Wal-Mart is often held up as the embodiment of a low-cost, efficiency-driven competitor. It has been argued forcefully that the world’s largest firm has pushed the US retail scene towards one where price and economies of scale are paramount. But what if someone could drive costs even lower?
That is the question being asked as German discount giant, Aldi, scales up its US presence.
Aldi has been in the US for over 30 years. It was the second overseas venture for Aldi Sud after Austria (Aldi has two distinct arms – Nord and Sud – who have split the German and other markets for decades). Nevertheless it only operates in 29 states with around 1000 stores, and only comes in as around the 11th largest US supermarket chain (and that is when bundled with its Trader Joes’ business – the Aldi brand is the 24th largest).
The excitement being generated is about Aldi’s business strategy. Put simply, they offer very low price groceries to the market. They are able to do this by reducing choice (i.e. less variety within product categories, and less categories), and then making sure they have very significant bargaining power with regard to the products they do sell.
This bargaining power is at the supplier end. Aldi stocks mainly private-labeled products and thus is able to build considerable scale in purchasing, as well as not bearing any passed-on marketing and branding costs from producers. They also maintain unambiguously austere facilities. Consumers know they’re getting a bargain and can see the cost savings all around them.
In a time when consumers are becoming very price-conscious, such a niche is well-worth pursuing. There seems very considerable scope for Aldi to expand within the US. It is most likely they’ll take market share away from all supermarket chains they encounter, but it is very possible that Wal-Mart could be the most susceptible to Aldi’s growth.
Wal-mart has been surprisingly non-committal to the grocery component of its business, despite it making up around a third of their revenue. This may well be because it has not achieved the same level of margins here as it does with clothing, electronics etc. The Business Week article does imply that some of its grocery offerings may well be loss leaders. How will it deal with a situation where consumers can see even cheaper options at Aldi?
As an aside for Aussie readers, the Aldi expansion down under proceeds at a very brisk pace.