Aldi, Ocado, & Online Grocery Business Models | In Practise

Aldi, Ocado, & Online Grocery Business Models

Former CEO, Aldi UK

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Executive Bio

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

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Interview Transcript

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

Paul, can we take a step back to the early 2000s when Tesco and online was first being launched. How was Aldi looking at ecommerce, back then?

Actually, Aldi was ignoring it. It was pretty obvious, right from the start, that delivering groceries to people’s stores or even simply picking themselves in the stores would add some cost. The Aldi mantra was, doing business at the lowest possible cost available. That didn’t include picking the products for the customers or delivering them to their home.

Do you think their thinking around online has changed?

Yes, I think it has. First of all, the popularity and the consumer demand is much, much greater than it was 20 odd years ago. Technology has moved on so costs have become lower. I think that now, Aldi – and Lidl for that matter – see that maybe there are some products that they can’t sell through their retail stores, but they could sell online, so it’s actually an enhancement of the offer. Plus, of course, when you are an online retailer, you know much more about your customer than if they come and visit you. That’s is also attractive, in terms of what you can do with that data and how you can use it to help you run your business more successfully.

How do you look at the potentially changing consumer habits around grocery? With immediacy players, such as Getir and Gorillas and other on-demand grocery, how do compare the shift between the weekly traditional shop and the more convenient, smaller basket sizes and more frequent shopping?

That’s an interesting question because there are two things playing out at the moment, one of which has been around for about a year and a half and that’s Covid. What has happened there is that the fear of mixing with other people has driven the consumer to shop less often and buy bigger baskets. That is a trend which is simply 18 months old and it appears to me that it is totally driven by Covid. If you look at the previous 10 years, it was going in the other direction. The consumer was coming more often, buying more fresh foods. They were more conscious about waste and, therefore, not willing to pick up large quantities. Pack sizes were also shrinking, so the whole thing was going in one direction and then, boom, along came Covid and changed everything.

At the same time, what Covid did was to offer consumers a way to get their shopping without actually going and mixing with people at all, by ordering online. For the first time, which is really critical for food retailers, they saw that customers valued this service. What I mean by that is, they are willing to pay for it. They are willing to pay something to have the delivery come to their home. Previously, there was a reluctance by many. That reluctance has certainly dropped, as a result of Covid. Now people have experienced not having to go and do their shopping, there is a percentage that quite like it and are continuing on with that.

All of that becomes a game-changer for a bricks and mortar food retailer. They could imagine, in the future, that people are prepared to pay for services such as delivery and that restores the profitability that was looking as if it was lost. If you had a perfectly happy bricks and mortar offline customer, that same customer, doing the same shopping, was less profitable if you had to deliver the groceries. That was really a problem for retailers. They were defensive in what they were doing. They were doing it because others were doing it and they didn’t want to lose important customers, as opposed to being really happy to do it.

The point you made about the guys who were doing the delivery service, these have also swarmed dramatically, out of Covid. If they weren’t delivering before online, it is actually quite difficult for a bricks and mortar retailer to get everything set up, to just plug and play with an operator who is doing it for many different businesses or even industries. Many of these players are delivering restaurant takeaway foods as well as groceries.

Of course, that means that their services are at a lower cost, because they’ve got a bit more scale to play with. I’m not surprised that that business has just shot out of nowhere, in the last two or three years, again, driven by Covid.

Over the next five years, do you expect a higher proportion of sales volume to be the more smaller, convenience, topping up the fridge shops, as opposed to the weekly shops?

I think there is always going to be both. Quite where it lands is a bit difficult to say because Covid changed everything. That appears to be subsiding. All of the retail businesses that I am involved in now are seeing a gradual return to a more frequent shopper, with a smaller basket. We are not back to anywhere near 2019 yet. But neither are we at the peak of October 2020, when visits to supermarkets were cut by a third, and basket sizes increased by a third, which is really dramatic. It really changes a lot of things about running a supermarket.

This, coupled with the fact that all these new services have appeared, and they are probably adding 10% or 12% to the basket. But given that we are often talking about items under £15, that would only be £1.50 and it appears to be going unnoticed, from the consumer’s point of view, even though they are getting the service. I can’t tell where it will end, but it’s not going away, that’s for sure.

Do you think the Getirs and Gorillas, these on-demand convenience players, pose a risk, longer term, for the big four and traditional grocers?

No, I don’t. I think it’s a service which retailers are watching and are part engaged in, because they are often providing the product, at least for some of these players. I am expecting that, if there is enough business in it, particularly in big cities, you will see acquisitions. You will see big bricks and mortar retailers just buying some of these players and absorbing them as part of their overall offer.

Couldn’t they just roll out some of the delivery from the convenience stores?

You’re right; they can do it themselves. But when you buy somebody who is relatively small, even if you pay a large multiple for them, you achieve two things. Firstly, you get rid of a competitor and, secondly, you instantly absorb the business that they already had. Maybe it will be a combination of both, but the concept is not going away.

Can we move on to look at selection and SKU count and range architecture? Historically, how has Aldi looked to optimize the number of SKUs?

The number of products that a discounter is selling is a critical number, to ensure lowest costs. There are several factors in play here. When a discounter sets up their business, they decide upon the range and then wraps it in a box, which are the walls and the ceiling of the store. The idea being that they don’t want to have to own or manage one more square meter than it needs to. It starts with the range size and it finishes with the store size.

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Aldi, Ocado, & Online Grocery Business Models

August 19, 2021

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