Why Aldi's New Store Format Could Be A Big Mistake

While Aldi's launch of their new "trial" stores may seem to be an attempt to capture middle income shoppers, it may end in disaster.

Picture: Mike Mozart

Aldi's four new trial stores located in Queensland, NSW, ACT and Victoria, will offer improved lighting, larger layouts and an expanded offering of fresh food including extending produce ranges, in-house bakeries and premium brands.

Employing Nielsen's 2014 Homescan Report, Aldi have determined that only 30% of their customers were now considered "low-income shoppers". Some 34.4% were from middle-income households and the remaining 35.6% now had household incomes greater than $90,000 a year — a segment which has grown by 6.7% since 2011.

So this probably the reason for Aldi's foray into new stores and ranges. However, such a move is considered risky.

The Aldi blueprint for success

From its humble beginning in Germany in 1946, Aldi has grown to be the 8th largest food retailer in the world, by maintaining a consistent business model across the globe. Their core business strength has been formed by offering shoppers a narrow range of very low-priced, good quality, private label grocery products, from small stand-alone sites.

Aldi's 1350 or so products pale in comparison to Coles and Woolworths broad and deep product ranges. Yet this provides them with lower supply chain costs and great efficiencies. Its 700 square metre stores are dwarfed by its competitors' 5000sq m plus footprints, yet this gives them the ability to occupy smaller suburban and high street location. This has been an intentional strategy that allows them to get through council restrictions quickly and enables the flexibility to open in areas that larges supermarkets can't access.

Since opening their first store in Australia in 2001, Aldi has captured nearly 9% market share, with 11% on the eastern seaboard where the majority of its stores are located.

Aldi has now grown to be the third-largest food retailer in Australia. With plans to open in South Australia and Western Australia in the coming years, experts suggest Aldi current sales will double by 2019.

Its growth since 2001 has come at the cost of Metcash's IGA supermarkets but has also impacted on Coles and Woolworths.

Aldi's entry into the Australian market in 2001 was timely in that they arrived just as shoppers' hunger for private label was growing and as Franklins No Frills was exiting the market. As a consequence, Aldi filled the gap left behind by Franklins and won over shoppers with their low price, good quality private label range.

So a move away from what you are very good at, seems very risky. From a purely strategic position, if your competitive advantage is selling high volume, low priced, private label food products, stick to it. Offering more range, premium products, in-store bakeries and extended fresh food offers only dilutes your market position.

Franklin's failures

Very much like Aldi today, Franklins was Australia's first low-cost grocer,with a narrow range of very low priced, generic grocery products. The concept of selecting your own no-named products, out of open cartons on shelves, packing them yourself into cardboard boxes (no bags were provided) was quite foreign to Australian shoppers. However, Franklin's market position differentiation worked in its favour.

Buoyed by the success of the No Frills stores, Franklins broadened its offer by opening a variety of new store platforms designed to tap into the convenience market (Franklin's Mini-Fresh) and supermarkets (Franklins Mega-fresh and Franklins Supermarkets).

But this proved a fundamental error. Moving away from their core business and target market added internal costs and put them in direct competition with Metcash's IGA and the two major supermarkets.

Private label strategies only works one way

Although criticised for allegedly limiting choice and removing popular national brands, Australian shoppers have accepted private label food products wholeheartedly, now accounting for 21% of packaged grocery sales in Australia.

The popularity of Aldi's private label has been a particular source of its success, causing both Coles and Woolworths to quickly expand their original plain packaged, generic product ranges.

Both Coles and Woolworths launched a three tiered, "good, better, best" private label strategy that included plain packaged, generic products, as well as Woolworth and Coles brands and premium Select and Finest ranges.

What this demonstrates is that Coles and Woolworths have the ability to move "down market" by providing a range of low priced, private label products.

Unfortunately, Aldi is not so well placed to move "up market" into the mainstream food retailing market by providing extended fresh offers or premium ranges.

Current 700sqm store layouts do not provide space for extended fresh produce displays, in-store bakeries or more checkouts. Such a move would require a variety of store types be developed. As the majority of Aldi's products are bulk displayed on pallets, adding new ranges may require shelving and other display fixtures; increasing capital expenditure. Increasing product ranges ultimately adds to your supplier base and limits supply chain efficiency.

Should Aldi stick to what they are good at?

The short answer is yes.

Attempting to capture a greater slice of the middle and high income shopper by offering bigger brighter stores, broader ranges, premium products and an extended fresh offer, may lessen their value proposition. It blurs the lines between Aldi and mainstream supermarkets.

There are three main risks. First, potentially Aldi's proportion of shoppers in five years becomes 40% high income, 45% middle income and 15% low income — therefore excluding its original target market.

Second, Aldi ends up offering exactly what Coles and Woolworths currently offer (so there is no differentiation).

Third, Aldi opens the door to other low cost food retailers (Lidl walk in and pick up the 'low income' market you left behind to chase a bigger slice of the middle/high income market).

While 64% of shoppers already shop at more than one supermarket brand each week, Aldi may find this move will cannibalise their own sales and isolate their core customer.

While the "numbers" suggest more and more middle and high incomes shoppers are patronising Aldi, it would appear they are shopping there to access Aldi's current range of good quality, low priced products. Ultimately, it is Aldi's "difference" that attracts shoppers, not their "similarity" with others.The Conversation

Gary Mortimer is Senior Lecturer, QUT Business School at Queensland University of Technology.

This article was originally published on The Conversation. Read the original article.


Comments

    I have nothing wrong with Aldi's products...just their customer service (or lack of it). Get to the checkout and you would feel right at home getting shocked with a cattle prod while scooping your groceries into the trolley with a shovel (you get rushed enough it feels like that) or Aldi's great idea of opening 2 registers when its busy and then closing one as soon as there is only 10 people waiting.

    I shop at Woolworths because it doesn't make me want to rage and smack everyone in the store, unlike Aldi which I can feel myself changing green with anger the moment I step inside.

      So if Aldi got self checkout, it would be perfect :p

        Self-service is *not* faster when the machines error all the time and constantly need admin overrides. Also, ask anyone who works at Coles and Woolies, and the theft rate through the self-service is much higher, which just adds to costs.

      @tricache Methinks you are missing the point. I love stacking my goods on the Aldi conveyor belt, working out which items to put on in what order. Then speed stacking them back into the trolley in a perfect arrangement. It's fun to see how fast the operators can scan the item when you have a good stacking rhythm going. Easily the highlight of shopping at Aldi. And, seriously, I've waited longer to get through a checkout in woollies with just a hand basket of goods, than going through an Aldi checkout with a full trolley.

      Last edited 26/05/15 9:13 am

        My wife does the shopping for the childcare centre she runs, minimum shop is a trolley and a half (we have had two piled up before), she does this twice a week.

        Speed pack that :P

          Fair enough. But that's the trade off you get at Aldi. Lower overall prices for some inconvenience in having to pack your own groceries.

          I'd rather speed pack a huge trolley full and get it at a good price, than shop at woolies and pay a fortune, and wait forever for the super slow operators at the checkout. Aldi is great.

        How can one "miss the point" of walking into a store with an open door and making a purchase?

    I like Aldi.
    I go there for several reasons:
    - I like the bargain hunt on their weekly one off items
    - The prices are good.
    - Their alcohol is good
    - Their meat and veg are good quality.
    I don't like:
    - Credit Card surcharges.
    - The queue's at the checkout - but I'll live with them.
    - The lack of time and space to put your purchases in your bag after checkout.

    Why do all Aldis have that strange smell?

    Improved lighting? Surely your lighting should be adequate no matter who you are trying to market to.

      with out visiting the new store i would suggest they mean feature or task lighting. e.g. a standard aldi probably has fluro runs from front to back on the ceiling of the store, where as the new one may have positioned lights over the fresh produce section, under shelf & counter lighting, etc...

      feature lighting does dramatically increase the 'premium' feeling of the shopping experience however it costs a surprising amount to install and maintain as it is not nearly as straight forward.

    Franklin's failures:
    I remember Franklin's having a wide range of goods, that were stacked on the shelves, not in the bulk 'display' boxes, and having plastic bags. It also carried essentially the same local goods as the competitors plus the NoName brand. I think a comparison with Franklin's is misguided, Franklin's lost out when the competitors started to beat them on prices.
    Private label strategies only works one way:
    Look to the UK where own-brand marketing has gone up-market. Tesco and particularly Marks and Spencers brands have own brand lines that are more expensive than the other brands they stock, and it has been highly successful. To wit, Coles are emulating this, I have noticed that they have own brand but specialised ice cream topping that is more expensive that their cheaper brands. I have read in the financial press that this is a strategy they are going to pursue further.
    Should Aldi stick to what they are good at?
    All the arguments here are predicated on Aldi abandoning their current strategy. Why would they abandon the smaller footprint stores limited line strategy? This is about expansion. Why would they give up a whole segment of the market that want more lines and a one stop shop? It makes more sense to have more than one format than try to convince the rest of the market to want less items or do part of their shop at Aldi's.

      +1 Plastic bags
      Most stores went out of business before other stores started charging for bags or removing them altogether.
      Franklins had a good variety, but smaller stores.

      I was confused by the Franklins description as well initially until I read this paragraph:
      Buoyed by the success of the No Frills stores, Franklins broadened its offer by opening a variety of new store platforms designed to tap into the convenience market (Franklin’s Mini-Fresh) and supermarkets (Franklins Mega-fresh and Franklins Supermarkets).
      I think I was going to a Franklins Mega-fresh, not a Franklins No Frills store.

      The article also mentions multiple pricing tiers for private labels (concerning your second point).

      I do agree that the article is rather too negative about Aldi's expansion into the traditional Coles & Woolworths style supermarkets. It stands to reason that if you have stores covering two market niches rather than one, your overall market share is likely to go up rather than down.

    You obviously haven't been to an Aldi store in Europe recently. This is what they've done (at least in Belgium where I was back in Jan) and I found it to be excellent - definitely an improvement over the "old format" Aldi both there and here.

    They don't need to differentiate from Coles and Woolies. They need to be considered equal to the duopoly (instead of the poor European cousin) if they want to win market share from their competitors. I think their strategy is in the right direction.

      So, you like it, which means it'll be fine?

        The results will speak for themselves, but what I must have failed to communicate is that it's not some thought bubble by Aldi Australia as the article would imply. The format has been tried and tested in Aldi's home market.

          its probably a trial being done in eu to differentiate from LIDL, we are most likely seeing it here as a potential response to LIDL coming to our market. If there custom research says most of there customer are cross over shoppers from Coles/WW then attacking them offers a bigger pie than defending the lower segments which are less loyal and more willing to switch with specials or to Costco and LIDL.

    I wasn't really expecting much from Aldi's Bendigo store - and I wasn't mistaken. Previously it was a somewhat noisy and busy store, we'd got used to where everything was and could negotiate easily. Now, with the new flooring which must absorb sound, it's like walking into a crypt, it's almost silent and somewhat disturbing. Why they don't have some gentle back-ground music to break the silence is strange. Sure, the layout has changed, but for the good? I don't think so! The head honchos must have had a brain storm and they've changed the entire store layout - and to it's disadvantage. Items that I never purchased are now the first thing one sees, so that part of the store I ignore, their psychology doesn't work on me. And their 250gm butter has jumped fro $1.89 to $2.29! I've been to the same store on three occasions and each trip has confirmed my first impression - I simply don't like shopping there now.

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