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Strategic Analysis of Aldi

What are the trends in the Australian Food Industry? The trend within the Australian food industry seems to attempt to be competitive price-wise. Furthermore, expanded their industry to other sectors including petrol, merchandise and liquor. The food industry looks to what people want and stocks it accordingly. By branching out, those in the food industry are able to cover more segments and increase their profitability in a wider sense. Aldi’s competitive environment in Australia consists of 5 firms, the two major competitor being Woolworths and Coles.

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Woolworths has positioned itself as the ‘The Fresh Food People’, aiming to provide a wide range of fresh produce in addition to dry groceries and other merchandise. Many farmers in Australia grow their products exclusively for Woolworths, adhering to strict quality, food hygiene and safety standards. The ‘Fresh Food People’ strategy has been an important way of differentiating themselves from major competitors, such as Coles. Woolworths actively advertises through magazines, newspapers, television and distributed leaflets, aiming to project an image of providing fresh, healthy and high quality products at a reasonable price.

Similar to Woolworths, Coles also is a full-service supermarket, offering fresh produce, dry groceries and other merchandise. Its strategy, however, is less succinct than Woolworths ‘Fresh Food People’ strategy. In March 2002, Coles announced a major restructuring program, aiming to cut costs by improving its supply chain management, implementing changes to its information technology, and trying to achieve better synergies with the other segments in the Coles Myer Corporation. The supply chain changes include restructuring its distribution centre network and simplifying operations and processes in its stores and distribution centres.

In addition, Coles planned to improve its loyalty programs. In addition to the major national chains Woolworths and Coles Myer, there are also a number of smaller regional players in the Australian food retail industry, namely Action supermarkets (owned by Foodland Associated), IGA and Franklins Foodland’s second division is its franchise and supply segment. Foodland is a grocery wholesaler to Western Australian independent supermarket operators including its own franchise banner groups. Foodland also operates three Cash & Carry branches and ‘Foodlink’, Western

Australia’s largest food service operator, supplying caterers, hotels, restaurants, cafes, institutions, 18 schools and mine sites. Foodland’s main strategies are to satisfy changing consumer demands by combining innovation with value and to reduce costs through greater efficiency and better use of technology. IGA is another supermarket with a regional presence in Australia. It has a market share of about 13. 5 percent47. IGA stands for ‘Independent Grocers of Australia’ and was brought to Australia by Davids Holdings in 1988. All IGA stores are independently owned and operated.

The IGA network unites formerly independent retailers that traded under many different names under one brand. This has led to better economies of scale and scope, better buying power and consistency in marketing, merchandising, information technology, and store design. The third regional player in the Australian retail industry is Franklins, a discount supermarket chain, which was founded in 1941 by Frank Lindstrom. Franklins’ strategy concentrates on providing value for money, quality, friendly service, speedy checkouts and a good overall shopping experience53.

Like all the other supermarkets, Franklins also aims to improve supply value chain management and update administration systems. The above discussion has shown the competitive environment in which Aldi operates. It is characterised by two major national chains, Woolworths and Coles, both full-service supermarkets that are trying to differentiate their product offerings and to provide more value for their customers by adding new retail services such as access to discounted petrol and to banking facilities.

They offer house brands as a cheaper alternative to national brands and are aiming to increase the number of products they sell under brand names they own. Both Woolworths and Coles are in the process of overhauling their supply chain management, warehouse and distribution systems in an aggressive bid to cut costs. Price is an important issue and both claim to provide customers with competitive prices and more value for money. The regional retail operators Action, IGA and Franklins pursue a similar approach. They are in the process of addressing supply chain efficiencies and improving logistic arrangements, also with the aim to cut costs.

Similar to Woolworths and Coles, all three regional operators offer house brands and are likely to increase their number over the next few years. Price is also a major issue for the regional supermarkets and they all state that their prices are competitive and that they provide value for money. How is this strategy reflected in Aldi’s value creating activities? Aldi uses the cost leadership strategy for its operations throughout its corporations across Europe, in Australia and the United States of America. This cost leadership strategy is reflected in the Aldi’s value creating activities in many ways: Firm Infrastructure

Aldi has very few layers of management and there are also very few employees at the staff level at the global Aldi headquarters in Germany, these practices allow Aldi to reduce overhead costs. Aldi’s business philosophy also involves simplified planning practices, as Aldi is a highly decentralised corporation, with planning and decision making mostly at the hands of frontline managers and management of individual local Aldi corporations, enabling Aldi to decrease its planning costs. Human Resource Management Aldi’s recruitment and selection of employees is done at the localised level.

Recruitment of new employees is dependent on characteristics that are consistent with the value of saving costs and Aldi usually develops its employees and provides them with career advancement opportunities by selecting internal candidates for managerial roles. Hence Aldi is able to keep the turnover costs at a low level. Aldi also has a hands-on approach to training new employees and managers. New employees and managers are trained to be consistent with Aldi’s goal of reducing costs at every level of the value chain, reducing waste and ensuring that goods are of a high quality acceptable to customers.

Technology Development Aldi uses the latest scanning technology for its check outs and provide the best possible chairs for cashiers at the end of a long conveyor belt, in order to reduce fatigue of cashiers and to reduce waiting time of customers in queues. Procurement Aldi would only offer high quality goods at lowest cost available, and Aldi constantly evaluates the small range of products to identify which products better meet the customer’s demands at a low price.

Aldi has long termed relationships with suppliers that offer low prices of goods at high quality to Aldi, with the opportunity of having their goods distributed throughout the world via Aldi’s corporate network. Marketing and sales Aldi prices its products at a low price, products are most often priced lower than competitors in order to capture a large sales volume. Aldi also does not have any marketing staff and spends very little in advertising which is congruent to its cost leadership strategy. Inbound logistics

Aldi has long-term contracts with suppliers that cater to Aldi’s specifications of high quality goods at a low costs, this allows Aldi to limit the costs of inbound logistics from suppliers. Operations Operation costs are minimised because of the use of economies of scale associated with handling low quantity of products that are sourced from suppliers tied up by long-term contracts that agree to supply to Aldi’s specification. Aldi uses its own carefully designed warehouses and place its own brand products into special display cartons that can be stocked directly on to shelves or wheeled into place with pallets.

The bays in Aldi stores are designed similar to the warehouse but in the opposite order to make stocking easier. This makes stocking the warehouse and stores more efficient and removes the need of additional employees to be assigned to pack or unload the goods. Aldi’s stores are smaller in size than its competitors and carry only a small range of 600 product lines. Additionally, each store only has a small team of employees who are employed on a full time basis. Aldi stores also have lesser opening hours than its competitors. Aldi provides higher wages than the market rate and its competitors, but the employees are lso employed on a full time basis and have lesser working hours per week, which allows Aldi to inevitably keep both labour and store operation costs low. Service Aldi does not only ensure that its goods are at a low cost, but that they are of a high quality in order to reduce the amount of product recalls. Aldi also offers a ‘total satisfaction or your money back’ guarantee in order to assure customers of its quality and introduces ‘special buys’ on Thursdays in order to create customer satisfaction, with customer retention in mind.

Issues arising from use of cost leadership strategy Other bases for cost leadership may erode While Woolworths and Coles are reducing their costs, they are focusing more on product differentiation, which will not allow them to successfully adopt a cost leadership strategy in becoming a cost leader, as they are companies which see themselves as offering more house brand goods at value rather than at the lowest possible price.

Both Woolworths and Coles are selling their house brand goods at low prices in an attempt to capture more sales volume and offering discounts to petrol with their partner petrol station firms, as a form of customer loyalty. Other competitors of Aldi in Australia like Franklins, IGA and Foodland Associated, which are regional players are also looking at streamlining operations and cutting costs while providing value goods. All of these companies seem be trying to follow Woolworths and Coles, as they offer the same offers for petrol discounts for purchases of goods.

Potential introduction of competitors that imitate Aldi’s cost leadership strategy There are also possible entries into the Australian market by Aldi’s global competitors like WalMart from the United States, Tesco from the UK and Lindl from Europe who are known to favour the use of cost leadership strategy would pose a significant potential challenge to Aldi’s cost leadership position in the Australian market. Should Aldi Change or Adjust its Strategy? Challenges Aldi’s strategy of cost-leadership seems to resonate with customers and supermarkets in close proximity to Aldi have tried to match heir low prices for basic commodity-type items such as milk, flour, sugar and butter. The prices for more ‘luxury’ items however, were not matched, and Aldi was clearly cheaper. Since other supermarkets have taken up the price challenge, it is important for Aldi to ensure that its prices are lower or at least equal to the ones of its competitors and that its products develop a reputation for high quality, through trying to strengthen and streamline their supplier and delivery relationships and choose reputable product manufactures.

This is particularly important considering that the competition in the food retailing industry is likely to increase, due to a number of economic factors that may influence consumer confidence and consumer spending over the next few years. A possible second challenge is that many people won’t step foot into ALDI because of the image that is associated with the company. And most people associate Aldi stores as the supermarket for poverty stricken individuals.

Also as mentioned perviously, a third challenge is the entry of other global players into the Australian market. An entry of international players is unlikely in the short term; however, in the medium-term, international players such as Wal-Mart (US’ largest retailer) or Tesco (UK’s largest retailer) might decide to move into Australia, which also offer high quality products at low prices. Recommendations to Strategy First, due to their negative consumer image, they must attract a new market segment. ALDI must concentrate on improving company and brand perceptions.

This can be improved by creating a positive image to public with increased advertising and focusing on improving its brand image in its marketing strategy. ?Secondly, we would like to see services being offered with-in the store. Many sales are lost to competing grocery stores in the same geographical area because of the lacking of services like a deli or seafood section. People will shop at ALDI for specific items, rather than fulfilling their entire shopping list and consequently are forced to travel and spend money elsewhere.

Also Aldi would need to retain its customers by continuing to be kept up to date with what customers would consider as the essential small range of groceries and household items they would want to have, by replacing products that are weak or lack demand with new items more in tune with customers needs whilst still not creating an extension of its product range. This approach ensures that Aldi stays with its concept of a limited product range, but adapts to the changing demands by modernising its product offerings.

Also getting to know customers and greeting them by name and offering rewards like discounts for long term regular customers on their birthdays would also increase their level of service and value for customers. Aldi would need to improve its scanning technology, warehousing and stocking processes to ensure that they do not fall behind the competition and are able to streamline such processes which will result in cost savings.

This can be done by sourcing the market for vendors who can help improve the technology and equipment of Aldi at a low price in conformance to Aldi’s specifications, and building a long term relationship with the vendor in much the same way as its suppliers, by offering the vendor the opportunity to work on improving the technology of Aldi in other countries as well. ?Finally, our last recommendation would be to form strategic alliances with other grocers.

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