The Rippl e Effect of Supermarket Wars

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C hapte r 5. Mini -Case

The Rippl e Effect of Supermarket W ars: Aldi Is Changing the Markets in Many

Countries

Aldi started as a small, family-owne d groce ry store loca ted in Essen , German y, in 1913 . Two sons ,

Ka rl an d Theo , too k ove r the store from the ir mothe r in 1946 ; soo n after do ing so , the y bega n

expand ing the bus iness . The y emphas ize d low cos ts from the ve ry beg inn ing , allowing the m to offer

the ir produc ts to cus tomers at low price s relative to co mpe titors. Ove r time, Aldi expande d to othe r

Eu ropea n coun tries , an d it en tered the United States marke t in 1976 . Curren tly, the re are rough ly

11,00 0 Aldi stores loca ted in 20 coun tries ; 1,75 0 of thes e un its are in 35 states in the United States . In

the United States alone , the firm se rve s 40 milli on cus tomers on a mon thly bas is.

Aldi ho lds its cos ts do wn in a va riety of ways . It large ly se lls its own brand -labe l produc ts in “no frill”

stores . Th e co mpan y limits the nu mbe r of ex terna l brand s it se lls (usua lly on e or two pe r produc t),

an d it ha s low packag ing , transpo rtation , an d employe e cos ts. To se ll produc ts in its stores , Aldi

pos ition s the m in way s tha t are similar to the app roac h warehous e stores use , for exa mple, plac ing

produc ts on pa llets an d in cu t-away ca rdboa rd boxes . In German y, Aldi adve rtise s ve ry littl e, bu t it

doe s adve rtise in the United States . It produce s its own ad s in-hous e (no ex terna l agency ) an d

adve rtise s mos tly throug h ne wspape r inse rts an d a few telev ision co mm ercials.

Aldi an d ano the r discoun t store, Lidl, hav e hu rt the larges t fou r supe rmarke ts in the U.K.

marke t— Tesco , W almart’s Asda , J Sa insbu ry, an d W m. Morriso n Supe rmarke ts. Aldi an d Lidl hav e

cap tured marke t sha re from thes e retailers, espec ially Tesc o an d Morrison , an d he ld app rox imately

8.6 pe rcen t of the U.K. marke t in 2016 . Aldi plan s ca ll for it to reac h abou t 17 pe rcen t sha re of the

marke t by 2021 . Tesc o ha s con trolled abou t 30 pe rcen t of the discoun t supe rmarke t marke t, bu t it ha s

bee n dec lining . Morrison ’s recen t poo r pe rformanc e ha s prec ipitated turnove r in mos t of the firm’s top

execu tives . In add ition , the ne w CEO, Dav id Po tts, ha s bee n mak ing major changes — large ly cu tting

cos ts in orde r to co mpe te on prices . Becaus e of reduce d cos ts, Morriso n cu t its price s on 13 0 stap le

items suc h as milk an d eggs . Like wise , Tesc o reduce d price s of 38 0 of its bran d produc ts by abou t 25

pe rcen t. Yet, becaus e of ga ins in its marke t sha re, Aldi plan s to inves t abou t $90 0 milli on to ope n 55 0

ne w stores in Britain by 2022 .

Aldi is hav ing similar effec ts on the Aus tralian marke t. It ha s ga ine d marke t sha re from the two larges t

supe rmarke ts in Aus tralia— Coles an d W oo lworths . In response , W oo lworths ind ica ted tha t it plan s to

reduc e its price s to avo id a pe rcep tion amon g cus tomers as the “expens ive op tion .” Th is ac tion doe s

no t see m to conce rn Aldi in tha t the firm intend s to spen d $70 0 milli on to ad d 120 –13 0 stores by 202 0

to its cu rren t nu mbe r of 30 0 stores in Aus tralia. Aldi appea rs to be ha rming so me co mpe titors in the United States as well. Fo r exa mple, a riva l

discoun t foo d retailer, Bo ttom Dollar owne d by Delha ize from Be lgium, close d all of its stores (loca ted

in New Je rse y, Pennsy lvan ia, an d Ohio) an d so ld the loca tion s an d lease s to Aldi. Aldi doe s hav e

stiffer co mpe titi on in the United States from W almart, Sa m’s (W almart’s warehous e stores ), an d

Cos tco , amon g othe r discoun t foo d retailers. Yet, Aldi is no t on ly su rviving , bu t also flou rish ing an d

growing in the U.S. marke t as well. In ea rly 2018 , Aldi announce d tha t it wou ld spen d $1 .6 billi on to

remode l an d expan d 1,30 0 U.S. stores by 2020 . Des iring to hav e 2,50 0 stores in the United States

by 2022 , the firm announce d in 201 8 tha t it wou ld spen d up to $3 billi on to ope n ne w stores to reac h

this targe t. If reached , a total nu mbe r of 2,50 0 stores wou ld resu lt in Aldi be ing the third larges t

supe rmarke t cha in in the United States .

In add ition to affec ting groce ry store co mpe titi ve riva lry ac ros s coun try bounda ries , Aldi’s ac tion s

(an d thos e of othe rs as well) hav e an effec t on who lesa lers an d othe r supp liers. Fo r exa mple,

who lesa le price s hav e bee n dec lining , an d so me of the major supe rmarke t cha ins , suc h as Tesc o

an d Morrison , hav e bee n reduc ing the nu mbe r of brand s on the ir she lves . Interes ting ly,

manu fac turers of popu lar produc ts, suc h as Mr. Kipling cake s an d Bistro grav y, stan d to ga in she lf

spac e an d inc reas e sa les becaus e of stores ’ dec ision s to tak e so me riva ls’ produc ts off the ir she lves .

Of cou rse , the supp liers whos e produc ts los e the ir pos ition s on stores ’ she lve s will like ly su ffer.

Th e bo ttom line is tha t Aldi is hav ing a major effec t on riva ls in multiple coun tries an d on man y othe r

co mpan ies tha t supp ly produc ts to the indus try. As a resu lt, the groce ry indus try’s co mpe titi ve

dyna mics are differen t toda y tha n the y were be fore.

Sou rces : 2018 , Aldi unve ils $1 .6 billion na tion wide store remode l plan to enhanc e cus tomer shopp ing

expe rience , Aldi Homepage , ww w.aldi.co m, Feb rua ry 8; 2017 , Motley Foo l staff, Se tting the stag e for

groce ry indus try co mpe titi on in 2018 , Motley Foo l Homepage , ww w.foo l.co m, Dece mbe r 24 ; 2014 ,

Aldi targe ts doub ling of UK stores with 60 0 milli on poun d inves tmen t, New York Times ,

ww w.ny times .co m, Nove mbe r 10 ; T. Hua , 2015 , Tesco ’s ove rhau l po ints to a price war, W all Stree t

Jou rna l, ww w.wsj.co m, Janua ry 5; L. Northrup , 2015 , Bo ttom do llar foo d to clos e stores , se ll cha in to

Aldi, Consu merist, ww w.consu merist.co m, Janua ry 5; 2015 , Mr. Kipling Make r Premier Food s see s

pos itive s in supe rmarke t wars, New York Times , ww w.ny times .co m, Janua ry 23 ; 2015 , Morrison s

cu ts price s on 13 0 groce ry stap les like milk, eggs , New York Times , ww w.ny times .co m, Feb rua ry 15 ;

2015 , British sho p price dec line steepen s in Feb rua ry— BRC , New York Times , ww w.ny times .co m,

March 3; K. Ross , 2015 , Supe rmarke t wars: Aldi take s on marke t sha re as W oo lworths drop s prices ,

Smart Company , ww w.smartco mpan y.co m.au , March 9; A. Fe lsted , 2015 , Morriso n ch iefs tak e

exp res s checkou t from strugg ling supe rmarke t, Financ ial Times , ww w.ft. co m, March 24 ; 2015 , Aldi

Foods , ww w.groce ry.co m, accesse d March 25 . Cas e Discuss ion Ques tion s

1. Using materials in the cas e an d items to which yo u ga in acces s throug h a

sea rch , desc ribe ho w Aldi is crea ting co mpe titi ve riva lry in the retail groce rs’

indus try.

2. As exp laine d in this chap ter’s Open ing Case , Amazo n pu rchase d W ho le

Foods . How will this transac tion affec t Aldi as it seek s to expan d its presenc e in

the United States ? W ha t co mpe titi ve ac tion s migh t Aldi tak e in respons e to

Amazon ’s pu rchas e of W ho le Foods ?

3. Using concep ts an d ac tion s exp laine d in this chap ter, dec ide if Aldi is more

like ly to respon d to an y strateg ic ac tion s Amazo n migh t initiate throug h W ho le

Food s or if Amazo n throug h W ho le Food s is more like ly to respon d to an y

strateg ic ac tion s Aldi takes . Be prepa red to jus tify you r dec ision .

4. In a co mpe titi ve riva lry sense , exp lain the ac tion s (strateg ic and /or tac tica l) yo u

be liev e W almart an d Cos tco will tak e to respon d to Aldi’s inten tion s to hav e

2,50 0 U.S. stores by 2020 .