Executive Summary

The analysis in this report demonstrates how Aldi effectively adapted its strategy and entered into the Australian market. The overview of the

external environment details how Aldi is operating in a highly competitive market of nuanced power relationships that the company is negotiating effectively. The examination of Aldi’s internal environment provides context to better understand Aldi’s strategic approach. Aldi’s entry into the Australian market using a price leadership and differentiation strategy can be deemed successful as they have gained market share, a loyal following, and have expanded greatly. Despite this, they are still a relatively minor player when compared to Coles and Woolworths. Moreover, there are forthcoming market entrants that will compete with Aldi on a price basis while potentially offering greater convenience. Therefore, it is recommended that Aldi continue its efforts

in developing its brand as well as improving e-commerce functionality.

Table of Contents

EXECUTIVE SUMMARY

INTRODUCTION 4

EXTERNAL ENVIRONMENT 5

INTERNAL ENVIRONMENT 8

STRATEGY FORMULATION 12

STRATEGY IMPLEMENTATION 14

EVALUATION & RECOMMENDATIONS 19

BIBLIOGRAPHY 21

This report describes, analyses and evaluates the business strategy of

supermarket chain Aldi in the Australian market. Analysis begins with an

examination of the external and internal environments Aldi is operating in.

Two major players dominate the supermarket industry in Australia but, since

entering the Australian market in 2001, Aldi has been a disruptive force, altering

the way all supermarkets operate. In terms of the internal environment, by

taking a Resource-Based View (RBV), Aldi’s success can be better understood. A

SWOT analysis further contextualises Aldi’s internal environment. Focus then

shifts to Aldi’s strategy formulation and implementation. It is determined that

Aldi took a planned approach to entering the Australian market, adopting its

successful German model. Analysis shows that Aldi predominantly uses a cost

leadership strategy but successfully incorporates elements of differentiation. It

is found that this distinguishes itself from the duopoly of Coles and Woolworths.

Finally, an evaluation is made and recommendations given to Aldi.

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Introduction

External Environment

・HIGH COMPETITIVE RIVALRY

The Australian supermarket and food retail industry is highly competitive.

Aldi holds 9.2% of industry market share, while Woolworths dominates with

37.2% and Wesfarmers holds 30.3% (IBISWorld 2018). The companies operate in

a highly price aggressive industry, which was set by Aldi itself. Aldi entered the

Australian market offering private label products at low prices. This strategy

was immensely popular, leading Coles and Woolworths to compete with Aldi on

a price basis (IBISWorld 2018). The industry has consequently seen decreased

profit margins over the past five years (IBISWorld 2018). With consumers

continuing to preference lower prices and private label ranges, price-based

competition between the three major players is predicted to continue (IBISWorld

2018).

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・HIGH BUYER POWER, LOW SUPPLIER POWER

Here it becomes necessary to understand the socio-cultural and economic

factors influencing consumers’ preference of cheaper groceries. While real

household disposable income is high, consumers remain price sensitive due

to a decreasing consumer sentiment index (IBISWorld 2018). This means that

households have negative perceptions surrounding the general economy and

will be less likely to purchase higher priced goods. Consumers are essentially

attracted to the increased availability of lower priced private label products,

and are prepared to shop around to secure the lowest prices. Promising

consumer demand for private label products is coupled with the low bargaining

power of suppliers (IBISWorld 2018). In supplying ‘phantom brands’, Aldi can

easily switch between suppliers, giving the company high buying power over

their manufacturers. This enables the company to maintain its low-price

strategy. Despite this, consumers themselves have high bargaining power

over supermarkets and food retailers. Supplying a disloyal customer base with

easy switching potential, food retailers must work to provide the lowest cost

alternative.

・LOW THREAT OF NEW ENTRANTS, HIGH THREAT OF SUBSTITUTES

In considering legal, technological and further socio-cultural forces, we

understand that the Australian supermarket and food retailing industry

is one of high entry barriers and high threat of substitution. Entry as a liquor

vendor is particularly challenging. BMI Australia (2018) indicates that due to

strict Australian laws, Aldi has been restricted from selling its full liquor range.

Additional entry barriers include the dominance of pre-existing market players,

as well as the difficulty in sourcing prime real estate (IBISWorld 2018).

Despite these factors, the entry of international brands Amazon and Lidl is

expected (BMI 2018). Amazon is expected to introduce AmazonFresh, an online

delivery service that will rely on the moderate technological shift towards

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online shopping. IBISWorld (2018) indicates that supermarket home delivery

is already increasing in Australia and predicts growth in online groceries

with AmazonFresh entering. However, the mass uptake of AmazonFresh is

considered unlikely, as people still value retail shopping for fresh food (Cloutman

2017). To put this into perspective, in 2016, 3.1% of average grocery buyers had

ordered online in the previous month (Roy Morgan 2017). In 2017-18, online

grocery purchases will only represent 2.8% of Australian supermarket revenue

(Cloutman 2017). Thus, new entrants will face pre-established barriers, market

structures and trends.

While threat of entry is deemed low, threat of substitute services is high.

Australians love to eat out; this trend has increased over the past 5 years, which

is likely to affect industry revenue growth (IBISWorld 2018). Cafes, restaurants

and takeaway services therefore compete with food retailers for consumer

income.

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Aldi entered the Australian market in 2001 and now operates over 500

stores countrywide (IBISWorld 2018). Aldi’s success can be attributed

to its unique and sustainable resources and capabilities. Applying the RBV as

a framework, Aldi possesses a strong reputation as well as strong financial,

physical, human and organisational resources.

Internal Environment

・REPUTATIONAldi has operated in over 17

countries since its establishment

in 1948 (MarketLine 2017). Its brand

history and strong presence in

foreign markets are difficult to

imitate.

・FINANCIAL RESOURCESSince 2013, Aldi has achieved

rapid growth inAustralian market

(IBISWorld 2018). It is in a suitable

position for growth.

SOURCE: IBISWORLD 2018

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TABLE 1: ALDI - FINANCIAL PERFORMANCE

・PHYSICAL RESOURCES

・HUMAN RESOURCES

The large number of stores and wisely chosen locations allow Aldi to reach

a wide customer base. The company’s smaller store structure and efficient

distribution system also add to its strength (Starr 2017).

Aldi invests substantially in recruiting and training employees to fit

organisational culture and improve commitment (Dunford, Palmer & Benveniste

2005). It also standardizes staff management practices to reduce employee

churn rate.

・ORGANISATIONAL RESOURCES

As discussed, Aldi maintains a lean structure; it builds long-term partnerships

with a small base of suppliers in order to sell limited private label ranges at

competitive prices (Passport 2016).

Given the resources illustrated above, Aldi needs to adopt strategies to obtain

sustained competitive advantages by exploiting its strengths and opportunities,

and neutralizing external threats and weaknesses (Barney 1991). Table 2 shows

Aldi’s SWOT analysis.

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TABLE 2: SWOT ANALYSIS OF ALDI

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Strategy Formulation

Along the continuum of deliberate to emergent, Aldi employs a planned

approach to strategy by formulating precise intentions, backed by strict

controls to ensure their correct implementation (Mintzberg & Waters 1985,

p.259). This is demonstrated through the company’s business philosophy

and guiding principles, which clearly articulate its objectives (Bonn 2006,

p.62). This philosophy is based on five principles: 1) huge savings, 2) excellent

quality, 3) outstanding value, 4) superb special buys and 5) buy with confidence

(Bonn 2006, p.62). Furthermore, Aldi’s planned strategy is realised through

specific management practices where managers are not only encouraged,

but as leaders, are expected to explicitly delegate responsibilities to ensure

staff know what needs to be achieved within the organisation (Dunford,

Palmer & Benveniste 2005, p.9). Aldi also ensures their staff are trained to

work collectively by encouraging employees to follow ‘The Aldi Way’, which is

a mindset that characterises the company’s expected values and behaviours

(Dunford, Palmer & Benveniste 2005, p.11).

Aldi’s planned approach to strategy formulation can also be understood

through Porter’s Generic Strategies (1985). To select the most appropriate

strategy, Aldi engaged in a detailed form of planning to evaluate the Australian

supermarket sector and establish where it could be most competitive. In an

industry that is traditionally dominated by two supermarket giants, Coles

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and Woolworths, Aldi determined that there was a gap in the market for a

retailer focusing primarily on price rather than convenience (Reynolds 2014).

Consequently, Aldi chose a cost leadership strategy based on the overall

analysis of its resources, strengths and distinctive competencies relative to its

competitors. Aldi aimed to implement this strategy by replicating its existing

German format of being a heavy discounter, which offers a limited number of

good-quality products at a low price (Bonn 2006, p.60). This required the careful

planning and alignment of its resources and capabilities to minimise costs

through the development of competencies unmatched by rivals, such as strong

supplier relationships and a lean organisational structure.

However, while the study of Aldi reveals the firm follows a strong planning

orientation to strategy formulation, shifts in the marketplace have also

led to emergent strategies. As mentioned in the analysis of Aldi’s external

environment, the supermarket sector in Australia is highly competitive and

dynamic. Thus, Aldi must continuously develop and adapt its strategies to

effectively respond to changes in its competitive environment and consumer

demands. Aldi has achieved this by introducing its ‘Good Different’ strategy,

which aims to increase the firm’s competitive advantage by promoting the

discount retailer’s differences and challenging the conventions of Australia’s

supermarket industry (Hogan 2017). This differentiation strategy has emerged in

response to a number of exogenous factors, such as the forthcoming entrance of

international supermarket retailers, Lidl and Amazon, who threaten to compete

directly with Aldi on a price basis. In addition, this strategy allows the company

to target more affluent customers, a segment that is increasingly shopping at

Aldi (Passport 2016).

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Strategy Implementation

・COST LEADERSHIP STRATEGY

Aldi’s cost-leadership strategy is premised entirely on cost reductions. Aldi’s

strategic implementation will be evaluated by assessing three key areas of

the business geared to maintain a low-cost strategic vision; culture and values,

structure and systems, and skills/resources.

・COST CULTURE AND VALUES

Aldi’s corporate culture is premised on notions of simplicity, efficiency

and transparency. Their ‘no frills’ approach to conducting business has

been part of the organisation’s corporate philosophy since its inception and

permeates through to all company activities, which are all oriented towards

these three key characteristics (Aldi 2018). A strong corporate culture is regarded

as an effective way to ensure strategic direction stays on course (Dess, Lumpkin

& Eisner 2008, p.309). Aldi successfully communicates their high quality, low-

cost vision to all areas of the business including their suppliers, employees and

consumers. Aldi prioritises the price sensitive consumer who desires quality

products at an affordable price (Aldi 2018).

Aldi’s slogan ‘Good Different’ celebrates the company’s unconventional

operating methods and underlies all of its business activities including its

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private label product range, supplier relationships and store operations. Aldi’s

approach to conducting business is rooted in the idea of efficiencies. These save

the organisation from incurring costs faced by its major competitors. Resultant

savings are then passed on to the consumer allowing the business to provide its

customers with products at competitively low prices (Samios 2017).

・STRUCTURE AND SYSTEMS

Aldi’s organisational structure and operating systems are designed to

ensure that efficiencies are capitalised on in many areas of the business.

Three key areas of operation are attributed to the company’s ability to keep

costs low; a small supplier network, an innovative logistics and distribution

system as well as the physical store layout and limited product range (Starr

2017).

Aldi maintains a strong supplier network, a key resource it attributes to

its strategic success. A small number of producers assist Aldi in producing

high quality private label goods at an extremely competitive price. These

relationships allow the brand to ensure the predictability of its pricing across

the range of goods it stocks, additionally it ensures that the brand is ready to

proactively address any price influxes and negate the potential consequences it

may pose to the price sensitive consumer (Starr 2017).

Cost leadership strategies work best in business environments that are

described as being relatively stable (Bowman 1998, p.79). By prioritising positive

supplier relationships, Aldi exerts a greater level of control over externalities

that could jeopardize its strategic approach. Additionally, Aldi does not charge

its suppliers for shelf space or marketing keeping costs to suppliers low (Murphy

2015). This is a markedly different approach compared to major competitors

Coles and Woolworths, who leverage their size and power within the grocery

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retail sector to exert dominance over suppliers, coercing them into complying

with more competitive pricing and cost cutting strategies (Mitchell 2017). In

the face of increasing cost of inputs, suppliers suffer as a result of the duopoly

created by the two Australian supermarket giants (Chung 2017).

Additionally, Aldi has adopted a centralised approach in relation to sourcing

its fresh produce. A centralised strategy not only ensures that Aldi has a

greater level of control over the quality of goods it supplies to consumers, but

it reinforces the business’ commitment to long-term positive relationships

between themselves and their suppliers which, as stated earlier, allows the

organisation to maintain a highly competitive pricing scheme (Hogan 2017).

The provision of a wider array of fresh produce throughout stores is considered

essential for Aldi, whose point of weakness in the past was their fresh food

offering. Their recent store refurbishments to showcase their fresh food offerings

generated a 15% increase in sales in 2017, placing increasing pressure on major

rivals Coles and Woolworths (Hatch 2017).

In relation to logistics and distribution Aldi has implemented an approach

that allows products to be packed from the factory ready for the shop floor

by developing an innovative range of product pallets with partner CHEP

Australia. Products are displayed on the shelf as they were packed in the factory,

eliminating the need for unpacking and shelving stock, saving both time and

money (CHEP Australia 2013).

Further, Aldi’s product range is comprised of approximately 1,500 core

products, in comparison to over 24,000 items stocked in an average Coles

or Woolworths store (Murphy 2015). Aldi’s limited product range assists the

organisation in maintaining lowered costs, as each product stocked within a

store is classified as a cost to business. This does not mean that consumers are

limited in variety, as Aldi shoppers have access to a wide range of food and

household items. However, the variety within each product category is limited.

Unlike its competitors, rather than having many variants of the same product,

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Aldi provides consumers with a single option, saving time, money and space

(Murphy 2015). Per square meter Aldi’s stores are much smaller than Coles and

Woolworths meaning the company also saves on operating costs.

・SKILLS AND RESOURCES

Aldi has also focused efforts on streamlining employee tasks in order to

maintain efficiencies at an operational level. The number of staff per store

ranges from three to five employees, who are all trained to complete all tasks

that allow a store to operate effectively (Starr 2017). Additionally, employees are

trained to scan products at high speeds at checkouts to effectively manage the

flow of consumers with less staff, allowing the company to minimise the cost of

human resources (Starr 2017).

・ALDI’S DIFFERENTIATED POSITIONING

While Aldi’s primary strategic motive is orientated towards a

cost leadership approach, their strategy integrates elements of

differentiation successfully. Aldi’s ‘Good Different’ strategy aims to showcase

to consumers the brand’s identity, which goes beyond simply being a grocery

store to becoming more of a lifestyle brand with its own ‘quirky’ consumer

culture (Campaign Brief 2018). This is achieved through Aldi’s range of highly

anticipated ‘Special Buys’. Twice a week the company discounts a limited range

of products including anything from stereo systems to camping gear (Aldi 2018).

Aldi has effectively created a culture of anticipation and excitement around its

brand and recent promotional efforts celebrating Aldi’s unconventional brand

identity have assisted the company in progressing beyond the characterization

of a ‘traditional’ supermarket (Dawson 2018). Aldi’s core range of products and

their Special Buys allow the organisation to be more adaptive to consumer

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needs and meet consumer preferences in a revolutionary manner, this flexibility

allows the company to adjust their strategy depending on consumer desires in

order to maintain relevancy and a competitive edge (Reynolds 2014).

Aldi is able to successfully execute such a strategy without facing the dilemma

Porter describes as being ‘stuck in the middle’ where a firm has no clear

strategic direction (Magretta 2012, p.132-136). This is due to the very nature

of the Aldi business model, from its dynamic business operations, its product

range and eccentric advertising campaigns, as well as never losing sight of its

organisational purpose (providing for individuals whose discretionary income

is limited but value quality), the company has effectively catapulted itself into

what some describe as a ‘viral success’, developing a brand identity that has

amassed a number of loyal fans and followers (Chung 2016; Evans 2017).

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Evaluation and

Recommendations

Aldi’s hybrid strategy of low-cost leadership and differentiation has worked

effectively to earn the business its reputation as a viable player within

the highly competitive Australian grocery retail sector (Chung 2017). Aldi’s

continued strategic success within the Australian market is driven by their

ability to understand and satisfy consumer desires for low-cost, high quality

goods (Donohoe 2016). Their economical pricing scheme has dismantled the

competitive barriers erected by duopoly Coles and Woolworths, allowing the

company to offer consumers a greater level of choice as to where and how they

shop. Furthermore, Aldi is an innovator in its own right, its conceptual stores and

innovative business operations provide consumers a novel shopping experience

unmatched by competitors (Donohoe 2016).

However, it is questionable whether their low-cost strategy is feasible in the

long run as consumer tastes and preferences continue to change. While Aldi’s

offerings meet consumer needs on the basis of price and quality, consumers are

becoming increasingly time poor and demanding a greater level of convenience

from their shopping experiences (Koehn 2017; Mortimer 2017). Grocery retailers

Coles and Woolworths have addressed these concerns by providing customers

with click and collect and online shopping services. Contrastingly, Aldi has not

responded to consumer demands, maintaining its physical stores as its sole

distribution channel (Kohen 2017).

Aldi must consider whether diversifying distribution is a viable option for

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the business to stay competitive, as competitive pricing becomes equally as

important as convenience for the time poor consumer. Adopting an omni-

channel approach, as opposed to the single channel approach the business

currently maintains, may result in a more competitive offering for Aldi in the

future and negate threats posed by new entrant AmazonFresh in Australia

(Koehn 2017).

However, any level of diversification will add costs to the business; considering

Aldi’s relentless focus towards its core value proposition (the promise of

consistently lower prices), any deviation away from this could negatively

affect the business’ success which has been attributed to its ability to secure

goods at a competitively low cost (Mitchell 2016). Therefore, it is recommended

that Aldi evaluate whether the costs incurred in providing consumers with

convenient online options is a suitable strategy in light of their current business

operations. While the diversification of its offerings and distribution channels

are recommended, this must be executed in a manner that does not jeopardise

its reputation as a low-cost leader within the Australian Grocery industry.

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