Aldi moves beyond competing on price?

ALDI moves beyond competing on price?

1- Introduction

In the current economic downturn environment, companies across the world are taking measures to increase efficiency yet at the same time cutting down cost of operation in order to sustain profitability. It is especially hard when consumers are highly cautious in their spending. In the UK, grocery retailers are being encouraged by the government to adopt innovative strategies to motivate shoppers to buy goods. As a result many grocery retailers have adopted new modes of delivery, value-added services, cheap products and discounts to attract consumers. In fact supermarkets have capitalized on this economic slowdown to diversify their services and change the retail experience for the consumers. In the process they have also changed competitive environment. In the face of such changing economy supermarkets like ALDI should respond to its environment, and take strategic actions to not only sustain growth but also improve on its competitive position in the industry.

5- Perspective of Competitors

The UK supermarket industry in 2008 accounted for retail sales of approximately £124.1bn and performed well compared to other industries despite market gloom (Verdict 2009). This combined output has been generated by the various categories of supermarkets - large grocery retailers, regional retailers, fascia group, convenience stores, LADs (limited assortment discounters), frozen food retailers and specialist retailers (Verdict 2009). Despite its financial size, the supermarkets industry is driven by the major large grocery retailers which account for 85 percent of its sales and four dominant supermarkets (Competition Commission 2008). Although, ALDI's direct competitors are Lidl and Netto, it is also competing with the other categories of retailers. Considering this scenario, ALDI which is a LAD must consider its competitive environment in order to devise strategic plans for sustainable growth.

To analyze the industry, Michael Porter's (1985) Five Forces Model is being used to gauge the competitive environment. The Five Forces include buyers bargaining power; suppliers' bargaining power, threats of substitutes; threats of new entrants; and the degree of rivalry among the firms. These shall be analyzed as follows:

Buyer's bargaining power:

The supermarkets are the price-takers according to the Competition Commission Report (2008) which means that the consumers have to buy at the price set by the supermarkets. The supermarkets compete based on prices which although allow consumers a wide range of retailers to choose from but the nature of the product (food) allows them to be flexible in whom they want to be loyal with. As a result the majority of the supermarkets compete based on pricing strategies by offering value for money, discounts and sales to retain their consumer base. Such strategies are becoming popular to show they are responding to the consumers' demands and changing consumption trend. ALDI, which already follows such tactics as its core strategy needs to improve on its current offerings through value creation rather than price.

Suppliers' bargaining power:

Depending on the type of supermarkets, the suppliers' bargaining power can be increased or decreased. For example large supermarkets like Tesco and Asda are wholesale themselves which reduce the cost of maintaining a supply chain. On the other hand, ALDI which offers its own label products enjoy the same privilege as the above two in cutting down on suppliers' cost. This means that suppliers have less power over the supermarkets (Competition Commission Report 2009).

Threats of substitutes:

There are really no threats of substitutes because the retailers offer the same type of products, that is, food and grocery items. The only relatively new type of threat is the demand for organic food, which already have been perceived and catered to by supermarkets. This demand for organic food and healthy living stems from the government's campaign to encourage the UK people to eat and live healthy. This policy helped supermarkets to diversify and create value for consumers in providing them with healthy grocery items of high quality (Competition Commission Report 2009). However, healthy food means consumers are willing to pay a premium for their desired product which is a negative factor for ALDI who have been surviving as discounters for decades.

Threats of new entrants:

In this respect too, the threats are low because of the dominance of the major players - Tesco, Asda, Marks & Spencer's and Sainsbury's. These players have major market shares with established capitalisation to invest and increase number of stores wherever they choose. New entrants must either have foreign backing or high capitalisation before it can rival any of these major players (Competition Commission Report 2009).

Degree of Rivalry:

As a result of the technically generic nature of products offered at supermarkets, low threats of substitutes and entrants, the industry is characterised by low rivalry. In fact, some analysts may even categorise it as monopolistic due to the power of the few players in the industry especially Tesco which can out price any competitor and sales volume. Others are merging or being acquired by foreign supermarkets to reinforce their standing in the industry. Others still are focussing their proposition on development of products to secure the changing consumer trends. As a result, the few players are getting more powerful while those in the smaller categories like LADs have to find new ways to sustain their growth (Verdict 2008).

6- Recommendations

Based on the above analysis the researcher recommends that ALDI follow a broad base competitive strategy which encompass differentiation leadership and cost leadership (Porter 1985). This could be achieved by growth strategies. According to Ansoff's Matrix (Baker 2007) there are four growth strategies - market penetration, market development, product development and diversification. For ALDI it would be prudent to adopt a strategy which would be less risky and require low capital to expand. This would entail deriving innovating marketing campaigns to attract customers from rivals such as Tesco and provide them with value-added services. This would mean that ALDI would have to realign its marketing mix in order to improve on selling potentials. It also needs to capitalize on the living healthy campaign launched by the government to expand consumer base in the organic foods industry while at the same time improve on its internal operations through economies of scale.

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