China Food

Aldi, the king of Discount: depression and desire


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My mother once told my brother, the founder who came back from the war and took over the grocery store: the worse the situation, the better our life.

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Core content

1. Aldi achieves low prices by simplifying services, departing from aesthetics, selling its own brands and streamlining SKUs.

2. Why was the hard discount store born in Germany? Why is Aldi “acclimatized” in the UK market?

3. Aldi keeps pace with it in the UK and US markets and its localization strategy in the Chinese market.

Market worries about inflation, interest rates and potential economic recession have made us stocks volatile. On May 20, the stock market once fell into the bear market area, which is a symbolic sign that investors are deeply pessimistic about the health of the global economy and the purchasing power of American consumers.

△ as of May 20, the s&p 500 has fallen for seven consecutive weeks, and a bear market is imminent (source: refinitiv)

 

The sell-off started in technology stocks and then eroded into areas outside of technology stocks. In addition to the fact that the inflation crisis makes consumers stay away from non necessities and “cancel subscriptions”, and the DCF formula makes interest rate hikes change the valuation of growth stocks, Robert Cantwell, portfolio manager of Upholdings, commented in an interview with Bloomberg, “this is a good time to sell losers, or” losers “, and turn to holding recession resistant enterprises such as cloud technology”. Peloton, a streaming media distance sports course company, was named by Cantwell because it fell into the list of “failed stocks” – enterprises that previously relied on “potential market size” to gain market favor often involved high marketing costs. In a bad macro environment, the cost of customer acquisition would only become more and more expensive.

 

This is confirmed by the continuous heavy losses suffered by growth stocks. On May 24, the share price of the parent company of snapchat, a social media application, plummeted by 43%, below the issuance price of $17, the largest one-day decline in history. Snap’s “failure” has dragged down social media companies including meta and alphabet. As social media companies rely heavily on digital advertising, the market value of the industry has suddenly evaporated by $160billion.

△ on May 24, snap crashed the stock market after the warning of “macroeconomic environment” (source: Yahoo! Finance)

 

Goldman Sachs pointed out in its recession manual recently distributed to its users that in the 12 months before the economic recession, the market performance of defensive and high-quality stocks was often better than that of other types of stocks. During the economic recession, the consumer goods sector was listed as “outperforming the market”. However, even one of the most defensive sectors in the US market cannot avoid the storm. The latest financial report data released by Walmart and target indicate that the sharply rising costs are eroding the profitability of American Enterprises – which has become the core of investors’ concerns.

 

On May 17, Walmart’s share price plunged 11% after releasing its first quarter profit, the largest one-day decline since 1987. The next day, Walmart continued to fall by 6.79%, while target exploded after releasing the company’s first quarter financial report. After target’s profit fell by an astonishing 52% in the quarter, the company’s share price plummeted by 25% and suffered its worst day in 35 years.

 

In the context of inflation crisis, the ability to successfully transfer the rising costs to consumers has become an important indicator to evaluate retailers, and the profit margin is the focus of the market.

 

Since the outbreak of the new crown epidemic, hard discount retailer Aldi, the “beneficiary” of the inflation crisis, has gone against the current and is accelerating its expansion process. According to the survey data released by Jones Lang LaSalle in March this year, grocery retailers are one of the biggest winners in the post epidemic era. In 2020, the groceries industry achieved a growth rate of 9.4%. In 2021, the total sales of groceries reached US $803billion, an increase of nearly 16.0% over the pre epidemic level. Industry participants reinvest the proceeds for store renovation, digital technology innovation and market expansion.

 

The Datex report shows that the new grocery leases in 2021 increased by 200% compared with the same period in 2019. Among them, Aldi is the most active grocer in terms of active expansion in 2019 and 2020, ranking first in the list of new store openings. In 2021, the company was the chain grocery store brand with the fastest growth in the number and area of stores in the United States. The crazy expansion pace since the outbreak of the epidemic makes Aldi leap to the third largest grocer in the United States with 2158 stores, second only to Kroger and Walmart.

△ in 2021, Aldi, the grocer with the fastest growth in the U.S. market (source: JLL Research)

△ ranking of grocers in the US market in 2019 (source: CNN)

 

How do German hard discounters gain price advantage? Why can Aldi and lidl achieve decisive victory in overseas markets? Where does pragmatism come from?

Low price strategy: simplified service, SRP, private brand, simplified SKU

 

Aldi reduces the shopping experience of consumers in an undisguised and extremely efficient way.

 

The company can always beat Walmart in low-cost games. Aldi claims that its price is 50% cheaper than that of traditional supermarkets. Wolfe research’s independent analysis shows that in Houston, Chicago and other markets in the United States, Aldi’s price is about 15% lower than that of Wal Mart.

△ price comparison of a basket of 40 common commodities between American Aldi and Walmart (source: CNN)

 

American customers who first know Aldi may be shocked by the shopping experience with different styles – shoppers need to use coins to “rent” a shopping cart. Plastic bags and paper bags are not free. The cashier urges shoppers to leave and pack their own bags when checking out. In fact, the low price of goods is largely due to the lack of services. However, consumers are willing to endure various unusual “inconveniences” for this. Ardent followers of Aldi even set up a 50000 member facebook fan group named Aldi nerd.

 

“Poor service” has improved Aldi’s efficiency and reduced labor costs. Coin operated shopping trolley, that is, the application of coin mechanism in shopping carts, enables consumers to take the initiative to put used shopping carts neatly back in the queue, while embedding the “self bagging” link in the consumption journey makes it possible to check out efficiently. The autonomous packing area is usually located between the checkout counter and the exit. When checking out, the cashier will put the goods directly back into the shopping cart, and the customer will pack the bags independently in the area.

 

In the UK, Aldi trained cashiers can remember the price of each item in the store, and their checkout speed is so fast that shoppers have experienced Aldi panic, or “Aldi panic” – consumers are worried that they may not be able to pack goods quickly enough. In this regard, the guardian commented that “for Aldi, panic and hurry are an indispensable part of the shopping experience”.

△ consumers’ unique Aldi shopping experience usually begins with coin operated shopping carts (source: Reuters)

△ after checking out, consumers enter the independent packaging area (source: CNN)

 

Aldi publicizes the concessions it has made in service to further strengthen the low-cost image of the brand. In fact, in the 1980s and 1990s, some U.S. grocery stores tried to launch coin operated shopping carts, and then gave up because they annoyed customers. However, Aldi has never wavered in this model since it entered the US market in 1976. The company insists that this system is the key to the implementation of the low price strategy, and often introduces the “25 cent key chain”, which is loved by die hard fans. It even makes its own Aldi quarter keeper to store coins.

△ 747 “Aldi quarter keeper” search results (source: Etsy) are currently displayed on the handicraft finished product platform Etsy

 

Aldi’s simplicity is not limited to store design. The independent packaging area and coin operated shopping trolleys reduce labor costs and optimize production efficiency in the “checkout” and “after-sales” links respectively, while shelf ready packaging (SRP), that is, the packaging design of “instant shelf”, reduces labor costs in the “shelf” link of commodities. SRP enables items to be directly put on the shelf without unpacking or repacking.

△ Aldi SRP (source: WSJ)

△ Aldi’s simple consumption experience (source: Financial Times)

 

Employees of traditional retailers always have a clear division of labor, while Aldi employees often receive “cross training” and have several jobs, although SRP simplifies employee responsibilities. In addition, the vast majority of Aldi stores do not disclose phone numbers, and the company does not want employees to spend time answering phones. Therefore, Aldi single store may only have 3 to 5 employees, and the entire payroll has only 15 to 20 employees.

 

In addition to poor service and plain visual experience, Aldi’s low-cost model also benefits from streamlining SKUs and private brands. Aldi’s U.S. stores usually have only 5 to 6 ultra wide aisles. Compared with about 40000 SKUs in traditional supermarkets, Walmart has more than 100000 kinds of goods, while Aldi has only about 1400 kinds of goods.

 

According to the guardian, Aldi stored only 600 basic commodities when it started business in the suburb of Birmingham Stratford in April, 1990. At that time, traditional British retailers Tesco and Sainsbury offered thousands of products and brands in their stores. This number has tripled since the early 1990s. By 2019, Aldi’s SKUs in the UK market have expanded to nearly 2000. Compared with more than 25000 commodity categories in large supermarkets in the regional market, Aldi’s SKUs are still extremely simplified.

 

The author believes that this may be due to the consideration of reducing production costs – after all, in a batch of goods with the same quantity and quality, the fewer the types, the easier it is to realize the scale effect; The more diversified the commodities, the higher the production cost.

 

In addition to a very limited choice of goods, more than 90% of the goods sold by Aldi are private brands. The upstream of traditional retailers is usually brands and channels, while Aldi has abandoned the price increase link of layers of middlemen. Through direct connection with the source manufacturer of the industrial chain, Aldi can reduce the cost of goods circulation to the extreme.

 

In order to avoid the price war caused by highly homogeneous competition, goods are usually accompanied by brands. Price war means losing both sides, and brand ability is the key to establish commodity differentiation. However, Aldi replaced “originality” with “plagiarism” and scoffed at the creation of “brand premium” – in the market where brand is the mainstream business form, the absolute low price is Aldi’s differentiated positioning. The packaging of Aldi’s own products is often similar to that of mainstream brand products, which saves the company huge expenses involved in brand establishment and maintenance.

△ for example, Aldi honey nut crisis oats is the same as honey nut cheerios of general mills, and it is difficult to distinguish the true from the false (source: CNN)

 

Why does Aldi sell 90% of its own brand goods instead of 100%?

 

The reason why Aldi still reserves 10% of the product share for other brands is that for a few products, the consumption drive of customers is dominated by brands. According to a report released by stern in 2002, Haribo’s gummy bear is so popular that once the product changes its name, customers will stop buying it. After Aldi Nord’s attempt to rename Haribo mix “colo Rado” to “casino mix” failed, the product quickly recovered its original name.

 

From the service process to the commodity itself, pragmatism has penetrated into Aldi’s DNA. Even the “plagiarized” packaging design has undergone Aldi secondary innovation, and the driving force of innovation is to reduce costs and improve efficiency, which is contrary to “Aesthetics”. The barcodes of Aldi’s own commodities are either oversized or printed on multiple sides. The convenience of scanning can further improve the checkout efficiency. Richard Hyman, a British Retail expert, once said, “when you leave the store, Aldi ensures that you don’t pay any price for aesthetics”.

 

In fact, Aldi consumers are willing to make sacrifices on “choice” and “service” and are not willing to pay for the brand premium. In addition, Aldi’s minimalism in product selection saves consumers time. After all, under the demand of pragmatism, customers are not eager to select the most intoxicating brand among the 50 different ketchups. People only patronize Aldi to get cheap ketchup.

 

The “efficiency improvement” brought about by limited commodity selection is two-way. It can accelerate the customer journey or improve the floor efficiency of Aldi – the single store area of Aldi is far smaller than that of traditional supermarkets. According to CNN, among major U.S. retailers, Walmart’s supercentre has an average area of about 178000 square feet, Costco’s warehouse has an average area of about 145000 square feet, while Aldi’s small box stores have an average area of only 12000 square feet. The significance of reducing the size of a single store lies in reducing the rental costs of real estate and labor costs.

“The worse people are, the better our lives will be.”

 

After Aldi first entered the U.S. market, it took 20 years to expand to 500 stores, and this number has increased to 2158 last year. According to JLL data, the German retailer opened 88 U.S. stores in 2021 alone, adding a total of more than 2.2 million square feet of store space. The company plans to open about 150 new stores this year.

 

The leap of Aldi in the post epidemic era may be related to the inflation crisis in the US market. However, according to the financial times, the COVID-19 once slowed down the growth of Aldi and lidl in the UK market. “Due to the lack of online supply, the range of product choices is limited, and customers prefer traditional supermarkets.”. Now, with the relaxation of epidemic prevention restrictions and the worsening of the cost of living crisis, German hard discount stores are recovering, and Aldi and lidl may accelerate their growth with the increasing pressure on household budgets.

 

In fact, pragmatism is the soil for hard discount stores to survive, and consumption power is always closely related to pragmatism. Aldi grows savagely whenever people are in distress – for German hard discount stores, “pain” is the “nutrient” to promote their growth.

 

The reason why hard discounters appear in Germany rather than other countries may be related to the devastating impact of war on the economy. From 1900 to 1960, Germany experienced three dramatic economic recessions. Although it is difficult to trace the economic data of Germany before the end of World War II, a few retained data show that the economic downturn is the characteristic of the post-war economy.

 

The first World War from 1914 to 1918 reduced Germany’s per capita GDP to 73% in 1913 in 1919, and Germany’s industrial production fell back to the level of the late 1980s. In 1923, the “double spiral of wages and prices” brought about hyperinflation. Monetary stability was not realized until Germany introduced monetary reform. In the same year, the per capita GDP rose to 81%, and in 1925 the figure rose to 96%. It was not until 1927 that the German economy recovered to its prewar level.

△ German economy from 1951 to 2014 (source: godmode trader)

△ Germany experienced three economic recessions in the 20th century (source: godmode trader)

 

“Eliminating the structural consequences of war” means not only reintegrating returning soldiers into the workforce, thereby transforming wartime production into a peacetime economy, but also “fighting hunger”. In fact, due to the “large-scale distortion” of the international market and global protectionism, the world economic growth after the first World War was generally weak.

 

From 1924 to 1929, the economy and politics were relatively stable, which was called the “golden 1920s” of Germany. However, the economic recovery that began in 1927 was soon interrupted by the outbreak of the great depression in 1929. The great depression in the United States triggered a global economic crisis. From 1929 to 1932, the global GDP was considered to have decreased by 15%. Among them, the industrial output value of Germany and the United States decreased by 41% and 46% respectively, the foreign trade decreased sharply by 61% and 70%, and the unemployment rate surged by 232% and 607%.

△ per capita income of countries from 1925 to 1940 (source: Angus Maddison, Barry Eichengreen)

 

In 1932, the unemployment rate in Germany was close to 30%. It was such a tragic economic situation and livelihood issues that gave birth to the Nazis and Hitler came to power. The Treaty of Versailles, which Germany was forced to sign after World War I, and the German economic recession had a decisive impact on the outbreak of World War II in 1939.

△ unemployment rate in Germany from 1925 to 1995 (source: FES Library)

 

However, the devastating impact of the war on the German economy was amplified after the end of World War II in 1945, far exceeding the consequences of the previous two recessions – after the war, the German economic output was considered to have dropped by about 70%, the German people were extremely poor, and the quality of life fell to an unprecedented level in a century. It took nearly ten years for the German prisoners of war to return. As the food supply of East Germany under the control of the Soviet Union was cut off, the agricultural output of West Germany decreased, and the food supply obtained from the former “conquered” territories also ended, and the food supply was always in short supply. High inflation has lost 99% of the book value of savings and debt, and the black market distorts the economy.

 

Aldi’s obsession with frugality came from Theo and Karl Albrecht, the early owners of the company, who took over the family grocery store in Essen, Germany, in 1946. Under the background of post-war German economic situation comparable to disaster, pragmatic consumer demand was born in hunger and cold, and Aldi grew in chaos.

 

Trapped by the realistic factors on the supply side, the early Aldi products had few types. Lacking funds, the brothers have only stored a small amount of basic materials such as spaghetti and soap, and plan to expand their supply later. However, they soon realized that stores could successfully sell basic products with a narrow range of choices. “If we don’t want to provide customers with a wide range of products, then we must at least have other advantages. Since then, our products have sold significantly cheaper.” according to a book written by Dieter Brandes, former manager of Aldi, and his son Nils, Karl recalled in 1953.

 

Karl believes that the basic principle of the store is “narrow product range and low price, and the two are inseparable”. The company was later named after Aldi, which was derived from the abbreviation of Albrecht diskont. Albrecht is the family name, and diskont is the discount. In fact, this principle was the strategy adopted by her mother Anna when she opened this small grocery store in West Germany in 1913 – just before the outbreak of World War I in 1913, which means that Aldi has been in a recession since its birth.

 

According to an article first reported by the Aldi brothers, mother Anna once told her son who returned from the war and took over the low-cost grocery store, “the worse the situation, the better our life will be.”.

 

Besides Aldi store, Theo and Karl’s pragmatism is also related to the background of the times. The two brothers were born in the early 1920s and were conscripted when World War II broke out. Karl was wounded on the eastern front and later captured. Theo fought in Rommel’s African regiment and was captured in Italy in 1945.

 

The relevant public information of the founder of Aldi is as limited as the efforts made by the brand in store decoration. In 1971, Theo was kidnapped and ransomed. Some media attributed the brothers’ attention to privacy to this unfortunate event. Similarly, Schwarz Gruppe behind lidl is famous for his reticence. Founder Dieter Schwarz avoided the public eye and left few photos.

 

A widely circulated story about the Albrechts family is that the brothers divided Germany into two “fiefs” in the north and south. The dividing line between the north and South markets, Aldi limes, is often called “Aldi equator” by people.

 

The company was divided into two independent group companies in 1961. Headquartered in Essen’s company, it developed into Aldi Nord (Aldi Einkauf GmbH & Co.), which was controlled by Theo; The company headquartered in M ü lheim later developed into Aldi s ü D (Aldi s Ü D dienstleistungs se & Co.), which was managed by Karl. Some sources attributed this to a disagreement triggered by the question “whether cigarettes should be sold”. Therefore, an effective way to judge stores is Aldi Nord for stores with cigarettes at the checkout, and Aldi s ü D for stores without cigarettes.

 

Despite the differences, the northern and southern empires cooperated – they were transparent and often copied success stories from each other. Most of the time, Aldi s ü D takes the lead and Aldi Nord follows.

 

It is worth noting that the brothers not only “divided” the north and South markets in Germany, but also divided the global territory outside Germany into two markets. Aldi Nord operates in Denmark, France, Benelux, Portugal, Spain and Poland, while Aldi s ü D operates in a broader market including Ireland, the United Kingdom, Hungary, Switzerland, Australia, China, Italy, Austria and Slovenia. The United States is the only country except Germany where both exist. However, Aldi s ü D has been able to appear in the public eye “openly” as Aldi brand, while Aldi Nord only appears as Trader Joe’s brand.

 

Aldi’s international expansion began in 1967, when Aldi s ü D acquired Hofer, an Austrian grocery chain. Since then, Aldi Nord opened its first overseas store in the Netherlands in 1973. In 1976, Aldi s ü D opened its first store in Iowa. In 1979, Aldi Nord acquired trader joe’s.

△ Aldi Nord vs. Aldi s ü D (source: Manager magazin)

“Economic recession” cannot be avoided away from the flames of War:

Pragmatism resurfaces

 

There is no doubt that post-war economy is closely related to pragmatism, but how can hard discount stores survive in peacetime?

 

In fact, political stability cannot be equated with economic stability – the sharp decline in consumption capacity caused by economic recession often leads to pragmatism. Besides war, the factors leading to economic recession also include but are not limited to the pure cycle of economic adjustment, the financial crisis caused by poor monetary policy, the public health crisis and other black swan events. The explosive expansion of Aldi in the US market in the post epidemic era is an example.

 

According to the world bank, in 1995, the German economy fell into a new round of recession. A report issued by the economic and Financial Affairs Council of the European Commission in 2002 attributed the recession to the sharp rise in German wages and the obstruction of German export growth caused by the Mexican currency crisis, and the sharp depreciation of the German currency. Just as the economy gradually eased, an external shock once again pushed Germany into the abyss of recession: the Asian financial crisis. Thus, from 2000 to 2001, Germany’s GDP was at the bottom. Aldi welcomes the opportunity of the times again.

△ German GDP from 1970 to 2020, measured in US dollars (source: the World Bank)

△ from 1991 to 2001, the number of employed people in Germany was initially 100, and the employment rate in East Germany was particularly miserable (source: European Commission)

 

The economic downturn is always accompanied by the prosperity of hard discount stores, which makes Aldi among the richest people in the Forbes annual list in 2002. Karl and Theo Albrecht ranked third in the list, followed by Bill Gates and Warren Buffett. At that time, Aldi expanded at an amazing speed. A report released by stern in December of that year attributed this to the rise in prices. “Almost everyone now goes to Aldi”.

 

In fact, a survey conducted by FORSA, a German market research institution, found that “in the past 12 months, the number of customers of Aldi has increased by 20%”. Among them, 95% of blue collar workers, 88% of white-collar workers, 84% of civil servants and even 80% of German self-employed workers have become customers of Aldi.

 

It is worth noting that among the customers who “visit Aldi once a week”, the self-employed who represent the high-income group account for as much as 49%, ranking first. The author speculates that this may be related to the “wave of bankruptcy” brought about by the economic crisis.

 

Alcohol has become one of Aldi’s hot selling products. Stern described the consumption behavior in this period as “extremely frugal men can only open a bottle of champagne Veuve Durand champagne at the current price of 9.99 euros, and people with higher incomes can put it into the trunk of luxury cars”.

 

In the new century, Aldi still does not have a public relations department or an advertising department. Its footnote has continued for decades, “if these goods are sold out too quickly in a carefully planned quantity, we request your understanding”. The special day is arranged on Wednesday in northern Germany and on Thursday in southern Germany. Customers always queue in front of the store to wait for Aldi to open. People firmly believe that Aldi is always the cheapest, although this recognition is sometimes broken by the “catch up” lidl.

 

With its amazing turnover rate, Aldi ensures that the food it sells is always “the freshest”. In addition, all products that score lower than “satisfactory” in Stiftung warehouse will be eliminated immediately. This rule forces producers with poor performance to re develop satisfactory products. Aldi is so quick to respond to user preferences that it can be called a pioneer of “agile production”.

 

Aldi and sheen are both beneficiaries of the flexible supply chain. The only difference between them is the difference in the application of digital technology in different times. Sheen realizes “real-time” data collection and product testing through computers, while Aldi realizes intermittent data collection and product testing with high frequency manually.

 

In fact, Aldi has long practiced lean management and is a pioneer of JIT (just in time) inventory management. The company requires the manager to continuously improve the process, which is very similar to Kaizen in the business philosophy of Japanese manufacturers. In the book, Dieter and Nils brands believe that Aldi’s support for Kaizen, its lean management structure and JIT inventory management method make it the most “Japanese” company in Germany.

Growing in chaos, wandering in prosperity:

New to the British market, Aldi is “unable to move forward” under the background of economic prosperity and class consciousness

 

If “the worse people’s situation, the better our life”, then the better people’s situation, the worse Aldi?

 

Aldi entered the UK market in april1990. Its first store was located in the suburb of stechford, Birmingham. However, for a long time, it was difficult for the company to show its strength in the British market. This situation was not improved until the economic and financial crisis broke out in 2008.

 

At first, the store only stored 600 basic commodities. For consumers who habitually patronize Tesco and sainsbury’s, Aldi’s product selection range is frustrating. It is widely believed that Aldi is doomed to failure because the British market is obviously “snobbish” and disdainful of the concept of discount stores. In addition, from traditional grocery stores to suppliers, the market is worried about Aldi’s “open aggressiveness” in terms of price.

 

“Other people in the industry hate us,” said Paul Foley, the third employee of Aldi UK. Foley served as CEO from 1999 to 2009. “It is said that we are called parasites, leeches and ‘locusts landing on the coast’… Which means that no one will help you – no one is willing to provide you with rented space or sell products to you.”.

 

At that time, the profit margin of supermarket giants in the British market was as high as 7%, ranking first in the world. Sainsbury’s said that Aldi lacked services, which was crucial for UK customers. In 1999, when Walmart acquired Asda, the third largest grocery chain in the UK, the financial times pointed out that Aldi “has little impact on the UK” because British customers are not as “price sensitive” as Americans or Europeans. “As a rich country, the vast majority of British citizens are not willing to compromise on food,” Foley said. It is very important for hard discount stores to realize this. The products developed by Aldi need to compete with the “brand”.

 

As we all know, German consumers push pragmatism to the extreme – Saturn, the electronics retailer giant, even regards “thriftiness is sexy” as a slogan. Up to 2009, 20 years after Aldi entered the UK market, its market share was still only 2%, while the German “imitator” lidl, which entered the UK market shortly after Aldi, had a similar market share.

 

Moreover, the UK is a high wage economy by global standards. This means that labor costs account for a large part of supermarket operating expenses. Hard discount stores have an absolute competitive advantage. Not opening delis and avoiding marketing make Aldi put into operation with a lower number of employees. In all Aldi UK stores, the most important performance measure is “revenue divided by employee hours”.

 

The guardian pointed out that at the beginning of this century, “self-identity cognition in terms of class and status” had a decisive impact on consumption decisions. In 2004, Peter Jackson, Professor of human geography at the University of Sheffield, pointed out that British shoppers seem to want an environment “surrounded by people like themselves”, which makes them feel comfortable. It is reported that in the plot of Alan Bennett’s “talking heads” drama, an elderly woman sarcastically mocked and hinted that tesco’s customers were “ordinary people” who were coarser than sainsbury’s shoppers – which subtly summarized the “obsession with class” of the British people and people’s almost tribal attachment and worship to specific supermarket brands.

 

“Waitrose exists for those who have two houses in chiantishire. Asda is suitable for those who desire to have two houses anywhere but may never have them; lidl is suitable for those who have never heard of chiantishire; marks and Spencer are open to those who have never heard of lidl.”.

 

Food writer Jonathan Meades points out that in Britain, social class can determine what a person eats more than in other regions. This situation is different in France. “The Masai workers and the Masai CEO eat the same food,” Meades said. “In the UK, the food of the workers at the Southampton construction site is very different from that of the site leaders.”.

 

Grocery consumption depends on class stratification. Reverse research found that professional social class A & B accounted for 47% of the shoppers in Waitrose, 34% in sainsbury’s, 22% in Marks & Spencer, 21% in Tesco and 17% in Safeway. Category D and e blue collars account for 72% of netto shoppers, 66% of Kwik save, 54% of lidl and 50% of somerfield.

 

“Successful people”, representing 9.6% of British families, are most likely to shop in Waitrose. Experian, a data analyst, said: “the cautious (choice) and low-key atmosphere related to traditional high-end brands is more attractive than the flashy consumption of nouveau riche.”   

 

Aldi and lidl are regarded as niche retailers and excluded from the mainstream market. The 2008 financial crisis overturned the industry. Inflation has soared, businesses have laid off workers, household incomes have been squeezed, and large grocery chains have raised prices in an attempt to maintain profit margins. “Consumers need to save money, but the big four supermarkets did not realize the challenge, but decided to profit from the inflation crisis,” said Clive black, research director of shore capital. “People are forced to try discount stores.”.

 

Consumers gradually realize that although Aldi is cheap, its quality is not as bad as they imagined.

 

With sales slowing, industry giants are looking for other ways to maintain profits. The standard practice of large grocery chains is to charge suppliers “brand listing fee” and “promotion service fee”. The premise of promotion service is that the product sales volume reaches a certain amount. Detergent manufacturers may pay hundreds of thousands of pounds to retailers to display the detergent in the best position at the end of the aisle. This strategy is said to increase sales tenfold.

 

Revenue from suppliers reduces the cost of selling goods, which is called back margin, or “post profit”, while revenue from promotional services is called front margin, or “pre profit”. It is reported that Tesco had 24 different ways to put pressure on suppliers and profit from them.

 

Due to Tesco’s desire to further increase the listing fee, the number of products on its shelves soared to 90000 in a short time, and the number of promotional activities also rose sharply. However, the average British consumer buys less than 20 items at the grocery store each time. They are confused by such a large range of product choices and fluctuating prices. More and more consumers are turning to Aldi and lidl. Some people just need necessities of life.

 

When the industry giants realized that the structural transformation had taken place, it was too late. “The big four are not just sleeping on the steering wheel,” said Clive black, research director of shore capital. The research director, “they are in a coma.”.

 

In fact, US retailers are facing similar problems in the past six months. As early as may 2021, Luke Templeman, a strategic expert of Deutsche Bank, pointed out that the panic buying of scarce inventory by American wholesalers due to the uncertainty of the supply chain may cause a “bullwhip effect”.

 

On May 20, freight waves published an article that pointed out that the “continuous expansion” of inventory is hitting the profits of Walmart, target and other retailers. According to the data of the US Bureau of statistics, the stock to sales ratio of furniture, household goods, electrical appliances, building materials, gardening equipment and “other general commodities”, including Walmart and target products, has risen sharply since November 2021, reaching the highest level since the eve of the global financial crisis and deflation. “The bullwhip effect may complete the Fed’s work in dealing with the inflation crisis. I doubt whether deflation is coming,” the author said.

△ stock to sales ratio of “other general commodities” in the United States from 2017 to 2022 (source: Freight waves)

 

Not every product will reduce prices, and the “bullwhip effect” of commodities will take longer to appear. However, once the positive “de Stocking” wave of retailers strikes, the “other general commodities”, including Walmart and target, will face the risk of price collapse, which will lead to deflation.

△ CPI comparison between the great depression in 1929 and the financial crisis in 2008 (source: New York Times)

How to avoid withering in prosperity:

Localization and image upgrading of hard discount stores

 

For Aldi, a healthy macroeconomic environment is obviously the biggest challenge. However, the recovery of the financial crisis does not seem to prevent hard discounters from continuing to seize the British market.

△ left figure: from 2011 to now, only Aldi and lidl have achieved satisfactory growth; Right: changes in market share of British grocery stores from 2011 to before the new crown crisis (source: Kantar world panel)

 

By 2017, Aldi had surpassed co OP to become the fifth largest retailer in the UK; In 2019, Aldi had a market share of 7.5% in the UK, second only to 10.6% of Morrisons, the fourth. Lidl has a market share of 5.3%, surpassing Waitrose. As Paul Foley, former CEO of Aldi UK, said, “take the profitability away from the industry” – as of the outbreak of the COVID-19, a profit margin of 2-3% has become the norm in the market.

△ profit margin of Aldi extrusion industry (source: Financial Times)

 

Hard discount stores have thus become industry disruptors. Morrisons closed many stores and laid off staff. Sainsbury’s and ADSA cut costs and lost market share. Tesco reduced SKU, acquired discount wholesaler Booker, and launched discount chain jack’s in september2019.

 

The reason why Aldi maintains its growth trend may be related to its changing customer insight and positioning. “Ten years ago, we had 900 product lines, and now we have 1800 product lines,” Jonathan Neale, a store employee, said in 2019. “This is not because we are trying to become the four major retailers, but because the tastes of consumers have changed. We are managing the balance between what customers want and the cost.”.   

 

In the 1990s, Aldi focused on the central region and northern England, where the store rent was cheaper and the customers were not so rich. The store location was deliberately far away from London and the southeast. Today, Aldi is more and more focused on entering richer areas in the southeast, including Sevenoaks in Kent, where there is a Lamborghini dealership and two Waitrose. In fact, lidl has opened a store in the region. This phenomenon shows that the “consumption sociology” of German hard discounters in the British market has undergone a complete transformation.

 

In fact, this change is somewhat similar to the situation in the US market in recent years. CNN pointed out in an article released in 2019 that Bain data showed that since 2017, new stores started by Aldi have concentrated in the more densely populated upper middle class suburbs. The average household income of consumers in these areas is $65822, about $4500 higher than the national average. Mikey vu, partner of Bain & company, said, “Aldi obviously wants to win more high-end customers.”.

 

In addition, according to the bain customer survey, 85% of U.S. shoppers said they were willing to try their own brand products. “Aldi products used to be labeled counterfeits. It was embarrassing to buy them, but they were very cheap,” Vu said of the store brand. Now, “people no longer care about big brands as before”.

 

The author believes that economic recession has weakened the “collective” consumption ability, and economic prosperity does not always mean the improvement of the consumption ability of “individuals” or specific “classes” — whether the life of the working class has been substantially improved depends to some extent on the deterioration of the gap between the rich and the poor.

 

Since the 1970s, it is difficult to rule out the possibility that the prosperity of capitalist economies dominated by the Neo liberal left-wing trend of thought is mainly driven by the surging income of the rich class. The statistical data released by the US centre on budget and policy priorities confirm this assumption.

△ actual household income in the United States from 1947 to 2018, based on 1973 (source: CBPP)

△ the gap between the rich and the poor in American society has been widening since the 1970s (source: CBPP)

 

According to the New York Times, the gap between the rich and the poor in the United States is widening, and its recent surge can be traced back to the major changes in the way the United States fought against economic recession after 2008. By early 2021, the richest 1% of Americans owned 32% of the country’s wealth, the highest level since records began in 1989. At the same time, the lowest 50% of the people have only 2% of the national wealth. This new record comes from the huge economic stimulus and the lowest interest rate for more than a decade. The Federal Reserve controls the flow of money, but only to the rich.

△ comparison of top 1% vs. bottom 50% changes in US social wealth from 2008 to 2021 (source: New York Times)

 

The overall improvement of Chinese consumers’ income level weakens the pragmatic demand, which means that it is difficult for Aldi to completely copy the hard discount store model in major overseas markets – to enter the Chinese market with the advantage of “low price”. In june2019, China became the 11th market for Aldi s ü d to open independent stores. This news was released only a few weeks after lidl closed its China online business. In fact, as early as april2017, Aldi has entered the tmall global platform to sell groceries and non groceries. This may be one of the ways for the company to collect the consumption behavior data of local users and judge the consumption trend of the market.

 

Aldi’s brand positioning in the Chinese market is much higher than that in the overseas market. Aldi’s online data show that groceries, including organic food and imported products, are very popular with Chinese consumers, which prompted Aldi to decide to establish a more high-end brand image. NHH said that the brand may be mainly aimed at Chinese consumers who “want to buy Western products at a more affordable price”.

 

Against the backdrop of high inflation in major Western markets, Aldi may usher in explosive growth again. Although the core PCE growth rate of the United States dropped slightly in April, and the US equity market has warmed up in recent weeks, the global food trade protectionism has intensified, which may further push up the prices of food importing countries. At that time, the further deterioration of consumer confidence and spending power may make hard discount stores win more consumers’ favor.

作者:Valerie Lin;来源:元气资本(ID:yuanqicapital),转载已获得授权。
转载授权及媒体商务合作:Amy(微信号:13701559246);
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