Why Not Blame the Parents?

I was very disappointed by the recent supposed exposé of the “secret world of Trader Joe’s” by Fortune magazine.

For those who’ve never wandered the aisles of this US supermarket chain, Trader Joe’s is a rather quirky purveyor of intriguingly packaged groceries that conjure up vague images of some exotic South Pacific trading post (see left) – if said trading post had access to goods and flavours from around the globe.

The chain has been spreading quickly across parts of the US in recent years, such that it now has 344 stores in 25 states. It is a very private business, with little to say to the finance press, or media in general. Fortune’s story makes much noise about the ‘secrets’ behind their success:

– a focus on private labelled offerings (i.e. about 80% of products are internally branded), that it turns out are often sourced from FMCG giants who are sworn to secrecy about these production arrangements
– tightly controlled costs
– small (often standalone) stores
– very limited variety within each product and narrow offerings generally (so around 4,000 SKUs per store vs 50,000 for typical supermarkets)
– a tiny head-office, and considerable autonomy for regional and store managers
– well paid staff at all levels in the very flat organisation
– low numbers of in-store staff who are expected to be very multi-skilled
– loyal customers who are not deterred much at all by the limited range…

Does that sound familiar to many of you? Bring to mind the Aldi model, perhaps?

That’s no surprise. German giant Aldi has owned Trader Joe’s since 1979 (Correction to initial version of post: it was Aldi Nord that acquired Trader Joe’s. Aldi Süd, the other half of the Albrecht brothers’ empire owns the Aldi stores in the US (and Australia) – See more in comments section below ).

While the article acknowledges this, the author implicitly dismisses any impactful level of involvement by the German hard-discount giant in Trader Joe’s practices.

This is very odd. While it may be the case that significant elements of the Trader Joe’s business model were the brainchild of the firm’s founder, to ignore the similarities in competitive advantage is to miss a big part of this story. It also ignores the exciting prospects for the future.

Surely Aldi bought these guys because they could see the crossover and scope to transfer knowledge and practices. The eventual expansion of the chain across the country reflects Aldi’s own experiences, as does the extent to which consumer behaviours have been transformed when these stores open.

The Fortune article asks some great questions – such as whether these quirky brands and perceptions of uniqueness and ‘small-ness’ can be retained as suppliers must service a bigger and bigger market, and as consumers become aware of the ubiquity (and perhaps the multinationality) of the stores. The answer may lie in Aldi’s sustained advantage in both supply relations and as a consistently well-regarded firm. But ignoring the parent makes such an answer unlikely.

The other unasked question (and lesson) is the transferability of this brand and model beyond the US grocery market. Would a higher-end, more gourmet-tinged supermarket chain, built around a relatively low cost private-label strategy, work in other markets (such as Australia)?

Advertisement

Another one bites the dust

The highly oligopolistic Australian supermarket industry just lost another multinational player.

South African grocer Pick’n’Pay (#143 on Deloitte’s list of global retailers by size) has sold off its Aussie holdings (the Franklins branded supermarkets) to our biggest grocery wholesaler Metcash.

Metcash (which was once South African-owned) supplies the very large network of 1000+ independently owned IGA stores. The 77 company-owned Franklin stores will soon be sold off to what are effectively franchisees locked into a supply arrangement with Metcash (now there’s a nice strategic play with respect to reduced bargaining power of buyers).

Franklins has proven a very tough company to run. It was sold off by Hong Kong’s Dairy Farm (#128) back in 2001 after they couldn’t turn a decent profit against the Woolworths and Coles behemoths.

Irrespective of the slow rise of Aldi and prospect of a Costco challenge, the rivalry in this market is mighty nasty for anyone without the big two’s economies of scale and reach.

The power of Aussie retail giants

I blabber on here regularly about the strategic decisions of Australia’s two biggest retailers – Coles (now part of the Wesfarmers empire) & Woolworths. The sheer size and breadth of these two firms’ operations warrant considerable attention.

The folks at ABC TV’s Hungry Beast have done a great job of bringing together the relevant stats and information about strategic agenda (and outcomes) for these two giants in a very neat, short presentation:

As their graphics show (although not explicitly), there is a lot going on in terms of Porter’s Five Forces.  Coles/Wesfarmers and Woolies have affected the economic structure of their industry(s) substantially so as to:

– reduce Rivalry (by acquiring competitors, and by building strength across retail markets so as to reduce the likelihood of competitive attacks)

– increase their Bargaining Power vis-a-vis Suppliers

– reduce Buyer’s choices of store operators (and thus their Bargaining Power)

– build substantial Barriers to Entry (although I would argue the Hungry Beast folks have misused the term greenfield).

The result is two firms that a massively oversized for the relatively small economy in which they operate.  Australia accounts for roughly 1.1% of the global economy (in terms of GDP).  Adding NZ (where these firms have much smaller coverage) only raises that figure to 1.26%.

Nevertheless, these firms come in at #26 and #28 on the Deloitte rankings of Global retailers by revenue. They are larger than all but 3-4 of the US’s supermarket chains, and of the British chains only Tesco is larger. Other than the US’s Kroger, Safeway and Supervalu, and Germany’s Edeka, no other large grocery chains operate in anywhere near as few countries (the rest are in 8-36 countries).

Seems like more evidence why I should be shopping at Aldi, my local farmers’ market and independent liquor outlet…

And thanks to Sakshi for bringing this clip to my attention.

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?

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.

Follow @drsamma