Strategic Management For ALDI’s Situational Analysis

Strategy and Context

Discuss about the Strategic Management for ALDI’s Situational Analysis.

Albrecht Discounts, also referred to as ALDI is a German retailer that was established in 1913. The company was established by Karl’s and Theo’s mother. The company did not experience success until the 30s when the two brothers took over the business. For operations purposes, the company is divided into ALDI South and North. However, the two divisions share information about important aspects of operation. In Australia, the company operates as ALDI South and is a perfect example of an efficient retailer (ALDI Australia, 2017). The company offers value for money to its customers, especially in household products sector. Some factors that enable the company to offer low cost products of relatively high quality to customers are offering a limited range of products and minimal customer service (Hill and Jones, 2013).

ALDI’s strategy focuses on minimizing cost. The benefits are passed down to customers to cultivate behaviour of repeated purchase. The Australian market is a competitive one, and other major player, such as Woolworth and Coles apply a similar strategy. ALDI also applies a differentiation strategy. For example, unlike its competitors who focus on supplying predominantly Australian products, the company supplies products from European countries at relatively cheap prices; therefore, the company has both a differentiation and cost leadership strategy (Scholz and Zentes, 2013).

One aspect of ALDI that enable the company to offer products at low cost is its focus on cutting the cost of operation. Most ALDI stores in Australia are located in the outskirts of cities where land is cheap. This offers low competitive advantage when compared to other companies such as Woolworth that have stores in prime areas. The company uses inexpensive material to build its stores, which also offer low competitive advantage because this is a onetime investment. Products in the stores are displayed on pallets in their original packaging, which reduces labour requirements (ALDI, 2017). Offering products in their original package offers high competitive advantage because each store employs few employees, which is a recurring expenditure. A typical ALDI store in the country employs four to five people, which is in contrast to other competitors who employ an average of 15 employees. Stores stock an average of 700 products, which is in contrast to other stores that stock products in the range of 30,000 products in one store. Most of the products stocked in ALDI stores are products consumed on a daily basis in households, such as fruits, milk, and vegetables. Fewer products in ALDI stores mean the company has a smaller warehouse relative to its competitors. This offers high competitive advantage because it is easy to manage a small inventory. ALDI stores have an average area of 1,200 M², which is in contrast to the average size of its competitors’ stores that are around 5,000 M².

Current Strategic Approach

Unlike other companies, ALDI does not provide free shopping bags. It encourages its customers to come with their own bags or to buy one and use it the next time they visit the store. Another strategy the company uses to reduce operating cost is having each customer return his or her shopping cart to the original place where it is suppose to be. The company charges a 2 dollar deposit that is refunded when one returns the shopping cart. This reduces the cost associated with returning the shopping cart because less fuel is used and few man hours are dedicated to this activity. This offers high competitive advantage. Since the inception of the company, avoiding unnecessary cost has been a focus of the business (Metzger, 2014). For example, Theo, one of the company’s co-founder placed emphasizes to switching the lights off during the day to cut the cost of power. While this might seem like a stingy move for such a large company, considering the saving the company makes through such a simple activity puts things into perspective. It is also better for the company to reduce expense on unnecessary things such as store lighting and services such as catering for customers’ shopping carts rather than compromise on quality.

ALDI does not only offer low cost products to the Australian market, but also sets itself apart from its competitors using a differentiation strategy. The differentiation strategy focuses on cost, processes, merchandise, distribution, and market segmentation (Klaas Jagersma, 2008). ALDI is unique in the sense that it aggressively pursues cost reduction but does not compromise on quality. The company also pays it employees relatively high rates compared to the industry standards. ALDI employees receive 19.10 dollars per hour, which is higher than the industry standard of 15 dollars per hour. ALDI maintains current customers and attract new customers by offering quality products at low prices. For example, the cost of one kilogram of bananas in an ALDI store is 1.69 dollars, which is less than 1.98 and 2.75 dollars in Woolworth and Coles respectively. The low cost of quality products also discourages new entrants into the industry (Simon, 2015).

Porter’s five forces play an essential role in the competitiveness and profitability of the grocery industry and ALDI. They include bargaining power of customers and suppliers, threats from new entrants and substitute products, and competitive rivalry between players in the industry (Competitive Forces (Porter’s Five Forces), n.d.). The five forces determine ALDI’s market share and are important in making strategic decisions. Entrance of new grocery stores into the market such as Wal-Mart or local farmer can eat into ALDI’s market share and affect the bottom-line. The company counters this challenge by collaborating with local farmers to provide fresh products to consumers. ALDI offers farmers competitive prices, which means they lack incentive to sell products directly to consumers. The company also keeps prices very low; therefore, it is unlikely for established companies, such as Wal-Mart to venture into the Australian market because of the low profits margin and return on investment (Gerhard and Hahn, 2005). The threat of new companies entering the Australian market is low because of the low profit margins and the competitive offers give to the farmers in the country.

ALDI faces minimal threat in substitute products because of the nature of products it offers. The company offers everyday household products, such as milk and vegetables. However, a patented product that gains popularity in the Australian market could be a significant issue for the company. This is a moderate threat to the company because of the popularity of processed food products in the country. Existing companies in the country such as Woolworth and Coles brand their products and continuously developing innovative products. ALDI faces medium threat from substitute products. Customer bargaining power is an important factor in ALDI’s strategy. Different stores offer products at different prices depending on location and purchasing power of consumers in the locality. Different stores may also stock different products depending on the taste and preferences of customers in the locality (Choi and Fredj, 2013). For example, before ALDI sets up a store in a new location, the company conducts a market analysis to determine the cost and availability of the products it offers in the location. The company also collects information about the cost of different products before fixing its prices. Customer bargaining power is a low threat to ALDI because the Australian population is price sensitive and the company offers the lowest prices in the country.

ALDI considers the bargaining power of suppliers in a location before setting up a store. For example, if a supplier enjoys monopoly, the supplier is unlikely to place emphasis on quality or offer competitive prices. Suppliers have an influence on the price and quality of final products. ALDI deals with common household products that are produced by multiple farms within a single locality. The company also imports a considerable share of its products from Europe. Therefore, the individual bargaining power of a single supplier is relatively low. The main competitors of ALDI in the Australian market are Coles and Woolworth. The company’s can develop new strategies that result in higher quality at lower prices than ALDI. ALDI has to ensure it maintains a capacity to response to new strategy development from its rivals to maintain and grow its market share (Bakucs, Fa?kowski and Fert?, 2013). The company faces a high threat from its competitors because they is a possibility of the companies merging or adjusting their strategy to mirror ALDI’s strategy.

The three generic strategies ALDI implements to maintain a competitive edge in the industry include cost leadership, differentiation, and focus. The strategies are implemented at a business level to maintain a competitive advantage. The generic strategies enable the business to leverage its strengths to mitigate the effects of the five porter forces discussed above. The competitive nature of the grocery industry in Australia and the limited forms of products that companies can offer means the industry is a pure competitive one. Profits margins are very low: therefore, companies that are performing well such as ALDI have normal profits. ALDI has adopted inventory management technologies such as Radio Frequency Identification (RFID), intelligent scale, self check-out machine, electronic shelf labelling, and wireless devices (B?l??escu, 2013) to reduce operating cost further and grow profit margins. The combined effect of the Porter’s five forces mean the Australian grocery industry is a low-profit industry characterised by aggressive competition and advertising to maintain and grow market share.

ALDI has a unique business model that focuses on bringing high quality products to consumers at low prices. This is possible because of numerous innovations and efficiencies that the company has instituted at different levels of operation. ALDI stores offer consumers commonly purchased household products at the common size and packaged in an environmentally friendly design with cost saving in mind. Majority of the products offered in ALDI stores are exclusive brands that are designed to meet and exceed consumer expectations (Nenycz-Thiel, 2011). By requiring customers to bring their shopping bags or buy one at the store, the company is not only cutting on cost, but also saving the environment. Since customers are required to rent and return their carts after shopping, the time and money spend retrieving carts is significantly reduced. Such savings are directly transferred to customers.

The modest size of ALDI stores in Australia means the company eliminates non-essential services that increase operating cost, which directly affects the cost of products in stores. By capturing the essence of saving and conservation in its stores, ALDI is able to offer products at competitive prices. Offering products in packaging they come in and displaying them on pallets means the company spends less time and resources displaying and re-packaging products. ALDI stores require few employees because products are not displayed on shelves and are not repackaged. This translates to savings, which is in line with the company’s goal of offering quality products at competitive prices (Semeijn, van Riel and Ambrosini, 2004).

ALDI stores also do not operate 24 hours a day, which means the company spends less on rent, labour, and energy. The company’s division structure also plays an important role in the efficient and effective operation of the business. ALDI has a flat management structure. A flat management structure encourages the open flow of ideas and enables leaders to be familiar with their subordinates. This means the decision-making process is effective and talent is easily recognised in the company (Wortmann, 2004). The company has a policy of promoting from within, which means employees are motivated to put in their best because their performance plays a role in their promotion and end of year bonuses.

The future of global brands is vertical integration. More companies are appreciating the importance of vertical integration and the role it plays in not only securing a leading position but also offering competitive prices to customers. ALDI can take advantage of it size and profitability to invest in other levels in its production chain to ensure it compiles profits at different levels and pass on benefits to the consumers (Chou, 2014). For example, the company can invest in farming of vegetables and fruits. This will not only guarantee supply, but also enable the company to avail the products to customers at lower prices because the profit margin of the producing level is not included in such a system. ALDI can also be more competitive in the Australian market by opening up small satellite stores in cities and densely populated areas under a major store in the area. The stores can be replenished daily from the main store depending on the preferences of consumers in its vicinity.

References

ALDI, 2017. ALDI Initiatives – ALDI Australia. [online] Aldi.com.au. Available at: <https://www.aldi.com.au/en/about-aldi/aldi-initiatives/> [Accessed 8 Feb. 2017].

ALDI Australia, 2017. ALDI History – ALDI Australia. [online] Corporate.aldi.com.au. Available at: <https://corporate.aldi.com.au/en/about-aldi/aldi-history/> [Accessed 8 Feb. 2017].

Anon, n.d. Competitive Forces (Porter’s Five Forces). Dictionary of Strategy: Strategic Management A-Z.

Bakucs, Z., Fa?kowski, J. and Fert?, I., 2013. Does Market Structure Influence Price Transmission in the Agro-food Sector? A Meta-analysis Perspective. Journal of Agricultural Economics, 65(1), pp.1-25.

B?l??escu, M., 2013. The Influence Of Innovations And Technology On The Future Of Retail. Bulletin of the Transilvania University of Bra?ov, 6(55)(2).

Choi, S. and Fredj, K., 2013. Price competition and store competition: Store brands vs. national brand. European Journal of Operational Research, 225(1), pp.166-178.

Chou, C., 2014. Strategic Delegation and Vertical Integration. Managerial and Decision Economics, 35(8), pp.580-586.

Gerhard, U. and Hahn, B., 2005. Wal-Mart and Aldi: Two Retail Giants in Germany. GeoJournal, 62(1-2), pp.15-26.

Hill, C. and Jones, G., 2013. Strategic management. 1st ed. Mason, OH: South-Western, Cengage Learning.

Klaas Jagersma, P., 2008. The hidden cost of doing business. Business Strategy Series, 9(5), pp.238-242.

Metzger, K., 2014. International Management Analysis of ALDI. 1st ed. Munich: GRIN Verlag GmbH.

Nenycz-Thiel, M., 2011. Private labels in Australia: A case where retailer concentration does not predicate private labels share. Journal of Brand Management, 18(8), pp.624-633.

Scholz, C. and Zentes, J., 2013. Strategic Management. 1st ed. Wiesbaden: Gabler Verlag.

Semeijn, J., van Riel, A. and Ambrosini, A., 2004. Consumer evaluations of store brands: effects of store image and product attributes. Journal of Retailing and Consumer Services, 11(4), pp.247-258.

Simon, H., 2015. Confessions of the pricing man. 1st ed. New York: Springer.

Wortmann, M., 2004. Aldi and the German Model: Structural Change in German Grocery Retailing and the Success of Grocery Discounters. Competition & Change, 8(4), pp.425-441.