Strategy in Practice - What do you do about a problem like Aldi?

Aldi is a German supermarket chain with over 11,000 stores worldwide, more than 900 of them in the UK.?Under the guidance of UK CEO Giles Hurley, Aldi has grown to hold over 9% of the UK supermarket market share & in 2022 became the fourth largest supermarket in the UK.

The UK advertising for Aldi in January 2023 proudly boasts that the firm has 'attracted 1.4 million new customers', citing its ability to maintain low prices as being particularly attractive to customers at the moment, given the cost-of-living crisis, driven by double-figure inflation rates (which are particularly severe in the food & drink sector).

At first glance, this would suggest that the other non-discount supermarkets - such as Tesco - are in big trouble.?

However, the actual picture is much more complex.

Strategy

Professor Michael Porter is a leading author on strategy, & he famously said that ‘strategy is about finding a unique position’.

This essentially means doing something that customers really like, that will make them choose to buy from your business over the competition.??

So how do supermarkets like Tesco seek to do this, given the success of the discounters?

Location

My own (limited & unscientific) research in university classrooms over the past few years suggests that many people make their decision on which supermarket to choose based on convenience i.e. choosing the closest supermarket to their home.?For someone like myself living in urban Birmingham, I will still have a certain degree of choice; however for those in rural areas, there is likely to be less choice, making the issue of location even more important.

There is no question that the business model employed by Aldi & Lidl is highly effective; however it is possible that they both owe their success in recent times in no small part to the number of new stores opened by both firms.

?

Copying

In 2018, Tesco launched their Jack’s chain of supermarkets, specifically targeting the discount market (Aldi & Lidl). The plan was to open 10 -15 stores a year & gradually build up a substantial chain that would be able to rival the established discounters.?

The timing for Tesco was unfortunate, with Covid 19 following in March 2020, but nevertheless they found it very difficult to make Jack’s competitive, partially because of its small scale at this point.

Perhaps providing proof that there is more to success in the supermarket sector than location, Tesco pulled the plug on Jack’s in February 2022.?It had only opened 12 stores.

What this does tend to suggest is that low-cost businesses such as Aldi & Ryanair are much more sophisticated than some people give them credit for.?For example, many budget airlines such as Wow Air & Monarch have tried to replicate Ryanair’s business model, only to fail dismally.?Aldi’s cost advantage is based on small stores, limited product ranges, highly flexible staff, & cost-effective logistics - & a dogged focus on maintaining operational efficiency to enable their low-cost model to work.

?

Differentiation

When lecturing on differentiation, I find it quite hard to provide good examples of differentiation within the 3 main sub-groups of the UK supermarket industry (Discount – Aldi & Lidl; ‘Big 4’ – Tesco, Sainsbury’s, Morrisons, & Asda; Premium – Waitrose & M&S).?In particular, it seems hard to find ways to offer differentiated actions that can trump the low-cost offerings of Aldi & Lidl, which have proven so popular in recent times.?

One example on differentiation is based on own personal experience.?From where I live in Birmingham, it is a roughly equidistant walk to my nearest Aldi & Lidl; I like both stores, however, my marginal preference is Lidl, as I enjoy their freshly baked section, which I feel is a differentiator that is of value to me.

Perhaps surprisingly, however, many of the ‘old guard’ had a successful Xmas 2022, with Tesco, Sainsbury’s & M&S amongst those posting better-then-expected results.?The Grocer reported that Tesco group retail sales were up 7.9% in the 6 weeks to 7 January 2023, driven by customers seemingly being drawn to either the value or premium product ranges.?Meanwhile, Sainsbury’s upped its profit expectations for 2023, after grocery sales for the same period rose 7.1% year on year.

Arguably, however, Tesco & Sainsbury’s have relied less of differentiation in the last year or so & more on trying to match the discounters on price.?This has worked well, but is it a sustainable approach?

Diversification

Diversifying into new business areas has always been seen a valid strategic choice.?And indeed, many?businesses do this very well; Nokia was originally a paper manufacturer, whilst Nintendo began as a firm making playing cards.?

The Covid 19 crisis struck down many ‘one-trick-ponies’, with lots of restaurants for example going into administration.?This has led many businesses to consider whether diversification would make them more resilient in the face of other potential pandemics, wars or other international crisis.

Tesco did at one point diversify to some extent, with an extensive international network of stores (some trading under local names, such as Kipa in Turkey), the Giraffe restaurant chain, & the Harris & Hoole coffee house chain.?However, under the leadership of Dave Lewis from 2014 - 2020, Tesco sold off many of its non-core operations, choosing to adopt a greater focus on its central UK supermarket business.?Two exceptions were its purchase of the Bookers wholesalers & the creation of Jack’s stores.?

Conclusion

It is clear that it is much easier to talk about the strategic issues facing the UK supermarket industry than to actually create an implement an effective strategy.?

Financial services company AJ Bell (writing in The Grocer) warned: “The UK supermarket sector remains cut-throat so Tesco’s ability to protect and even build on its market-leading position is impressive. However, with sales growth running behind inflation, it seems Tesco has had to indulge in heavy discounting to fight off the challenge from the discount operators.”

Ultimately, strategic leadership is key; Tesco CEO Ken Murphy has been in place since 2020 & appears to have done a good job so far, following on from his successful predecessor Dave Lewis.?However, the cost-of-living crisis won’t last forever, & Murphy may need a new strategic plan when this happens.?

Meanwhile, the CEO of Aldi UK, Giles Hurley, will also need to consider how to prevent people reverting back to the ‘Big 4’ after the current crisis in over, as has been the case in some previous periods of financial pressure, such as after the 2008 economic crisis.?

Dewi Lloyd, January 2023