Aldi 3 Essay

Company Overview – ALDI: Aldi Group has been highlighted as a leading grocery chain store with more than 7,500 stores across the globe[1]. The company has its roots in Germany that has remained its strongest market over the years with 40% market share in food retail segment, while aggressive expansion has been undertaken into other European countries and the US[2]. Aldi is a privately held company that operates as Aldi North and Aldi South, with its headquarter in Essen, Germany. PESTEL Analysis: Political: The accession of some major countries like China to the WTO made it easier for Western food retailing companies to penetrate lucrative markets worldwide[3]. Moreover, the joining of the ten Eastern European and Baltic states to the EU in 2004 similarly facilitated the entry of Western companies into these markets[4]. This suggests that supermarkets would be able to strengthen their supply chains by leveraging upon economies of scale and scope, therefore an increase in supplies is expected in the future. Economical: The health of economy is a vital influence on the extent of discretionary buying and how much is spent on necessity purchases. The trends in personal disposable income has seen steady rise of 14% in the period of 2002-2006[5]. This growth has been assisted by low unemployment, low inflation and falling interest rates for much of the period. The following graph and the table of figures have been made with the help of data taken from Mintel[6] and ONS[7]. [pic] |Year |PDI |Consumer |Savings ratio |Interest | | | |expenditure | | | | |? n |? bn |% |% | |2002 |703 |649 |5. 3 |4 | |2003 |721 |664 |5. 5 |3. 7 | |2004 |752 |697 |6. 6 |4. 4 | |2005 |777 |720 |6. 9 |4. 4 | |2006 |801 |742 |6. 9 |4. 5 | • The inflation in UK remained at historically low levels between 2002 and 2006, and is forecast to continue at around 2 – 2. % till 2010[8]. The Retail Price Index (RPI) measures price inflation in consumer goods and according to that the rate of inflation on food purchases has generally remained at a lower level than that for all items in the past few years, turning negative in 2000 (deflation)[9] and showing only 0. 6% growth in prices in 2004[10]. Analysts held price competition between retail superstores responsible for this low level of inflation. A table summarizing the trends in inflation with the help of data from ONS is produced as follows: [pic] |Year |RPI all |RPI food | |items | | | |% |% | |2000 |3 |-0. 3 | |2001 |1. 8 |3. 3 | |2002 |1. 7 |0. 7 | |2003 |2. 9 |1. 3 | |2004 |3 |0. 6 | |2005 |2 |1. 4 | Social: • An analysis of the UK population shows that the fastest growth between 2002 and 2006 is among those aged 55-64, representing the ‘Baby Boom’ generation[11].

This is somewhat discouraging for supermarket groups as such consumers are less likely than their younger counterparts to travel to out-of-town superstores to shop. • The change in life style has increased the use of organic food due to its potential effects on health. In 2003, shoppers in UK spent ? 1. 1 billion on organic food and drinks. This trend is expected to rise to ? 1. 6 billion by 2007[12]. Technological: • The use of internet has affected the way supermarkets operate, many of which are adopting online retailing e. g. Asda, Tesco and Sainsbury[13].

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According to the latest official figures from the Office of National Statistics (ONS) indicate that subscriptions to the internet has grown more than 50% from 15 million in 2000 to 35 million in 2005. It has also been estimated that 60% of the population in UK use internet in their daily lives. Environmental: • There is growing concern for green issues, corporate social responsibility, global warming and ozone depletion in today’s world than ever before. The retailers are constantly confronting environmental pressure groups in order to improve their wastes and recycling capabilities..

Legal: • The government undertook a partial deregulation of pharmacy licensing from 2003[14]. It decided to soften the licensing of pharmacies for the superstores as long as a fully qualified pharmacist is always present. This has acted as a driver to the growth of non-food sales within supermarkets, as it has enabled superstores to expand the number of pharmacies on their premises that are able to dispense NHS prescriptions[15]. • According to the Low Pay Commission Report[16], the October 2003 and October 2004 up-ratings combined have increased the minimum wage by 15. % compared with an increase in average earnings of under 8% between October 2002 and October 2004. This could raise the working costs of the supermarkets. Competitive Analysis: Powerful tool of Porter’s Five Forces is used in order to analyze the competitive environment of the UK retail supermarket industry as follows: [pic] Bargaining Power of Suppliers: • The bargaining power of suppliers is very low • In the food retailing business, large superstores have adopted the business model of vertical integration to provide low cost quality products to the customer.

Therefore different departments of retail superstores are responsible for the supplies for their outlets. The companies have access to a large pool of suppliers and choose the ones that offer lowest cost for the best quality. • In case of differentiated products major operators in the industry tend to work with a limited number of specialized distributors thus raising the competition among suppliers and consequently making their bargaining power very low. Bargaining Power of Buyers: • The bargaining power of buyers is high. As the industry deals primarily in the consumable items therefore the switching costs between different retailers is zero. Although the major players in the industry are trying to create a barrier to retain customers by using loyalty cards but still aggressive low pricing makes customer switch retailers[17]. Threat of Potential New Entrants • The breadth of potential new entrants in all the segments is medium to high. • The supermarket industry is capital intensive. Capital is required to vertically integrate to offer low prices, to develop brand equity and to build store network.

Therefore this provides a barrier to entry for new names in the UK market. • As UK economy has been forecasted to grow at a rate of 4. 7 % annually[18]. Therefore the retail business in UK is attracting some of the established names from the US and mainland EU markets. Threat of Substitutes: • Threat from substitute is low to medium. • Retail superstores have diversified businesses and therefore the threat of substitutes in the non-food segment is high. This is due to the presence of specialized retailers and service providers in this segment. In the case of food-retailing that is the core business of superstores, substitution consists of local off license and grocers. But the magnitude of size allows these companies to have a competitive advantage over the small and medium sized players and therefore threat of substitution is low. The Extent of Competitive Rivalry: • The extent of competitive rivalry is high • UK retail supermarket industry is highly competitive due to the presence of major players and names in the market. The main retailers are Tesco, Asda, Sainsbury, Morrison/ Safeway, Waitrose, Somerfield, Co-operative Group and Iceland[19].

Some of the key figures regarding these major players can be represented with the help of following table: |Name |Number of Outlets |Sales ? millions |Share of Food Retail Market | |Tesco |1,878 in UK & 2,318 Worldwide |30,814 |35% | |Asda |267 |13,098 |17% | |Sainsbury |727 |14,220 |15. % | |Morrison/ Safeway |187 |12,116 |13. 5% | |Waitrose |144 |2,548 |3. 5% | |Somerfield |1,268 |4,521 |4. % | |Co-operative Group |1,756 |3,079 |- | |Iceland |748 |1,544 |- | • The share of all the major supermarket chains in the UK have been highlighted with the help of following pie-chart[20]: [pic] Figure: Retail Supermarket Industry Share SWOT Analysis: In the light of key success factors and Aldi’s analysis an abridged Strengths, Weaknesses, Opportunities, and Threats (SWOT) analysis can be undertaken

The key strengths of the company have been found to be its successful business model of focused low cost leadership through a range of popular food items; strong geographically diversified store network of 7,500 stores; and lean management style which is aligned with the current turbulent retail supermarket industry environment. On the other hand, the weaknesses have been found to be its over dependence on its core geographical market Germany that accounts for two third of company’s total sales; and the inflexibility along with low levels of business process customization in international expansion that can be less competitive in new markets.

The opportunities that can be pointed out for Aldi in the UK’s retail supermarket industry include the growth in non-food segment that is currently not the core business of the company and therefore can be approached through a focused low cost strategy; strong growth in organic food range can also be an opportunity for a well known brand within food retailing; and further international growth can help the retailer in minimizing risks associated with concentrating on one market.

On the other hand, the threats for Aldi’s business include aggressive competition by giant retailers like Walmart Group and Tesco; price wars due to low levels of differentiation between retailers; and the high capital investment required for international expansion. The SWOT analysis can be summarized with the help of following abridged diagram: [pic] References: Aldi (2007), Official Website, Aldi Group Abell, D. (1993), “Managing with dual strategies”, Free Press Daily Record (2006), “Tesco way ahead in store wars”; [Streets Edition] Glasgow (UK): Jan 14, 2006. p. 6

Datamonitor (2007), Company report – Aldi, Datamonitor UK Evening News (2001), “Inflation falls to new 25-year low”, JIM STANTON, Deputy Business Editor, London (UK): Feb 13, 2001 Financial Times (2003), “An unpalatable attitude towards food”, Shlaes A. , London (UK): Oct 22, 2003. p. 19 Financial Times (2006) “The boom in organic food sales defies science and sense”, MICHAEL SKAPINKER, London (UK): Jan 18, 2006. p. 13 Financial Times (2006), “King claims Sainsbury is ‘in the zone’ with Tesco FOOD & DRUG RETAILERS”; [LONDON 1ST EDITION], ELIZABETH RIGBY, London (UK): Jan 13, 2006. p. 22

Gagnon, J. & Chu, J. (2005), “Retail in 2010: a world of extremes”, Strategy & Leadership, 2005, Vol. 33 Issue 5, p13-23, 11p HM Treasury (2007), “Fiscal Policy in UK”, www. hm-treasury. gov. uk Herald (2005), “Baby boom gone bust, Policies needed to tackle worryingly low birthrate”, Glasgow (UK): Nov 11, 2005. p. 21 Independent (2004), “The New Europeans; Tomorrow, 10 more members join the European Union”, Stephen Castle, Apr 30, 2004. p. 14. 15 Independent (2003), “Supermarket groups bank on pharmacy deregulation as OFT inquiry concludes”, Nigel Cope City Editor, London (UK): Nov 21, 2003

Lynch, R. (2003), “Corporate Strategy”, 3rd Ed, FT Prentice Hall Mintel (2006), “Retail Intelligence Report – Grocery Multiples”, Mintel International Group Limited, April 06 Miller, D. and Friesen, P. H. , (1986), “Porter’s generic strategies and performance: an empirical examination with American data”, Part I: testing Porter, Organization Studies, 7, 37–55 Mail on Sunday (2006), “Online sales boom boosts Sainsbury’s”, TEENA LYONS, London (UK): Jan 15, 2006. p. 2 National Minimum Wage, (2006), “Low Pay Commission Report – 2005”, www. lowpay. gov. uk

ONS (2007), “Office of National Statistics”, www. statistics. gov. uk Porter, M. (1985), “Competitive Advantage: Creating and Sustaining Performance”, The Free Press Yamin, S. , Gunasekaran, A. and Mavondo, F. T. , (1999), “Relationship between generic strategies, competitive advantage and organizational performance: an empirical analysis”, Technovation, 19, 507–518 ———————– [1] Datamonitor (2007), Company report – Aldi, Datamonitor UK [2] Aldi (2007), Official Website, Aldi Group [3] Financial Times (2003), “An unpalatable attitude towards food”, Shlaes A. London (UK): Oct 22, 2003. p. 19 [4] Independent (2004), “The New Europeans; Tomorrow, 10 more members join the European Union”, Stephen Castle, Apr 30, 2004. p. 14. 15 [5] HM Treasury (2007), “Fiscal Policy in UK”, www. hm-treasury. gov. uk [6] Mintel (2006), “Retail Intelligence Report – Grocery Multiples”, Mintel International Group Limited, April 06 [7] ONS (2007), “Office of National Statistics”, www. statistics. gov. uk [8] Gagnon, J. & Chu, J. (2005), “Retail in 2010: a world of extremes”, Strategy & Leadership, 2005, Vol. 3 Issue 5, p13-23, 11p [9] Evening News (2001), “Inflation falls to new 25-year low”, JIM STANTON, Deputy Business Editor, London (UK): Feb 13, 2001 [10] Mintel (2006), “Retail Intelligence Report – Grocery Multiples”, Mintel International Group Limited, April 06 [11] Herald (2005), “Baby boom gone bust, Policies needed to tackle worryingly low birthrate”, Glasgow (UK): Nov 11, 2005. p. 21 [12] Financial Times (2006) “The boom in organic food sales defies science and sense”, MICHAEL SKAPINKER, London (UK): Jan 18, 2006. . 13 [13] Mail on Sunday (2006), “Online sales boom boosts Sainsbury’s”, TEENA LYONS, London (UK): Jan 15, 2006. p. 2 [14] Independent (2003), “Supermarket groups bank on pharmacy deregulation as OFT inquiry concludes”, Nigel Cope City Editor, London (UK): Nov 21, 2003 [15] Financial Times (2006), “King claims Sainsbury is ‘in the zone’ with Tesco FOOD & DRUG RETAILERS”; [LONDON 1ST EDITION], ELIZABETH RIGBY, London (UK): Jan 13, 2006. p. 22 [16] National Minimum Wage, (2006), “Low Pay Commission Report – 2005”, www. owpay. gov. uk [17] Daily Record (2006), “Tesco way ahead in store wars”; [Streets Edition] Glasgow (UK): Jan 14, 2006. p. 6 [18] HM Treasury (2007), “Fiscal Policy in UK”, www. hm-treasury. gov. uk [19] Mintel (2006), “Retail Intelligence Report – Grocery Multiples”, Mintel International Group Limited, April 05 [20] Mintel (2005), “Retail Intelligence Report – Grocery Multiples”, Mintel International Group Limited, April 05 ———————– Potential Entrants Buyers Substitutes Suppliers The Industry

Threat of New Entrants Bargaining Power of Customers Threat of Substitute Products Bargaining Power of Suppliers Rivalry among Existing Firms Porter’s Five Forces HIGH VERY LOW MEDIUM / HIGH LOW / MEDIUM HIGH Threats Strengths Opportunities Weaknesses Focused Low Cost Leadership Store Network Price War International Expansion is Expensive International Growth Over Dependance on German Market Inflexibility Aldi: Abridged SWOT Analysis Non-Food Segment Growth Organic Food Range Aggressive Competition Management Style

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