Aldi Strategy Case Study

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Nova School of Business and Economics

Undergraduate

Strategy

Fall Semester 2015/2016

Case-Study 2

Submitted on 11/12/2015

By Group I:

Inês Andrade, nº 12876

Inês Carvalho, nº 12854

Mara Sousa, nº 12644

Rodrigo Ramos, nº 12853

Question 1

One of many ways that Aldi explores scale economies is standardizing the products sold in every store, which allows them to get its products in high quantities. As more quantities are bought from the suppliers Aldi increases its bargaining power for negotiation about the best possible prices with the suppliers until a certain price is fixed (which gives security to both parties) and this will lead to a decrease in the average cost.

Another way is related with the expansion of Aldi stores, since there are more stores and sales, the cost of the construction and maintenance of the stores will be distributed among the products bought and then sold, lowering the average cost as more units are bought and sold.

Question 2

No. Aldi is well known by offering a limited selection of private quality products at a low price. This business model allows them to better control the costs in order to provide a great relation between price and quality to its consumers. This format appeals mainly to budget-minded shoppers and low income shoppers, representing the majority of Aldi’s consumers. Therefore stocking branded products will probably lead to a reduction of the efficiency that is nowadays observable, for example in inventory management, since that to stock more products, it would require some adjustments in the inventories, and probably in average inventory turns.

In addition, the format has been successful and changing it by stocking branded products is going against Aldi’s image and philosophy. Moreover, there are already many companies offering branded products and it would be very difficult to Aldi to compete against them, because they would have to incur in a lot of costs such as hiring more employees and investing in larger stores.

Question 3

No, because Aldi incurs in less inventory costs than Walmart does. Aldi is much more efficient dealing with inventories, having an average annual inventory turns of 52, while Walmart has 7.3. So, per square meter, Aldi has more sales than Walmart’s and the goods do not deteriorate as much (since they do not stay in the warehouse as long as Walmart’s products). In conclusion, there is evidence that Aldi is managing its inventory more efficiently, incurring in less costs.

Question 4

No, it was not the expected response. The variable location is a strategic substitute since when one firm (Kwik Save) increases its locations, a limited resource, the other one (Aldi) has lower available locations, so Aldi could not expand its locations, as it is used to do. With the purchase of 100 existing retail stores and by matching Aldi’s prices, Kwik Save would have an increase of quantity sold (direct effect). Secondly, this leads to a decrease in the quantities sold by Aldi (strategic effect). This is a tough commitment from Kwik Save, because it would put Aldi under pressure to decrease its quantities delivered to the market.

However, the Aldi’s response was not this. Aldi managed to make an agreement with Gateway Foodmarkets, in order to place itself in Gateway’s sites and, in this way, reach more consumers. This is justified by the fact that Aldi wanted to keep its operating model without compromising the loss of quantities sold.

Question 5

No, it isn’t a mortal threat. First it’s important to state that the consumers of Aldi’s products consider that it is possible to buy goods with great quality at low prices, so we should only focus on these consumers and not the ones that only buy branded products.

Nowadays, private label goods can be found at a wide variety of retailers but they are still not perceived as products with great quality. In Aldi’s case its consumers consider it a trustable brand, because Aldi does quality control tests to make sure they maintain the quality of its products. Consumers perceive this, since “in 2012, Aldi ranked among the top 20 companies (and was the only grocer) on Facebook with the most loyal fans, defined as those most likely to recommend the company”.

Supermarkets can’t compete with the prices and the quality offered by Aldi, since the traditional ones have a bigger range of products and brands, they can’t deliver their “own label” products with such a low cost and thus a low price. So, the consumers that are interested in buying cheap products would prefer buying them in Aldi.