Aldi: Hard Discounter Business Models | In Practise

Aldi: Hard Discounter Business Models

Former CEO, Aldi UK

Learning outcomes

  • Aldi's approach to market entry: key criteria Aldi looks for when evaluating the attractiveness of a market to enter
  • Aldi market entry strategy: time horizon to establish a relevant proposition at scale
  • Aldi market entry strategy: process for setting up a supply chain for locally sourced products
  • Discounter disruption in grocery retail: how the (short term) management incentives of incumbent retailers play to Aldi's advantage when entering a new market
  • Aldi's philosophy in dealing with its supplier base
  • Aldi vs mainstream retailers: Strategic options mainstream retailers have to combat the threat posed by Aldi and Lidl (price investment, cost reductions)
  • Aldi's approach to managing costs: how Aldi has put cost control at the heart of corporate culture
  • Aldi’s cost structure of operations vs a mainstream retailer
  • Aldi's Approach to Talent Selection and Leadership Development
  • Aldi Market entry economics: typical capital investment Aldi has to make when entering a new market to reach break-even
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Executive profile

Paul Foley

Former CEO, Aldi UK

Paul started his career in 1974 and has over 40 years of experience in retail. The bulk of his career was 23 years at Aldi Süd, a privately held, German-headquartered global retailer, with operations in 10 countries covering Europe, US and Australia. During his tenure, Paul served on Aldi Süd international management board. He was the CEO for the UK and Republic of Ireland from 1999 -2009 as well as identifying and implementing new business opportunities, including entry into new geographies (including Australia). He is currently serving on the board at GIPPO Hypermarkets in Belarus, VOLI in Montenegro, BIM in Turkey and FORTENOVA in Croatia. Read more

To begin, Paul, could you take us through your career experience in a bit of detail?

I started my career back in the 70s with a firm called Iceland. It’s still running today. It’s a pretty powerful frozen food supermarket retailer. I cut my teeth in operational management with that firm and I’m eternally grateful for all the experience that they gave me. I stayed there 12 years from the boyhood 18 years old to around 30. At this stage, I got a chance to join a new business coming to the UK. It wasn’t a new business overall. The company was Aldi. It was planning on an assault on the UK market and it was looking for management to help it get some traction. I joined them. After some really big consideration because I had a lot of fantastic experience from Iceland. I stayed the next 24 years with them. The last ten, I spent as the CEO of the UK and Irish business. The bulk of my career has been spent with Aldi. Then let’s say the twilight of the career was to do something on my own in an advisory and board role practice. First of all, actually, for Aldi, I was still part of their organization for three more years in an advisory capacity. Since then, I’ve joined a number of boards and set up an advisory team that focuses mostly on the emerging markets and mostly in the discount space. That’s where I am today.

If we can go back in history to your words: Aldi’s assault on the UK, where you got involved at a very early stage. The earliest stage of Aldi’s presence in the UK. Can you take us through what the logic was for market entry and what makes a market particularly attractive to a hard discounter like Aldi?

I’m happy to do that. Some of the points might be a bit surprising, to be honest. When a discounter like Aldi, I have to say my knowledge is that Lidl is similar in its approach is looking for new markets. It has a number of criteria which are important for it to feel comfortable and to feel confident about that market. The first is probably obvious. They’re looking at the discount penetration. If there is none and when Aldi was looking at the UK, there was just a firm called: Quick Save that seemed to be struggling a little bit in its positioning and its success. That was it. There was no other player on the market, and they had around two and a half percent of the market. Discount penetration is a critical first factor. To give you an example. If you were a new discounter, you wouldn’t be choosing Germany as your next market to try and penetrate because there’s already 45 percent of the entire market controlled by discounters there. That’s number one.

Number two is that you’re actually looking at how rich and successful the industry is. To give you some benchmarks and examples. Across the world, on average, a good food retailer can earn five percent EBITDA and three percent net profit. If you’re anywhere above that, the industry would be considered rich. When Aldi entered the UK and was doing its market entry study, most of the good players who were dominant on the market had actually double-digit EBITDA figures, more than ten percent. Double what the global average was. What that actually means is that they had relatively high prices. They could get away with that, the customer was quite happy to pay those prices because they were good operators and because there wasn’t any alternative. The customer could afford it, too.

What that means for a discounter is it will not have to invest so much money to be significantly cheaper than the incumbent on the market. The third element is that you need a consumer who’s been by global standards, let’s talk GDP per capita, rich for a generation. What happens when you have that kind of situation is people have expectations of what they consume. They are not willing to eat things that they don’t like just to get enough calories inside them. They have enough money to be able to consume exactly the quality level and the taste profile that they’re either used to or want. Furthermore, the postman and the hedge fund manager, at the core of the diet basically eat the same things. Same cornflakes, same jam. Same milk, same beer. Same cheese. Same bread. All the core of the diet is pretty consistent irrespective of what you’re earning. It only diverges when you talk about niche products. The postman is not buying champagne every week, but that’s not the core of the diet either to be honest.

This is very important to a discounter and why? Because a discounter wants to come with one product in every particular category. Not a wide choice of product, but one product and it’s got to appeal to the majority of people in order for it to be successful. Finally, as a hope, I would say, a discounter like Aldi when entering a market would prefer that its competition is stock market listed. Stock market listed companies have programs, management incentive schemes, which means that the management is not likely to react to a new threat until the last minute. They’re whole compensation package, what is expected of them as a management team, their contracts, their job descriptions are all based on maximizing shareholder value, maximizing profits.

Taking some threat 15 years into the future and trying to cancel it out now by reducing your prices and reducing your profit, that’s just not on the agenda of a publicly run company before it has to. It buys the discounter a period of time of going under the radar. Nobody takes any notice of it until hopefully from the discounter’s perspective, it’s too late. These are the criteria that somebody like Aldi is looking for.

When Aldi is looking to enter a market, as in the UK, these conditions appear to have been met, what sort of time-frame is Aldi looking at to build the business? Paul, if you could perhaps highlight some milestones, whether it’s scaling operations, supply chain, buying, when does a discounter really start to be a threat to incumbents?

That’s a super question to be honest because that is a very key part of market entry strategy. At what stage will the discounter be able to enjoy some success? I can tell you it’s never at the beginning, never. There are two reasons for that. First of all, food retailing is a scale business. If you haven’t got scale, then you don’t have any success. The second reason is that food retailing is a local business. What I mean by that is, the diet of the Great British public is quite different from the French or German or Australian or UK. It doesn’t matter if you’ve got a big business in another country, if you try to bring the products from that other country and capitalize on that kind of supply chain, actually you’re just bringing foreign product, which will taste different, look different, smell different. It doesn’t matter, but it’s different. All of the people that are listening to this that have never travelled will know it’s very interesting to go and drink coffee in France or eat cheese in Belgium or chocolate in Belgium. It’s not what British people grew up with or vice versa. You need scale in the market you are in. The only way to get that is to build out stores. This takes time. If you want a precise time scale, it’s relatively easy to work out mathematically.

What you want to be as a discounter is, you want to be the biggest purchaser for private label product, because that’s what the business is based on, of the products you are going to sell. You simply look at the stats. You look at the market leader. You work out what kind of private label business that they actually have. That becomes your target in every single product category. Then you need to do the math. How many stores do I need to rival those guys? What that means is, you’re generally talking about ten/fifteen years. Especially for a company that’s leverage shy, which Aldi definitely is. It basically wants to grow out of its own cashflows and profitability, rather than having huge borrowings. It builds a long-term plan to build up enough stores. To build up a local management team that can one day boast that it’s got that buying power. That buying power, it feels very confidently, even arrogantly I would say, will bring it success. Whatever. That is basically the concept. When we entered the UK, it was understood that it would take ten to fifteen years for the business to be really successful. It took that long. It was an accurate estimation. Once we got the buying power that was superior to anybody else’s, there was basically no looking back.

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Aldi: Hard Discounter Business Models

May 10, 2020

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