ALDI is a German Based Discount Supermarket Chain. Albrecht Discount is the full form of ALDI. The Supermarket Chain consists of two main groups. ALDI NORD and ALDI Sud. However both groups are independent in their operations and work within the specific market grounds. The individual groups were originally owned and managed by brothers Karl Albrecht and Theo Albrecht. The company has transformed from a small business to one of the most successful and valuable retail business chain with an annual estimated turnover of 53 billion Euros, over 9,000 stores in 18 countries and around 100,000 employees around the world. ALDI operations are mainly based on the limited Assortment Concept – The high quality range of goods sold in the store was initially limited to a basic selection of goods to be purchased in large quantity, sold at realistic prices and presented in simple way. At ALDI, everything from building shop, selecting suppliers, locations and selling goods, is done to make possible considerable savings with the discount always passed on to customers in the end price.
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ALDI’s “No Frill” Strategy is another cost saving methods. They have introduced Cart Rental System. Customer need to put one coin in the grocery Cart and gets back the coin when the Cart is returned. This mechanism will cut off the need to hire employees whose job is to retrieve the grocery cart. The grocery industry has been revolutionized with a unique business model by ALDI that enable them to provide the highest class product at the lowest prices. [1]
ALDI’s VISION
ALDI has a clear business philosophy and a number of guiding principles. It can be summarized by following statement: “Top quality at incredibly low prices- guaranteed”. ALDI has got five main ideologies, to be precise 1) Huge savings, 2) excellent Quality, 3) Outstanding value, 4) Superb special buys and 5) Buy with confidence. [2]
Organizational orientation can be of 4 types. ALDI is considered as mix of both Market Oriented as well as Sales Oriented Organization. Let us discuss about types of orientation and then focus on some important details on how ALDI is successful in grocery retail market by being mix of market and sales orientations.
Production Orientation
“Production orientation is an approach to business that centers its procedures on producing goods more efficiently and cost effectively; presumptuous that price is the only factor significant to customers”. [3]
Product Orientation
“Product orientation occurs where the focal point is given to product rather than the market. A product is prepared so that it meets its own requirements and not that of the markets. The needs of the customers are less important to that of the products”. [4]
Market Oriented Organization
“Marketing Orientated Organizations are treated as organizations wide generation of market intellect pertaining to the current and future customer necessities, distribution of intellect across departments and organization wide responsiveness to it. These companies get close to the customers in order to recognize their needs and problems and come up with strategies accordingly so as to reach the expectations of the customers and thereby satisfying them”. (Kohli & Jaworski, 1990 &1993)
Capture.JPG
[Source: Jobber, (2007)]
Market orientation consists of a three pattern of activities in the company, and has three dimensions, the generation of, dissemination of, and the response to the market intelligence. (Grunert, Baadsgaard& Larsen, 1996)
Product
ALDI specializes in their own-branded labels rather than any other branded labels so that they can control the cost and production processes. ALDI also stock non- food items such as
Clothes
Health and beauty products
Fresh fruits and vegetables
Stationery
Household goods
Electronic products
Soft tools
Price
The process of distribution of products shows ALDI’s pricing strategy used for being able to sell their products at low price. This comes from ALDI’s business model – Keeping high bargaining power over their suppliers, ALDI can buy large quantities of stock to service all the shops across the country. Secondly Customers have very limited amount of choices that enables ALDI to purchase one item per line that’s keeps the price of product low.
Place
Place is the one of the important ingredient of market mix. It concerns opening hours, communication channels, physical location as well as distribution channel. ALDI has got the physical presence in the form of stores as the physical building around Europe and Americas. Moreover online presence of ALDI in form of marketing channels helps the customers to locate nearest store, obtain information about the product etc.
Promotion
As mentioned earlier ALDI invest very less amount money for promotion. Another area ALDI save cost is marketing. It has got no marketing department. And the marketing budget is about 0.3 per cent of the revenue. Another interesting feature is Zero spending on public relations. ALDI offers some selective “Super Buys” offers which will change each week and are available till the stock lasts. [1]
As explained earlier ALDI is the retail Grocery supermarket chain. ALDI’s founders influenced its culture very sturdily. Its business strategy, Organization’s philosophy and guiding principle are reflected by the cultural values and rules. ALDI’s simple business model concept is understood by its employees and customers. Employees at every organization level are very cost conscious. They try to reduce unnecessary cost wherever possible. For example when there are enough days light, all lights in the offices will be switched off.
ALDI pay a special attention for the economic efficiency. Economic efficiency is achieved by going to details of every aspect. Its aims to find small improvement in every area. If new ideas and solutions are proved to be successful, they are implemented quickly. The organizational culture is characterized by determination and persistence in addition to its focus on economic efficiency and continues development. Business approach of ALDI has been changed very slightly since its foundation. ALDI’s employees explore the customer’s need and stock them. The prices of the products across each country are uniform.
ALDI’s shops are relatively smaller in size as compared to other Supermarkets. Maximum size comes up to 1200 meter squares. And typical ALDI stores consist of five employees. ALDI don’t employs Butchers or Backers as these products come prepacked. Designs of ALDI store are similar and simple. That means all the stores have same layout and similar style of presentation. ALDI does not provide free shopping bags and customers are encouraged to bring their own shopping bags. This is ALDI’s another cost saving strategy.
Business structure is ALDI is mainly based on Decentralization and Delegation. This will help to reduce the bureaucracy and conflicts. Issues can be easily dealt with. [2]
COMPETITIVE ADVANTAGE
Competitive advantage can be defined as when the firm is able to make profits as compared with the competitor by still offering the customer a less price or by offering better benefits for the high price paid by the customer. (Porter, 1985)
The concept of Michael Porter’s “Competitive Advantage” can be used to explain. It is divided into four sections as:
Differentiation Focus
Cost Focus
Differentiation
Cost Leadership
Cost Focus and Differentiation Focus are for Business Activities in narrow scope; Cost Leadership and Differentiation Leadership are for Broad range of Business activities in a broad scope.
DESCRIPTION OF ALDI’S COMPETITIVE ADVANTAGE BASED ON MICHAEL PORTER’S CONCEPT:
Strategy – Differentiation Focus:
Customer satisfaction is created by using criteria used by the customer while buying a product and it is about charging premium prices so that it covers the extra production costs justifying the need of choosing their differentiated product over the competitor’s product (Porter, 1985).
ALDI main target sector are people in the middle class whose main factor in buying is the price factor than the quality. They give an edge over the competitor like TESCO, ASDA, Lidl, Netto,BI-LO, Kwiksave, Save-A-Lot, Penny Market, Plus, Dia by providing goods at cheap price but high quality product. And thus, it creates an excellent value for the money paid [2] .
3
Products and Services Offered:
Regular discount of products.
Brand items are refunded if the purchase receipt is submitted to the ALDI store manager.
If the products are found to be defective, it can be returned if the original receipt is submitted and the full amount is refunded.
It has 900 product lines in stock and it is a no-frill store with over 9000 stores throughout the world.
It has its own brand level products and stores of ALDI have diversified products like Bonanza Potato Chips, Millville cereal.
Watchwords of ALDI are “Incredible Value Everyday” and “The Double Back Guarantee”.
ALDI Talk (low cost pay-as-you-go) offers low rates of call to customer, say for e.g. 3c/SMS to other subscriber of ALDI Talk, 15c to landlines and mobile.
They offer sales on exclusive products like electronic items, computer, gadgets, clothes, toys etc on a weekly basis but in a limited range.
They believed at “Spend a little, live a lot”, “Top Quality at incredibly low prices” and “Smarter Shopping”. [1]
Strategy – Cost Leadership:
In this kind of strategy the firm produces the product at the lowest cost and if the price which it sells is equal or more than the average price of the market then it gains profit. Such lost cost producer gives discount to the product to increase the profit (Porter, 1985).
ALDI is a supermarket which offers the products at the lowest price possible. It operates on its business with “Low price philosophy “Strictly no frills” approach. They achieved it by allowing minimum operational costs like buying a single line per item of a particular brand which in turn gives minimum choices to the customer. Transportation costs are kept to the minimum by keeping the goods directly from the warehouse to the store, the process is quite straight forward. This reduces the overall purchasing expenses.
The design of the stores is done in a basic way and the first person to handle the products is the customer themselves. They store non-branded items more in quantities but fewer in products which are a significant factor as compared with the other key competitor of ALDI.
Another important system introduced by ALDI is the checkout system. Long queue is a common thing in most supermarket but in ALDI through checkout system it is made efficient in spite of the less number of staffs .The savings made by ALDI is generally passed on to the ALDI consumers.
All these factors make ALDI a low-cost producer and thus enable to offer customer at a lower price and yet still obtain the profits needed which gives a competitive advantage over others [2]
Strategy – Cost Focus:
Firm dedicates to product that is basic at a lower cost to a segment of people but acceptable by the consumer (Porter, 1985).
ALDI supermarket as mentioned above, considers the middle class people in the rural and the sub-urban areas mainly by introducing the low price offer on all its products.
By focusing only on few products but in high volume, ALDI is able to increase more sales and thus can offer the price at minimum level by keeping few branded products and more local made products.
1
Strategy – Differentiation:
Differentiation is about the ways of establishing the competitive advantage. The question of Differentiation advantage comes in focus when a firm delivers greater services for a non-unlimited higher price than its competitors. It emphasises on unique source of differentiation in the value chain rather than on products and market (Porter, 1985).
Value Chain Analysis:
Value Chain Analysis shows how the company outperformed the competitor.
The diagram for Value Chain Analysis is given below:
Source:[ Porter,(1985)]
There are two types of activities while performing value chain analysis according to Porter and it can be stated as:
Primary Value Chain Activities: The main objective of primary value chain activities is to uphold the competitive advantage on production and delivery of product.
Inbound Logistics: Inbound logistics concerned with the activities of receiving and storing materials required to manufacture of a product.
AIDI purchase a bulk of materials to produce its product in its own brand name which save cost and ultimately prolong a competitive advantage in the business over other competitors.
Operations: It shows the lifecycle of product and services. ALDI have their own brand and they are able to get back their customer again and again to their store to purchase with the non compromising quality and services they are offering.In consideration of the product cycle the product life cycle of ADLI is in the growth stage because it is already well recognized in the market with the other competitor in retailing.
Outbound Logistics: It is concerned with how the produced goods and services are made reachable to buyers .ALDI has its own outbound logistics like own transport system to reach the product to the customer
Marketing and Sales: It is mainly concerned on how the products are made know to the customer through marketing and sales.ALDI’s marketing and sales strategy is to save money in all possible way. ALDI have twisted the market with the other competitor like by following the marketing strategy of cutting the cost and pass the savings to the consumer ultimately .(Brandes,2008 pg 27)
Aldi Market Entry Strategy
Customer loyalty matters because selling more to existing customer is much easier, and cheaper, than looking for and selling to new customers. On the other hand, it is significant to obtain new customers. Nevertheless, new customer requires more investment to make them loyal. [1]
Service: The aim of the customer service is to satisfy the customer with excellent service. ALDI has excellent strategy in order to sustain the competitive advantage considering this issues.. incredible courtesy every day. ALDI have beaten the’ big four’ Operators with the incredible courtesy of the employees and satisfactory customer service .local store managers are liable to solve all the customers frequent issues to ask for their convenience. 1
Secondary Activities: Activities which increases the efficiency but not directly involved with production. The activities are stated as follows:
Procurement: It relates to the resources management for the operation of the business.
Human Resource: It relates to the recruitment of the efficient and eligible staff in particular sections.
Technology Development: It involves to the management of the information and knowledge of the business.
Infrastructure: It concern with support sections such as Quality, Planning, and senior management.
ALDI manages its resources efficiently for the operation of its business .It recruit the efficient staffs to satisfy the customers and to run the store efficiently. ALDI manages its information in very restrict way. A very few exposure of the information of the business is done to the public .It controls the quality of the product and deals with the senior management in non bureaucratic way which we have mentioned earlier.
Porter’s Five Force Model
Source:[ Porter(1980)]
Porter’s five forces model will help in knowing the flaws and improve it and at the same time help in understanding the strength and the current status in the present scenario.
The five forces can be explained with respect to ALDI as:
Competitive Rivalry: HIGH
“They advertised on a number of products in their Cash savers campaign. They effectively said that the benchmark for the best price is ALDI”. [1]
Since ALDI offers the everyday used products in minimum price but of high quality products, ALDI stores and customer has increased in huge number with time. This poses a threat to other competitor like:
Lidl (5,000 stores)
Netto (1,200 stores)
BI-LO (214 Store Australia)
Kwiksave (UK only)
Save-A-Lot (1150,USA stores)
Penny-Market (Europe)
Plus www.plus.de
Dia%(Spain, Portugal)
2
Threat of New Entry: MEDIUM
ALDI has many competitors like TESCO, ASDA, Lidl, Netto, BI-LO, Kwiksave, Save-A-Lot, Penny Market, Plus, Dia and hence the new entry has to face the competition with the already existing supermarket.
Threat of Substitutes: HIGH
As ALDI does not have specialized products or services, the product which can be found at ALDI can be found at other stores.
Only difference is that ALDI offer the products at the lowest fare possible.
Except ALDI’s own product, the other products can be easily available at other stores. [3]
Buyer Power: MEDIUM
There is intense competition in the retail world, so if ALDI is offering price that is quite high, consumer has the choice to choose from other stores.
Consumer can exercise their power and keep the price as per their value.
Supplier Power: LOW
If the supplier does not agree with the price ALDI is offering, then ALDI can switch to other supplier chain.
MARKETING MIX -ITS POSITIVE AND NEGATIVE INFLUENCE
Marketing Mix-Product
“A product is a physical good, idea ,person ,or place that is capable of offering tangible attributes that individuals or organizations regard as so necessary, worthwhile or satisfying that they are prepared to exchange money, patronage or, or some other unit of value in order to acquire it”(Brassington and Pettitt, 2006:288)
ALDI provide services in certain area of the region. It is necessary to strategically plan the services and manage the brand and product line portfolios, serving multiple markets and segments.
Product life cycle
“No matter how wide the product mix, both product lines and individual brands needs to be managed over time. A useful tool for conceptualizing the changes that may take place during the time that a product is on the market is called the product life cycle.” (Jobber, 2007)
Source:[Jobber, 2007]
According to Jobber (2007), the product life cycle processed is explained as below:
First stage is introduction
“When first introduced on the market a product’s sales growth is typically low, and losses are incurred because of heavy development and promotional cost. Companies will be monitoring the speed of product adoption and, if this is disappointing, may terminate the product at this stage.”(Jobber 2007)
ALDI in introduction Stage
ALDI’s product strategy is to deliver a restricted selection of fast products. The company sells mainly staple products like food, beverages, and household supplies, which is needed on a daily basis. Many people in German bought their main product from ALDI, and the additional product which is not found in ALDI are brought from other stores.
“ALDI stores carried only around 700 different products, compared to around 25,000 products carried by a traditional retailer and almost 150,000 carried by a Wal-Mart Supercenter”. [1]
Second is Growth:
Growth is the second stage in the product life cycle. In this stage product is considered by speedy sales and profit growth which is topped by rapid market recognition. At the closing stages, there are lots of competitions from the rivals and the profits decreases slowly but surely because of competitive shakeout.
ALDI in the growth stage:
Though ALDI is one of the biggest retailers in Germany, the market may become inundated. It has been researched that about 80 percent or more of the Germans lived around 20 minutes in the vicinity of an ALDI store and this may give a limitation in the company’s expansion. In Germany, shopping does not limit not only to low income people. [1]
This proves their deep saturation into the market and intensive network. Statistics show that there are repeated customer’s which proves that ALDI has created brand preference also. This proves that ALDI has migrated from the introduction stage to the Growth stage of the product life cycle.
Third stage is Maturity
“The need for effective brand building is astutely recognized during maturity as brand leader are in the strongest position to resist the pressure on profit margin” (Jobber 2007)
ALDI’s business model is based on simplicity and competence. The company’s motto is ‘Top quality at extremely low prices – guaranteed.’ even though officially ALDI are two separate companies; both of them followed the same strategies and operating with the same business model. All the rudiments in ALDI’s business model are aimed at keeping costs low, so that the company could fulfill its guarantee of providing the lowest prices to its customers [2] .
Last stage is Decline
This is the last stage of the product life cycle company’s experiences decline in the sales and profits due to new technology or changes in consumer’s tastes, fashion, style or companies Budgets for promotions and product development. Companies need to look for other segments or products need to be dropped or slashed down to maintain profits.
.
Source:[Bal Samra, 2010]
The cash flow of the product is believed to be dependent on the box in which the product falls in the Boston consulting Group Growth-Share Matrix.
There are four boxes
Stars:
They are the market leaders and they tend to high growth and profitability. Resources should be invested to maintain /increase the leadership position.
ALDI in Stars Stage:
Since retail business is looked in long term prospective, ALDI decided to continue its operations. In the growth stage of the life cycle, ALDI has gradually entered into the Star box of the matrix. People started recognizing the brand name and reputation of the company. They started introducing innovative products and services and applied strategies to channeling their distribution network.
Problem Children:
These are the low share products I high growth markets which are not profitable and causes a drain on cash flows.
Cash Cows:
The product in this box shows high profitability with lo investment. They have the highest market share in low growth markets. Excess cash generated are used to fund stars, problem children.
Dogs:
These are weak products that fail to achieve market dominance in low growth markets. They produce negative cash flows.
The negative influence of ALDI mix strategy of product is that since ALDI keeps non-branded products mainly, the customer may not be satisfied with only the ALDI’s own product. They can have the strategy of keeping more products with lots of choices branded as well as branded so that customer can be satisfied more.
Marketing Mix – Pricing
Pricing:
Price is the only factor among the 4P’s which can earn revenue and profit, the remaining 4ps denotes expenditure. So the company has to come up with pricing strategy and consider other factors which affect the price .Price plays an important decision maker for a customer to purchase the things. Price should give the value of the money the customer is paying (Jobbers, 2007).
Customer usually perceived the quality of the product through price of the product. “It is a convenient judgment criterion, has snob value and influences the perceived risk” (M.C .Cant, J.W.Strydom, C.J.Jooste, P.J du Pleiss, 2007)
According to M.C .Cant, J.W.Strydom, C.J.Jooste, P.J du Pleiss,( 2007) the pricing model can be followed and it is explained as given below:
Source: [M.C .Cant, J.W.Strydom, C.J.Jooste, P.J du Pleiss, (2007), p.325]
Factors that influence pricing are:
Demand Constraint: Demand sets the price of the product where it can reach maximum. If the price of the product is set very high then there will be no demand of the product and it is thus zero if customer are not willing to pay such high prices.
Cost Constraint: When we say cost it consists of four things i.e. total cost, fixed cost, variable cost, marginal, incremental cost. It determines how much the price of the product should be since cost should cover the cost of production and marketing and it should return more than the capital invested and the risk associated. It determines the floor of. [1]
Competitor Prices: Competitor’s price will help to set the price of the product to low or either goes for promotional item according to the strategies used by the competitor. In short it helps in cutting price.
Pricing objective covers:
Profit Objective: Its objective is to obtain maximum profit, keep a target profit, to get profit from each product and it should be a satisfactory profit.
Sales-Volume Objective: Its aim is to increase the sales and volume such that the market share also increases respectively.
Other pricing objective: It includes no price competition, to maintain a constant price so that it will be stabilized and to sustain in the market.
Determining the basic price:
Cost Oriented Methods: It discusses whether to use absorption/full or direct/variable costing. The absorption method uses both full and direct costs while calculating the production cost and all other cost are also included while the direct costing uses only the margin cost to set the price of the product.
Customer-Oriented Pricing: Here the prices are set according to the customer perceived value and according to the customer demand and the willingness of the customer to buy that product. But while doing so the firm may set a price that does not cover the production and marketing costs and it may go through losses instead of the profit. So the price should be set such that it is according to the customer perceived value and it equals or exceed the marginal cost.
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Competitive Oriented Methods: The firm sets the price according to the price set by the competitor without taking into consideration their production costs and demand which may lead to loss. They may not charge the same price as the competitor instead they may sell it at a bit lesser than the competitor’s price or may add an additional item as an offer when they buy that particular product.
Price Level: The firm will determine whether to follow one-price policy or flexible policy while pricing the product.
The final price of the product: The final price of the product is determined by negotiating it with the suppliers.
ALDI adopted the method of Customer Oriented and Competitive Oriented Method and its price objective is Profit Objective. This can be concluded from the following findings:
“At Aldi, we’re not about fancy gimmicks or expensive price tags. We’re about giving you – our customer – good, honest value; fresh and great tasting food and drink; and the best quality household products” [1]
“According to the head of Aldi in Britain and Ireland “The major advertising campaign Tesco used to herald the arrival of its Cashsavers range gave its rivals a competitive advantage” [2]
“Don’t expect to find Campbell’s, Coca-Cola or Betty Crocker at Aldi. Almost everything in the store is an Aldi private brand” [3]
ALDI is a basic store without flashy design and they pass their profits to customer by giving discounts, holiday tickets.
External factors that affect pricing decision of ALDI:
Customers and consumers:
ALDI targets mainly the sector of people whose main concern is low price and ALDI follows the strategy offers the product at the lowest price possible.
Distribution Channel:
ALDI distribution strategy is directly from the warehouse to the store. They do try to put minimum costs as far as distribution is concerned.
Competitors:
ALDI has strong competitors like TESCO, ASDA, Lidl, Netto which also follow the same kind of pricing strategy has what ALDI has followed.
New Product Launch Strategy:
[Source: Bal Samra, 2010)]
According to Jobber (2007), it is defined as:
Rapid Skimming: It is the strategy of high price and high promotion expenditure.
Slow Skimming : It is the strategy of high price with low levels of promotional expenditure.
Rapid Penetration: It is the strategy of low price with high heavy promotional expenditure.
Slow Penetration: It is the strategy of low price with low promotional expenditure.
“Aldi adopt slow penetration strategy” (Jobber, 2007)
Pricing Strategy:
By using Price-Quality matrix, let’s see the type of matrix ALDI exhibits and can find out the quality of the product accordingly.
Price-Quality matrix:
Source: [Bal Samra, 2010]
Fig: Price Quality Matrix of ALDI
It can be seen from the Price Quality Matrix that ALDI follows the strategy of “high value and low pricing” strategy. And their main objective is “guaranteed high quality products at low prices [
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