Can Aldi beat Wal-Mart?

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?

aldi-logo1That 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. aldi_muesli_bars_pdThey 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.

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4 Responses to “Can Aldi beat Wal-Mart?”

  1. Unrelenting Tedium Says:

    ALDI makes you feel that every time you purchase somthing someone somewhere is being exploited. This is probably no more true than any other supermarket but i can’t help that feeling. I think it is the control they have over suppliers and producers…it is Aldi branding so who knows if they switch suppliers.

    It is Aldi’s (and walmart for that mattter) agressive handling of the anonymous producers that leads to people putting melamine in baby milk and stuffing up western australian wheat country with super-phosphates…I shall dismount my high horse now.

    Once more I realise this rant is at best peripheral to the point you were making.

  2. Andre Sammartino Says:

    It is a justifiable (and non-peripheral) concern UT.

    Interestingly, the feedback I have heard from Australian producers is that they do NOT feel overly squeezed by Aldi (as they tend to contract in a fairly straightforward fashion and are guaranteeing considerable and predictable purchasing for 12 months at a time). Many of the producers for Aldi are the big players in the Australian market (who often also produce private labels for the big supermarket players, as well as their own brands). Aldi is, in essence, cross-subsidising their products and providing protection as Woolworths and Coles rationalise their own offerings and shelf-space.

    I can’t help but think Aldi does itself an enormous disservice by keeping so quiet about its practices, and thus not refuting or dispelling your concerns (and those of others).

  3. Steve Sammartino Says:

    There is one simple and interesting consumer insight here: The firm who collects the ‘money’ from the consumer always has the power.

  4. charles Says:

    Andre,

    I always thought that Aldi’s practice of keeping mum about their source of supplies (i.e. from major players in the industry), a major reason for the cooperative partnership they formed with these suppliers.

    For example, if Audi were to widely publicise that they source their “tim tam” from Arnotts, it might diminish the brand value of Arnott (such that, we can now get similiar products produced by Arnott at a much lower price, hence, increasing the similiarity of substitutes).

    For me, why should i pay 3 bucks to buy Arnott tim tam when they produced it in Aldi packaging for a much cheaper price e.g. 2 bucks.

    (P.S. there is a slight taste differences in the product)

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