D. Brandes, ‘Uncompromisingly simple – the ALDI success story’, ERA Packaging Conference, Freiburg, Germany, October 2004.



32. Ibid.

33. Woolworths Ltd.,

Annual Report

2004

; Coles Myer Ltd.,

Annual Report 2004

.

34. Metcash Shareholders Back Foodland Bid, www.xtramsn.co. nz/money/0,,5487-4034756,00.html (accessed 21.1.2005).


Annual Report 2004

.

36. Ibid.

37. Online shopping, www.woolworths.com.au (accessed 21.1.2005).


Annual Report 2004

.

39. Ibid.

40. Our history, www.woolworthslimited.com.au/aboutus/ourhistory/index.asp (accessed 12.1.2005).

41. Coles Myer Ltd.,

Annual Report 2004

.

42. Ibid.

43. Ibid.

44. Ibid, p. 5.

45. R. Clow and R. Gluyas, ‘Food Fight’,

Weekend Australian

, 13–14 November 2004, pp. 33 and 36.

46. Foodland Associated Ltd.,

Annual Report, 2004.

47. Ibid.

48. S. Lloyd, Grocery growing pains, Business Review Weekly, 22–28 April 2004, pp. 60–61.

49. About IGA Australia, www.iga.net.au/info/aboutus.cfm (accessed 18.1.2005); Metcash Trading Ltd., Annual Report 2004.

50. About IGA Australia’, op. cit.

51. Metcash Trading Ltd., Annual Report 2004.

52. Lloyd 2004, op. cit.

53. J. Whyte, ‘Foodland readies response to Metcash’, Australian Financial Review, 24 January 2005, p. 12.

54. About us, www.franklins.com.au/aboutus.html (accessed 12.1.2005).

55. The price comparison was done by the author on 22.1.2005 at Aldi, Coles and Woolworths in Labrador, Queensland.

56. Annual report, global retailing 2004, www.igd.com/analysis (accessed 6.1.2005).

57. Angriff des Super-Kraemers’, Manager Magazine September 2003, pp. 38–47.

References


CASE STUDY 8 • Aldi in Australia C11


Aldi in Australia — Discussion questions

1 What is Aldi’s competitive advantage?

2 Discuss some of the trends in the Australian food retailing industry

3 Is the industry in which Aldi operates an attractive industry?

4 Should Aldi make changes to its current business strategy?

5 Should Aldi move into the other Australian states and territories, e.g. South Australia, Western Australia, Tasmania, ACT, Northern Territory?


aldi in australia

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