Aldi is a German deep-discount grocery store that has disrupted the market through its relentless drive to lower prices for consumers. It now has over 4,000 stores across the United States and Europe.
Aldi’s successful business model is based on offering high quality grocery at the lowest price to cost-conscious consumers. Its products are typically 20 to 45% cheaper than those of its regular competitors.
The company is able to offer such low prices thanks to its persistent focus on lowering operating costs across the business through simplicity, consistency and responsibility.
Simple product range and limited inventory
Aldi only stocks around 1,500 staple items compared to the tens of thousands of SKUs typically stocked by regular supermarkets. This simplifies every levels of the supply chain, from purchasing to distribution, thereby keeping costs low. High sales volume per SKU also allows the company to take advantage of economies of scale in purchasing, further reducing the price for the customer.
In addition, 90% of Aldi’s products are own-brand, generating lower prices for consumers and higher margins for the company.
Aldi has a just-in-time inventory model which means that products are delivered when they are needed. This reduces the capital tied up in stock as well as lowering the cost of warehousing and associated labour costs.
Each Aldi store and warehouse is constructed to a similar simple design, allowing for uniform processes and systems, and ultimately lower operating costs. Complexity has also been removed from distribution and packaging: delivery vans are the same size, and pallets are standardised.
Aldi has removed many non-essential grocery store services including unpacking and arranging products. Boxes and pallets are typically used as product displays to save on labour costs associated with product handling.
Aldi has reduced the time it takes to checkout through a number of different schemes. Fruit is sold in bags so it does no longer needs to be weighed. Products have multiple barcodes reducing the time it takes to search for and scan the barcode. Customers put their purchases back into their trolley after paying and then bag them elsewhere, allowing space for the next customer to check out. This parallel processing reduces the throughput time and increases the capacity i.e., the number of customers that can be serviced by a given cashier and checkout station. Fewer tills are therefore required, and labour costs can be reduced.
Trolley rental system
Customers are required to ‘rent’ shopping trolleys by putting in a coin in order to release a trolley. The coin is then returned once the trolley is linked back up to the column of trolleys. Along with a wheel locking mechanism that is activated when trolleys are removed from the shop, this reduces the number of lost trolleys, thereby reducing the cost of replacement for Aldi. This saving can then be passed onto the customer through lower prices.
The trolley rental system also incentivises shoppers to return their trolleys to the docking station rather than leaving them lying around the shop or car park, thereby reducing the labour cost associated with managing the trolleys.
Aldi’s workforce is well-trained and tightly disciplined. The company has adopted various aspects of the lean manufacturing principle, including a focus on continuous improvement and accountability for all employees from the shop floor up to senior management. Employees are also cross-trained: this flexibility allows the company to maintain a smaller workforce and therefore lower costs.
Building a sustainable advantage
Aldi’s highly efficient operating model is critical to its ability to offer high quality products at deeply discounted prices. This strategy has thus far served the company well, leading to global sales of €67.4bn in 2013, double-digit growth and global expansion.
Aldi will, in all likelihood, continue to reap the benefits of its low-cost model since the model appears to be sustainable over the long-term, and is difficult to replicate thanks to its reliance on a culture of continuous improvement and employee responsibility.
- Competitive Advantage Through Efficiency, An Aldi Case Study, businesscasestudies.co.uk
- The 4 As, Boxwood publication