Aldi’s risky move to woo cashed-up shoppers

While Aldi’s launch of their new “trial” stores may seem to be an attempt to capture middle income shoppers, it may end in disaster.

Aldi’s four new trial stores located in Queensland, NSW, ACT and Victoria, will offer improved lighting, larger layouts and an expanded offering of fresh food including extending produce ranges, in-house bakeries and premium brands.

Employing Nielsen’s 2014 Homescan Report, Aldi have determined that only 30% of their customers were now considered “low-income shoppers”. Some 34.4% were from middle-income households and the remaining 35.6% now had household incomes greater than AUD$90,000 a year – a segment which has grown by 6.7% since 2011.

So this probably the reason for Aldi’s foray into new stores and ranges. However, such a move is considered risky.

The Aldi blueprint for success

From its humble beginning in Germany in 1946, Aldi has grown to be the 8th largest food retailer in the world, by maintaining a consistent business model across the globe. Their core business strength has been formed by offering shoppers a narrow range of very low-priced, good quality, private label grocery products, from small stand-alone sites.

Aldi’s 1350 or so products pale in comparison to Coles and Woolworths broad and deep product ranges. Yet this provides them with lower supply chain costs and great efficiencies. Its 700 square metre stores are dwarfed by its competitors’ 5,000sq m plus footprints, yet this gives them the ability to occupy smaller suburban and high street location. This has been an intentional strategy that allows them to get through council restrictions quickly and enables the flexibility to open in areas that larges supermarkets can’t access.

Since opening their first store in Australia in 2001, Aldi has captured nearly 9% market share, with 11% on the eastern seaboard where the majority of its stores are located.

Aldi has now grown to be the third largest food retailer in Australia. With plans to open in South Australia and Western Australia in the coming years, experts suggest Aldi current sales will double by 2019.

Its growth since 2001 has come at the cost of Metcash’s IGA supermarkets but has also impacted on Coles and Woolworths.

Aldi’s entry into the Australian market in 2001 was timely in that they arrived just as shoppers’ hunger for private label was growing and as Franklins No Frills was exiting the market. As a consequence, Aldi filled the gap left behind by Franklins and won over shoppers with their low price, good quality private label range.

So a move away from what you are very good at, seems very risky. From a purely strategic position, if your competitive advantage is selling high volume, low priced, private label food products, stick to it. Offering more range, premium products, in-store bakeries and extended fresh food offers only dilutes your market position.

Franklin’s failures

Very much like Aldi today, Franklins was Australia’s first low-cost grocer,with a narrow range of very low priced, generic grocery products. The concept of selecting your own no-named products, out of open cartons on shelves, packing them yourself into cardboard boxes (no bags were provided) was quite foreign to Australian shoppers. However, Franklin’s market position differentiation worked in its favour.

Buoyed by the success of the No Frills stores, Franklins broadened its offer by opening a variety of new store platforms designed to tap into the convenience market (Franklin’s Mini-Fresh) and supermarkets (Franklins Mega-fresh and Franklins Supermarkets).

But this proved a fundamental error. Moving away from their core business and target market added internal costs and put them in direct competition with Metcash’s IGA and the two major supermarkets.

Private label strategies only works one way

Although criticised for allegedly limiting choice and removing popular national brands, Australian shoppers have accepted private label food products wholeheartedly, now accounting for 21% of packaged grocery sales in Australia.

The popularity of Aldi’s private label has been a particular source of its success, causing both Coles and Woolworths to quickly expand their original plain packaged, generic product ranges.

Both Coles and Woolworths launched a three tiered, “good, better, best” private label strategy that included plain packaged, generic products, as well as Woolworth and Coles brands and premium Select and Finest ranges.

What this demonstrates is that Coles and Woolworths have the ability to move “down market” by providing a range of low priced, private label products.

Unfortunately, Aldi is not so well placed to move “up market” into the mainstream food retailing market by providing extended fresh offers or premium ranges.

Current 700sqm store layouts do not provide space for extended fresh produce displays, in-store bakeries or more checkouts. Such a move would require a variety of store types be developed. As the majority of Aldi’s products are bulk displayed on pallets, adding new ranges may require shelving and other display fixtures; increasing capital expenditure. Increasing product ranges ultimately adds to your supplier base and limits supply chain efficiency.

Should Aldi stick to what they are good at?

The short answer is yes.

Attempting to capture a greater slice of the middle and high income shopper by offering bigger brighter stores, broader ranges, premium products and an extended fresh offer, may lessen their value proposition. It blurs the lines between Aldi and mainstream supermarkets.

There are three main risks. First, potentially Aldi’s proportion of shoppers in five years becomes 40% high income, 45% middle income and 15% low income – therefore excluding its original target market.

Second, Aldi ends up offering exactly what Coles and Woolworths currently offer (so there is no differentiation).

Third, Aldi opens the door to other low cost food retailers (Lidl walk in and pick up the ‘low income’ market you left behind to chase a bigger slice of the middle/high income market).

While 64% of shoppers already shop at more than one supermarket brand each week, Aldi may find this move will cannibalise their own sales and isolate their core customer.

While the “numbers” suggest more and more middle and high incomes shoppers are patronising Aldi, it would appear they are shopping there to access Aldi’s current range of good quality, low priced products. Ultimately, it is Aldi’s “difference” that attracts shoppers, not their “similarity” with others.

Gary Mortimer is Senior Lecturer, QUT Business School at Queensland University of Technology.

This article was originally published on The Conversation. Read the original article.