Critical evaluation of the international strategy of Aldi based on the example of the UK market
Nowadays, due to globalization, most businesses are growing internationally. Multinational Enterprises (direct investment in foreign countries) are very popular because most companies operate in different countries (Hill, 2008).Therefore this paper is going to critically evaluate the international strategy of Aldi in the United Kingdom. Aldi (Albrecht Discount) is a discount global retailer that was created in Germany in 1913. It is privately owned by two brothers (Karl Albrecht and Theo Albrecht). Aldi’s main focus is on people with low household income, therefore its products are very cheap (Euromonitor International). Aldi’s stores offer a limited range such as groceries, fresh fruit and vegetables, chilled and frozen foods, beers, wines and spirits and household goods (Euromonitor International). Currently, Aldi Group consists of two companies (Aldi Nord and Aldi Sud). Aldi Sud expanded into Australia, the UK, Slovenia, Switzerland and the US, whereas Aldi Nord expanded into Belgium, Denmark, France, Luxembourg, The Netherlands, Portugal and Spain. For the purpose of this critical evaluation of the Aldi operations, the paper is going to talk about the company’s operations in the UK. The UK has been chosen because there is quite high competition for Aldi in the UK; however, the discount retailer is still successful. Moreover, the discount grocery part of the UK market was vulnerable because there was no such kind of supermarket. Currently, Aldi has 358 stores in the UK and the Republic of Ireland. The paper is also going to analyse Aldi using the I-R framework (integration/responsiveness framework), analyse the Aldi value chain, discuss Aldi’s main competitor Lidl, and provide recommendations using the Asnoff matrix tool (Jobber, 2004).
Aldi entered the UK in the 1990s because of superstore saturation as a process of internalization (Hill, 2008). Internalization theory explains why firms prefer foreign direct investment rather than licensing. It is beneficial because it allows companies to maintain their business strategy (Hill, 2008). Aldi offered low prices and broke the national market. It happened because before Aldi’s entry into the UK, all supermarkets in the UK were British (Duke, 1993). However, Aldi encountered some barriers, which later on were successfully overcome. The three main barriers were: intense competition, low profitability in the market itself, economies of scale and scarcity of new store sites (Duke, 1993). However, Aldi managed to overcome those barriers. In 1990, Aldi earned £6.9 million, even more than Tesco (Duke,1993). Aldi also managed to overcome barriers because of the branded goods from smaller manufacturers, and by not using many of its own brands and labels. Another barrier that Aldi successfully overcame was the shortage of unexploited store sites. Aldi took a secure defensive position and became competition even for the big stores, and what is more, renewed people’s interest in discount grocery retailing (Duke, 1993).
The UK market is very good for the discounter due to low market maturity. In countries like Austria, Belgium and The Netherlands there is limited potential for operating growth due to the high level of market maturity. The UK market is highly competitive and concentrated and is a place where Aldi and Lidl can offer a wide choice of private labels. Aldi outperformed Lidl in the UK in 2008 thanks to more rapid network expansion and advertising (Euromonitor International). It is trying to appeal to more affluent consumers in the UK. It plans to open 50 new stores in London and the South East and this will include city centres where the traffic is the highest. In 2009, Aldi had record sales due to an aggressive marketing strategy and the recession.
The Aldi business model is to ensure that all the costs are kept to the necessary minimum, by purchasing large quantities of a small range of often own-labelled goods (Key Note, 2007). There is also simplicity and efficiency (Business Insight). Aldi restrict 90% of their stock to their own private labels; however, they can only gain as much as market share (Harvard Business Review).
Now the paper is going to analyse Aldi in terms of the I-R framework; in other words, the MNE integration/responsiveness framework. Responsiveness means pressures for global integration and cost reduction, while responsiveness means pressures for local responsiveness to what is demanded by consumers. The I-R framework also is based on how managers perceive the environment. This framework is about examining strategy in an international context. It suggests that “two silent imperatives simultaneously a business competing internationally” (Roth and Morrison, 1990). Businesses that operates in different countries have somehow secured competitive advantage. On the other hand, they must respond to the demands of the market. The idea is to meet the market demand (responsiveness) and try to maintain competitive advantage. ”The global integration and local responsiveness pressures impact on the structure of different industries, the competitive positioning within industries, and even the configuration of an organization” (Roth and Morrison 1990, p. 2).This framework impacts on the structure and competitive position of the company. There are three kinds of ways a business responds (globally, internationally or multi-focally). The I-R framework has been chosen to analyse Aldi because it allows us to analyse the business in terms of the response to the market, environment and competitors. Moreover, the I-R framework has important strengths because it allows the company to realize its international strategy in different contexts, not only as a global industry. Forces which have an impact on global integration and local responsiveness include: standardized customer demand worldwide, local customer demand, global information and product recognition, standardized product technology and international distribution infrastructure (Roth and Morrison, 1990). Pressures which come from industry rivalry means competitors both local and international. Last, but not least, global responsiveness and global integration are also affected by worldwide economies of scale, factor cost differentials across countries, the level of government intervention and transportation costs.
Aldi is a multi-focal company. This is because it has global coordination and responsiveness but quite low as in international companies. On the other hand, it responds locally when necessary, so local responsiveness can be said to be ‘medium’. For global coordination and responsiveness it is important to emphasize Aldi’s brand positioning and its strong position as a discounter. Aldi also tries to emphasize not only that Aldi products are cheap, but also that the quality of those products like fresh meat, fresh fruit and vegetables and it also sells goods like electronics. It has also tried to expand its branded goods by introducing mobile phones and photo developing services (The Economist 2007). As a response to environmental issues, Aldi introduced an organic and Fair Trade certified food line (The Economist, 2007). To go with the trend in retailing Aldi tries to combine luxury products and low prices. The Aldi business model is simple and is the same everywhere: reducing operating costs and product prices. The Aldi culture is about adapting and innovating and this is what gives Aldi a strong position in the market. What is more, Aldi changed the negative perception of discount retailers and therefore has grown in strength in all its international business (Datamonitor, 2007). Another problem with Aldi’s global responsiveness is that it is trying to attract all kinds of customers. It first focused only on the working class and now wants also to appeal to the middle class. That might be a problem because Aldi cannot accept the fact that not all people want to shop at Aldi and it cannot force people to shop there. Another problem is that Aldi do not advertise that much, which may be why it is losing customers.
As for local responsiveness, especially in the example of the UK market, Aldi introduced a new food range called ‘specially selected’. It is also trying to compete with private label brands like Waitrose and Marks and Spencer. It is also trying to change how their shops look to make the ‘shopping experience’ something great. Aldi entered the UK market and had to overcome people barriers and uncertainty towards discount groceries (The Economist, 2007). In 2009, as a response to local demand Aldi started to sell holidays online; through an online travel agency it is offering discounted holidays. In 2003, the same products were introduced in Austria with great success (Travel Weekly, 2008). Aldi is the best discounter because it quickly identifies what customers want and the trends in retailing, especially premium and organic food (Datamonitor, 2007). Another step to meet customer demand is to expand its offers and by doing so challenge the Big Four (the four biggest supermarkets in the UK: Asda, Tesco, Sainsbury’s and Morrison’s (Datamonitor, 2007)). However, this idea will not necessary be successful for Aldi. Those big supermarkets already have a strong position in the UK market ,and what is more, their business model is much more flexible, they have wider geographic appeal and a different range of store formats (Datamonitor, 2007). Aldi also offers a few iconic domestic brands not only in the UK. In the UK, it introduced Marmite and Branston Pickle, in Austria Vegemite and Milo, and also in 2008 it developed leisurewear fashion. In Germany, Aldi introduced Ferrero, Haribo, and Mastrefood. Another Aldi problem might be the lack of home delivery, which may be worth focusing on. Aldi distribution channels are shops. By 2013 it aims to open another 260 stores in Great Britain. Now the paper is going to discuss the Aldi distribution channels in more detail.
In terms of distribution channels and transportation, Aldi’s shops are supplied by regional distribution centres. Where possible, Aldi get their products from local suppliers, which is also good because it helps to support local industry so there is local responsiveness as well as it is beneficial for the environment due to a reduced carbon footprint. Food is taken directly from suppliers on a global basis. Aldi also rely on suppliers which also provide food for their German and other stores in Europe, which on the other hand shows global responsiveness. Because those products come from the same suppliers, they can be found in different countries. They also privately label products so the labelling can be tailored to the individual country (Key Note, 2007). Non-grocery products such as clothes and electrical items are mainly supplied by China, India and Vietnam. Individual stores also build relationships with individual manufacturers and factories to take products from them. In terms of transportation, products are shipped if they are supplied from overseas or road freighted to the relevant depot of their distribution network for local delivery to stores (Key Note, 2007).
The paper is also going to mention online sales; however, they are not very successful. It is one system of product distribution; however, it worth remembering that Aldi focuses mainly on working class people as consumers. Those people very often do not have access to the Internet. That is why the Internet is unlikely to be a significant force within the discount sector (Key Note, 2007).
Last, but not least, the paper would like to mention value chain analysis (Porter, 1985). This is a tool to analyse the network of processes and services that an organization should focus on to manage their operations in the best and most efficient way. By analysing internal operations it is possible to increase efficiency, effectiveness and competitiveness. The activities are divided into primary and supporting activities. Primary activities add additional value to the output of the organization, while support activities support primary activities and also take care of the administration, finances, procurement and IT. A company should focus the most on the activities that add most value and give strategic advantage and where cost reduction is possible. In the Aldi value chain, cost reduction is introduced at all levels (Colla, 2003). That is why Aldi is competitive in price, from the supplier to the retailer. Moreover, there is coordinated management of certain activities (logistics, sales) which are optimized with major reductions in costs. Competitive advantage is linked to the purchasing volume and by the production line (Colla, 2003).
Aldi’s competitive position in the UK is based on keeping labour costs to a minimum, employing low staff numbers and having a low number of products. However, products are bought in large quantities for a low price. The major competitor for Aldi in the UK is Lidl. Lidl is also a German discount retailer that was created in 1973. The first Lidl store in the UK was opened in 1994. For Aldi, its main competitive advantage over Lidl is that it offers a few products, which enables Aldi to have lower costs than Lidl. On the other hand, Lidl has introduced store improvements like lighting, advertising and aisle ends. Lidl also wants to open their stores in countries where Aldi has a first mover advantage, which means they want to be in Switzerland and in the USA by 2012 (Euromonitor International). Lidl is also undertaking a more aggressive expansion outside Germany. However, Aldi may struggle to differentiate its positioning from Lidl (Euromonitor International). Moreover, Aldi do not have Internet retailing, but Lidl has. However, that may not be an advantage for Lidl because both of the shops are hard discount retailers with a focus on the low social class and usually those people are less likely to have access to the Internet and are therefore less likely to shop online (Key Note, 2007). Aldi also outperformed Lidl in terms of the market share in the UK where it had 3.1% and Aldi had 2.4% in 2009. Aldi also tries to compete with non-discount retailers like Asda, Tesco, Sainsbury’s and Morrison’s. However, those shops have more flexible business models and a very long established reputation and it is not really a threat to the big non-discount shops (Datamonitor, 2007). Now the paper is going to present recommendations for Aldi using the Ansoff matrix tool.
|Existing products||New products|
|Source: (Jobber, 2004)|
Using the Ansoff matrix tool from the diagram above, Aldi can adopt the following strategies to perform even better. In terms of market penetration, it should continue to grow at a similar pace in the UK. Moreover, it should open even more stores and focus on different types of customers, not only from lower social backgrounds. It should also introduce a loyalty card to make loyal customers feel better and by doing that encourage them to continue shopping at Aldi. Nieri (2009) also suggests that it might also be worth talking to the local communities, for instance to sponsor a local sports team, which is a kind of advertising. They should also change customer perception about discount shops, that is to say, that a low price can also mean a good-quality product (Nieri, 2009). It should focus on building its reputation to maintain customers. In terms of product development, it should keep costs low and maintain a margin to enlarge its assortment quickly. It should also introduce new products and service lines to secure revenue streams in order to grow. It may also consider introducing a delivery system to satisfy customers as well as focus people’s attention on the quality of the products and show that something with good quality can have a low price as well (Kenri, 2009). In terms of market development, it should try to expand further into new markets to build its international position. Regarding diversification, it should introduce new product lines and services and focus on offering a wider product range to attract customers.
To summarize, the purpose of this paper was to critically evaluate the international strategy of Aldi from the example of the UK, also taking into account the international context. Therefore the evidence from this study suggests that the Aldi position in the UK market is very strong. Even compared with its competitor Lidl, Aldi has a bigger market share. Moreover Aldi is locally responsive so it is trying to respond to local demand not only in the UK, but also in other countries in which it operates. In their strategy the most important focus is on low cost and low price. Aldi also takes care of the environment by focusing on reducing carbon footprint emissions.
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