Aldi Case

1. Is the U.S. grocery industry an attractive one?

There are two sides of this industry.

Firstly, U.S. grocery industry is not very attractive for following reasons.

1) Buyer’s bargaining power is strong. Customer does have negotiating leverage since the kinds of product in grocery stores are pretty standard, including food, drugs etc. So the switch cost for customer is very low. Also, because the grocery cost is one of the biggest spending buckets, the customer group is very price sensitive.
2) The threat of new entrance is high to existing players. Even though small players would find it is hard to get into this industry due to first move advantage including location, customer perception etc., the big players from other industries,
with access to capital, access to customers and economies of scale, can easily come to grocery industry.
3) Rivalry among existing competitors is intensive. The number of competitors is high and many of them are close in size of power, such as Wal-Mart, Target and Costco. The competition is in both price and service. Also since the grocery industry is pretty stable with limited space to expand, players are fighting to get shares rather than find a new market.

Meanwhile, there are two other reasons to make this industry still an option, especially for companies with access to capital, access to customer and an established logistics network.

1) Supplier’s bargaining power is weak. Lots of suppliers need to pay slotting fee to get into grocery store.
2) The threat of substitute is low. Grocery shopping, including food, drugs, is non-substitutable. The only switch which may potentially have big impact is the need for natural and organic foods. But the majority of the grocery need would not change significantly.

So overall, different companies may draw different conclusions based on their own competencies.

2. What is the competitive position of Aldi Stores (not Aldi Corporation) in the U.S.? Do Aldi Stores have a competitive advantage in the U.S. grocery industry? Is it sustainable?

Aldi Stores are using the “Low Cost” strategy. It can be concluded from factors below:
1) Size: Relatively smaller than other grocery stores, close to drug stores.
2) Location: Second-rate locations
3) Products are stored on pallets from the distribution center with the cardboard box tops removed.
4) Only one type of each product available to reduce in-bound logistics complexity.
5) Dramatically lower price than other grocers, even the cost leaders.
6) Focus on low cost, fast turn products such as frozen food or normal drugs.
7) Fewer Employee without specialize.
8) No free bags.
9) Deposit for carts to avoid labor cost.
10) Slightly higher salary but no good benefits. Also no union.

In the sense of strategic groups, we can identify service and product choice as two key dimensions for grocery store as below.
For competitive advantage, Aldi has advantage on price. Since its cost is very low, it can afford smaller margin on sales while still generate profits from volume. Its cost of operating and admin, as well as cost of goods sold are relatively low for following reasons.
1) HR Management:
a. The payroll/benefit package design for Aldi tends to have higher salary with low end benefit. This package appears to be very attractive for relatively young employees with no additional cost of employer. The package design supports the overall low cost strategy very well.
2) Procurement:
a. Aldi does not sell, thus does not buy fresh produce or meat, or extensive pharmacy products. So the self-consuming cost, such as meat decomposition can be minimized. Also the turn over rate would be higher.
b. Aldi offers only one type, or at most two, of product. This would simplify the managing process. Also since the products it carries are usually private labeled, the cost is relatively lower.
c. No slotting fee but only putting popular products. It makes sure the cash flow runs fast for
Aldi.
3) In-Bound Logistics:
a. The products are directly put into store on pallets from the distribution center with the cardboard box tops removed. It saves time and cost to unpack and putting things onto shelf.
4) Out-Bound Logistics:
a. Customers have to put deposit for carts and get the return once put the cart back. It reduces labor cost to move carts back and forth for Aldi.
5) Marketing and Sales:
a. Minimum marketing cost was spent for Aldi.
6) Services:
a. Fewer employees with no specialization reduce labor cost as well as cost of training.
b. No free bag further reduces the cost.
c. Customer needs to bag their purchases.

Even though with so many connected things in Aldi’s business that are supporting low cost strategy well, I think Aldi’s business model is not very sustainable in the United States.
There are existing competitors, such as Wal-Mart, that are running a similar business model on a bigger scale. Except going further extreme on limited service and limited product choice dimension, Aldi does not have very unique thing to get customers from Wal-Mart, who has better understanding on Americans, established relationship with suppliers, brand perception as price leader, and other first move advantages. If the competition gets intensive or the volume decreases, with the low margin and the mentality to expand only using cash rather than debt, Aldi’s ability to grow can be very
limited.