Session 3 Case Study ALDI in Australia PDF

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ALDIINAUSTRALIA(2018)  1

 TOMOSEGOWITSCH,UNIVERSITYOFMELBOURNE JULY2018

I NTRODUCTION  OnalateeveninginearlyJanuary2018,TomDauntnestledbackintohisofficechair.TheCEO ofALDIAustraliahadjustfinishedhis first conferencecallfor theyearwithcorporatehead‐ quartersinGermany.Involuntarilyhereplayedtheconversationinhismind. Afteran exchangeof well‐wishes for the New Year,Daunt hadreceivedplentyof praise from this superiors for the past year. Only weeks earlier, he had attended the opening of the group’s500thstore. ALDIAustralia’sexpansionbeyondtheeasternseaboard wasalsogoing to plan. In 2016 the company had commenced a 120‐store rollout in South Australia and WesternAustralia,thusextendingitscoveragetoall Australianmainland states. The opening ofthefirstset ofstoresinSouthAustraliahadbeenattendedbythestatepremier,whohad toastedALDI’sarrivalandthetimelyboosttoAdelaide’sstrugglingnorthernsuburbs(Interna‐ tional Supermarket News 2016). The Western Australian rollout had commenced a few monthslater.ALDIwaswellontrack to create in excess of 2,000permanent new jobsacross thetwostatesanditssuccesshadattractedplentyofpositivepresscoverage. Lookingback,ALDI’sexpansionintoAustraliawasan unquestionablesuccessstory.Sincear‐ rivingin2001,thecompanyhadgrownintoasignificantplayerintheAustraliansupermarket industry. Towards the end of 2017 the company employed some 11,000 Australians. Reve‐ nues had achieved double‐digit growth in 2017 and exceeded $8b (Chung 2017). Over the yearsALDIhadreceived plenty of praise and goodwill from politiciansand consumer groups forinjectingmuchneededcompetitionintoAustralia’ssupermarketlandscape.Importantly,it hadalsoachieved profitabilitywellwithinthe10‐yeartimewindowinitially setbycorporate headquarters(Anonymous2009). Inrecenttimes,however,anumberofdarkclouds hadappeared onthehorizon.Australia’s dominantgroceryretailers,ColesandWoolworths,hadinitiallybeenslowtoreacttoALDIbut were now fighting back vigorously. Price competition had undoubtedly intensified and the tworetailgiantswere imitatingsomeofALDI’s practices. Addingto Daunt’s worries was the recent arrival of retail powerhouses Amazon and Kaufland, as well as the possible entry of discount competitor Lidl, the group’s closest rival in Europe. Tom Daunt knew he was navi‐ gatingachangingcompetitivelandscapeandhisinstinctstoldhimtosteelhimselffordifficult timesahead.

ALDI  G ROUP H ISTORY  ALDI Australia is part of the privately‐owned ALDI group. The corporate founders, brothers KarlandTheoAlbrecht,werebornin1920and1922,respectively,andgrewupinmodestcir‐  1

Thiscasewasdevelopedsolelyfor thepurposeofclassroomdiscussion.Theauthoroverwhelminglyprepared the casefrompublic sources.AlldollarvaluesareinA$unlessotherwiseindicated. ©2018UniversityofMelbourne.Allrightsreserved.

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 cumstances in the town of Essen in Germany’s Ruhr Valley. After the mandatory schooling both served retail apprenticeships before being called up for military service during WWII. UponreturninghomefromanAlliedPOWcamp,thebrothers tookovertheirmother’s small grocerystore.Aselsewhereinthewar‐ravagedcountry,theresidentsofEssenwereclamour‐ ing for staple foods and other basic necessities. Karl and Theo focussed on selling a strictly limitedassortmentofgoodsatlowpricesandwithminimalservice.(Brandes2005) Thebusinessenjoyedconsiderablesuccessandsoonexpanded.By1948thebrotherswereal‐ readymanaging13storesintheRuhrregionand incorporated theirbusinessasAlbrechtDis‐ count(or“ALDI”forshort).By1960thecompanyoperated 300storesthroughoutGermany. (ALDIwebsite2011) Followingadisagreementoverthe direction ofthebusinessin1961,thebrothers dividedit intoanorthernandsouthernhalf,ALDINordandALDISüd,withTheoinchargeofthenorth‐ ern division and Karl heading the southern division. Despite the formal split, the two parts maintainedasinglecorporateidentity. Thetwodivisionsagreedto sharethebrand,to team upfornegotiationswithsuppliersandtofreelyexchangeretailmethodsandresults.(Brandes 2005) Followingitssuccessinthedomestic market, ALDImadeitsfirsttentativestepintotheinter‐ nationalarenabyexpandingintoneighbouringAustriain1967.Thisinitialforaywasfollowed byentriesintotheUS,variousEuropeancountriesandAustralia. Internationalmarketswere dividedbetweenthetwodivisionsandtothisdayGermanyandtheUSaretheonlycountries wherebotharepresent(seeExhibit1).2 E XHIBIT 1:  ALDI’ S G LOBAL F OOTPRINT  2017  (S OURCE :  ALDI‐N ORD 2017;  ALDI‐S ÜD 2017)

Country

YearofEntry Numberofstores

Germany 1961 4,190 Austria 1968 490 Netherlands 1973 490 Belgium 1976 430 USA 1976 1,740 USA(Brand:TraderJoe’s) 1979 474 Denmark 1977 220 France 1988 850 UK 1990 760 Luxembourg 1998 10 Ireland 1999 130 Australia 2001 500 Spain 2002 250 Switzerland 2005 190 Portugal 2006 40 Slovenia 2005 80 Poland 2008 100 Greece 2008 0* Hungary 2008 130 China 2017 0** Italy 2018 0*** TOTAL  11,074 *ExitinDecember2010 **Onlinestoreonly ***StoreopeningsscheduledforJanuary2018 

ALDINorth/South North&South South North North South North North North South North South South North South North South North South South South South 

2 IntheUS,onlyALDISouthoperatedanetwork of ALDI‐brandedstores. ALDINorthopted foradifferentretailformatunderthe TraderJoe’sbrand.

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 Over theyears, ALDIhadgrownintoa globalretailingpowerhouse.By theendof2017the groupwaspresentin18countriesandhadcommencedonlinesalesinChina (Reuters2017). It employed roughly 200,000 employees worldwide and total turnover was estimated at US$85b, making it the 8th  largest retailer in the world (Deloitte 2018). The privately‐owned groupdidnotdisclosecorporate profitsbutwhenKarlAlbrecht diedin2014hisnetwealth wasestimatedatUS$26b(Forbes2014). Despite the group’s substantial size it was shrouded in mystery. The dearth of information was attributed to ALDI’s founders’ almost pathological disdain for publicity. According to a closeconfidanteoftheAlbrechtfamily,itwas the owners’firmbeliefthatthecompanyhad prosperedbecauseitwasnotdistractedbyengagementwiththebusinesspressandthepub‐ licatlarge.(Amann&Tietz2010) According toinsiders,thecompanyregardedopen communicationasamistakeoratleast as awasteoftime.ALDI’sstandardresponsetorequests forinformationwasthatitsfounders andexecutiveshadnothingtosaybecause theywereconcentratingonrunningthebusiness. Insiders providing information on the family or the company were regarded as traitors and typicallydidsoonconditionofanonymity.(Amann&Tietz2010) Thedeath ofTheoin2010,fouryears beforehisbrotherKarl,ledtoa numberof tentative changes.ThecompanyengagedPRconsultantsforthefirsttimeinits60‐yearhistoryandbe‐ camemoreactiveinengagingwiththebusinesspress. The company’s Australian offshoot underwent a similar evolution. Daunt’s predecessor, Mi‐ chaelKloeters, hadregularlyturneddown requestsforinterviews andinvitationsto industry events.Inoneofhisrareinterviews,Kloetershadexplainedthatthecompany’slackofame‐ diaprofilewasnottoavoidscrutinybutsimplyamatterofcostcontrol. Tosavecosts,wedon’thaveapublicrelationsdepartment.You can’tbehalfpregnant;ifyou doadecentPRthenitisgoingtocostyoualotofmoney‐oryoudon’tdoitatall.It’sverydif‐ ficulttodoitsomewhereinbetween.(Walker2003) AftertakingoverasCEOin2011,TomDauntgraduallyopenedupthecompanytothepublic. Whilestillmindfulofthetimespent onmediaengagements,heliftedthecompany’sprofile andrevealedsomeofthethinkingbehindthecompany’sstrategy.

ALDI IN A USTRALIA  ALDISüdforgeditsplanstoenterAustraliain thelate1990s.Thetask oflaunchingthe com‐ panydownunderfelltoMichaelKloeters.Acompanyveteran, hehad heldseveralexecutive positions within ALDI and had developed a personal relationship with the Albrecht family. (Lindhe2008) When tapped to head the company’s Australian venture he agreed on condition that he wouldbeallowedtoinvestigatetheAustralianmarketplacefirst hand.Kloeterstravelledto Australia in the late 1990s to study the country’s supermarkets and shopping habits (Webb 2008). He accepted the job once he had convinced himself that ALDI could succeed. Com‐ paredtoGermany,Kloetersfoundthatsupermarket operators“hadsomuchfathereinAus‐ tralia.Itwasunbelievable”(Walker2003). AtthetimeofALDI’sentry,theAustraliansupermarketindustrywasalreadydominatedbyre‐ tail giants Woolworths and Coles, who controlled nearly three quarters of the market be‐ tween them. Over decades the two companies had consolidated the industry to the point whereitwasoneofthemostconcentratedintheworld.Thetwoheavyweightshadshrewdly adoptedretailingtechniquespioneered in other countries andtheirconsiderable economies

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 of scale helped to cement their position. They had seen off many rivals over the years and their size and status deterred new entrants. Their respective parents, Wesfarmers Ltd and WoolworthsLtd,alsohelddominantsharesinotherpartsofthe retailsector,suchas liquor, hardware,householdelectricalsanddepartmentstores. OnJanuary26,2001,thefirstAustralianALDIstoreswere opened in the Sydney suburbs of MarrickvilleandBankstown.Encouragedbytheresponsefromlocalshoppers,thecompany opened28storesinNewSouthWalesbeforeexpandingintootherstates. At the end of 2017, ALDI Australia operated some 500 outlets, spread across all mainland states (Exhibit 2). Thecompany hadcaptured nearly9% of the$101bnational supermarket market (IBISWorld 2017); innewly addedSouthAustralia and WesternAustralia it held just over4%and3%,respectively(ALDI2017). E XHIBIT 2:  N UMB EROF ALDI STO RESIN A USTRALIA ,  E NDOF Y EAR (S OURCES :  CASE  AUTHORS’ ESTIMATES ;  E UROMONITOR , VARIOUSEDIT IONS ;  ALDI PRESSSTATEMENTS , VARIOUS ) 

600 500 400 300 Stores 200 100

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2002

2001

0  Afterearlierbeingcriticisedforits secretivenature,in2015ALDI Australiadisclosedfinancial detailsforthefirsttime.ThecompanyprovidedasubmissiontoanationalSenateInquiryinto corporatetaxation.WhiletheAustralian offshootrepresentedaverysmallproportionofthe globalALDIgroupitwasdeemedoneofitsmostsuccessfuloperations,aidedbythecompara‐ tivelackofcompetitioninthelocaldiscountsegment.Revenuehadgrown steadilyoverthe years,ashadprofits.Thecompanyalsodiscloseditstaxpayments, inresponse tocompeti‐ tors’accusationsthatitwasusing‘exoticstructures’tominimisetaxationliabilitiesinAustral‐ ia (Heffernan 2014). For the years disclosed (Exhibit 13), the rate paid by ALDI in Australia closelytrackedthestatutory30%companytaxrateandwassignificantlyhigherthan theav‐ eragecorporatetaxratepaidbyAustraliancompanies. E XHIBIT 3:  ALDI  A USTRALIAFINANCIALINFORMATION (ALDI  2015,  2017 AND 2018,  C HUNG 2017)

Yearended31Dec

2010

2011

2012

2013

2014

2015

2016

NetRevenue

$3,1b

$3,5b

$4,2b

$5.0b

$5.8b

$6.6b

$7.5b

ProfitBeforeTax

$121m $140m $232m $261m $231m $269m $205m

IncomeTaxExpense

$35m

$47m

$67m

$83m

$72m

$87m

$65m

29%

34%

29%

32%

29%

30%

32%

EffectiveTaxRate(ETR)

5





T HE ALDI  W AY  ALDIwasaself‐described‘harddiscounter’.Itsbasicapproach –bornout ofnecessityduring thepost‐waryears– wastooffera strictlylimited number of quality products at lowprices. Retailexpertscommonlydefinedharddiscountersasthosethathadthefeweststock‐keeping units(SKUs),providedfewnon‐fooditemsandutilisedrelativelysmallstoresandlowstaffing levels. Despiteitshistoricalsecrecy,somedetailsofthe‘ALDIWay’(Brandes2005)ofcompetinghad emergedovertheyears.Firstandforemost,ALDI’sstrategywasanexpressionofitsfounders’ firmlyheldprinciples.Aboveallelse,KarlandTheoprizedthriftandsimplicity. Fromtheoutset,thebrothersfocusedonwhattheyconsideredtobe theessentials.Anyin‐ creaseinthenumberofSKUswasseenascompromisingthesimplicityofoperationsandthus resisted(Corsten&Kumar2006).Forthesamereasonthecompanyrefusedfordecadesto carryanythingbut drygoodsasperishables and frozen foodsrequired refrigerationand spe‐ cialhandling. KarlandTheowere alsopenny‐pinchersof mythicalproportion and numerous anecdotes at‐ testedtothebrothers’frugalnature(Amann&Tietz2010).Thefounders’corevaluesofthrift andsimplicitypermeatedthegroupandgaverisetotheALDIWay,aregimentedapproachto running the business that was replicated, with only minor adaptations, in every market the companyentered.

TheALDIWayinAustralia:‘SmarterShopping’ InAustralia,theALDIWayusedtobecapturedby theslogan ‘smartershopping’,thus“ena‐ blingAustralianshopperstolivericherlives, forless”.Thefundamentals of smartershopping consisted of “keeping the operation simple, keeping costs down and offering everyday low prices. We achieve this by avoiding the costly overheads that force other retailers to raise theirprices”.(ALDIwebsite2011) As elsewhere in the world,ALDI’s range ofmerchandise in Australia was strictly limited. An ALDIstoreofferedaround1,250SKUs(ALDI2014),comparedto 20,000to30,000 SKUsata typicalColesorWoolworthsoutlet.Onaverage,ALDIstoreswere1,200squaremetresinsize, compared to the average Coles store of 5,000 square metres (IBISWorld 2017).ALDI’s busi‐ ness model drastically restricted the variety and packing size of products in store. In the wordsofTomDaunt,“wedon’tcarryeightdifferentflysprays–wemighthaveone ortwo” (Speedy2012). The limited range of merchandise translated into large volumes for the chosen suppliers which,inturn,yieldedbulkdiscountsforALDI.Thelimitedassortmentalsocuthandlingand distributioncostsandallowedthecompanytogetbywithsmallstores. Inadditiontoitsregularrange,ALDIalsoofferedanumberofweekly‘SpecialBuys’.Thesein‐ cluded merchandise such as electrical goods, household appliances, apparel, sports equip‐ mentandtoys.Theproductschanged ona weekly basis. Theywere announced on the com‐ panywebsiteandwereavailableaslongasstockslasted.Someretailanalystsmaintainedthat the items added an element of excitement to the ALDI shopping experience. One shopper, representativeofmanyALDIcustomers,articulatedtheprevailingsentiment. “It’sexciting,becauseyoudon’tknowwhatyou’regoingto getevery week.[…]They have greatspecials.LikeMerinowooltops.Whenthey comeup,it’scrazy.There are lines outside the store and people push each other out of the way to get the good stuff.”(Huntley2014)

6



 On occasion, ALDI’s Special Buys created national news and went viral, such as when the companyofferedskiingequipment(TomDaunt,personal communication,October 2015), or children’s clothing created by well‐known fashion designer Collette Dinnigan (see video: http://www.smh.com.au/business/retail/aldi‐trials‐new‐store‐format‐in‐test‐for‐australian‐ market‐20151019‐gkcxzp.html)or18‐yearoldsinglemaltscotchat$70(Lacey2016). Liketheircounterpartsinothercountries,AustralianALDIstoreshadasimplelayoutwithonly afewaisles.Thestoreswerebrightbuthadanaustereatmosphereastheycontainedfewfix‐ turesandfeaturednobackground music.A lot of stockwas displayedeither on pallets or in specially designed cardboard boxes from which shoppers took individual items. To restock, staffreplenishedcardboard boxes orwheeledinanew pallet on an electric jack. Items such asmeatorbreadwerepre‐packed,aswasmuchofthefreshproduce. ALDIoutletsdidnot featurein‐shopdelisorbakeries. Anotherkeydifferenceincomparisonwiththecompetitionwasthepredominanceof‘private label’brands.InthecontextofALDItheywerealsooftenreferredtoas‘phantombrands’,to highlightthefact that theymadenoreferencetoALDI,insteadcarryingawiderangeof ‘ex‐ clusive’brandnameslikeLacuraSkincareorBelmontBiscuits.Inaddition,thepackagingtypi‐ callymimickedthatoftheestablishedmanufacturers’brands(Mortimer2016).(seeExhibit4) E XHIBIT 4:  ALDI’ S ‘ PHANTOMBRANDS ’  COMPARE D  TO  MANUFACTURERS ’ BRANDS (S OURCE :  M ORTIMER  2016,  ALDI WEBSITE , MANUFACTURERS ’ WEBSITE S ) 



7



 ALDIAustraliadidstockasmallnumberoficonicmanufacturers’brands,suchasVegemiteor Milo,but95%ofitsrange consistedof privatelabels(Cowie2011). Thesuppliers ofprivate labelswerenotidentifiedonthepackagingbutitwaswidelyknownthatmanyALDIproducts originated with manufacturers that had their own popular brands.3Significant cost savings couldberealisedfromprivatelabelsastheydidnotrequirethemarketingbudgetsassociated withregularbrands.Grossmarginsonprivatelabelproducts were5to10percentagepoints abovethoseonmanufacturers’brands(Speedy2010). ALDIcustomerswentoutoftheirwayinsearch ofabargain.Marketresearch on shoppers’ attitudesrevealedthatgrocerybuyerswhousuallyshoppedatALDIweredramaticallymore likelytoagreethatgoodvalueandlowpriceswere“veryimportant”.Conversely,peoplewho usuallyshoppedatColes,WoolworthsandIGAweremoreconcernedwithfactorssuchassu‐ permarketlocationandconvenience(RoyMorgan2015). Likeev...