Aldi and Lidl: International Expansion of Two German Grocery Discounters"
Aldi and Lidl: International Expansion of Two German Grocery Discounters"
Aldi and Lidl: International Expansion of Two German Grocery Discounters"
Fawaz Baddar
MARZENA SOLOWIEJ
M00321025
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TABLE OF CONTENTS:
1. INTRODUCTION 2
2. MAIN BODY: 2
DISADVANTAGES ....................................................................................................
.........................2
ii) THE RATIONALE BEHIND ALDI STRATEGY TO IMPROVE ITS IMAGE IN THE UK AND
2020........................................................................................................................9
3. CONCLUSION 11
4. RECOMENDATIONS 11
5. APPENDICES 13
6. LIST OF REFERNCES 17
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Introduction:
The purpose of this report is to investigate the internationalization process of two
German grocery discounters. First section will analyze the reasons behind chosen Greenfield
emphasize the advantages and disadvantages of this entry mode. Second part will examine
the marketing approach undertaken by Aldi with associated risk. Moreover I will try to
explain why Aldi and Lidl chose different expansion strategy and finally I will provide my
recommendation for Lidl geographical presence strategy until 2010 supporting my point of
view using PEST analysis. All these analysis will be supported by using the variety of
Main body:
Both companies’ owners started their businesses as small family shops and changed them
into groceries discounters. The success of this idea, lead to a rapid expansion first within
the country and afterwards abroad. Aldi’s as well as Lidl’s internationalization strategy
opted for a long term investments not for a quick increase of the cash flow or revenue. They
carefully look for the new markets where they could establish a strong position for their
establish a presence in a new market. It has to date only entered those markets where the
established” (IGD supply Chain analysis).The wide scale of the countries they operate in
could lie in German business culture as it is deal focused and open to do the business with
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strangers without ‘knowing’ the future dealer. This kind of thinking could fasten the
expansion as well. The Greenfield strategy they have chosen allows the owners to build
their business vision and be in total control over the company (Lee and Carter 2009). It is
easy to understand why the privately own companies chose this form of entry mode.
Moreover it allows the discounters such as Aldi and Lidl to achieve very important factor
such as purchasing power and experience in own label (Colla 2003). The stable financial
situation of Aldi and Lidl indulged them to take the risk associated with this approach. They
had to invest large amount of money to establish their presence in a foreign country by
building stores and manufacturing facilities. On the other hand in most cases direct
investment let the grocery discounters to save money by looking at the lower costs of
labour, raw materials (Mullins 2005). That is another reason why the “organic” approach is
in this situation appropriate as it is bond with the company objectives and strategy to keep
Advantages Disadvantages
total control over the company Expensive research
long term investment Slow speed of entry
producing “locally” build trust of new Huge losses in case of withdraw
customers and help with product Adaptation to different laws, rules,
adaptation economies, politics within the host country
better after- market service could be difficult, expensive and time
greater potential profits consuming
help from host country government could “Restricted or devalued currencies, falling
be available when entering developing markets government changes” (Mullins
countries as building and running plants, 2005)
shops creates a lot of jobs
However it is necessary to analyze the advantages and disadvantages of this concept
to truly understand the rationale behind this decision. The table below present them in a
clear form.
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When choosing the entry mode it is very important that the overall strategy and
companies objectives match. The advantages stated above fit perfectly for the Aldi and Lidl
concept of making a privately own “family business” international. The disadvantages in this
case don’t have that much influence on choosing the entry mode as it has been proven that
both companies successfully learnt how to lessen their impact by gaining the competitive
suppliers.
It is not surprising then, that the internationalization on that scale brings Aldi as well as Lidl
many problems related to the customer behaviour in different cultures. In this section I
would like to clarify the reasons why Aldi had to offer a higher level of customer service to
According to Colla 2003 the retail business slowed its growth in Europe from 1995 to 2000;
however countries such as Switzerland and UK were the exceptions. I believe that the
attractiveness of these markets did not stop the retailers from competing and trying to gain
as much market share as they could in order to increase their profit. The Swiss retail market
before 2005 was dominated by two companies Migros and Coop (75 % of the entire
market). In Germany by contrast five retailers hold only 62% of the market (Greber 2004).
Moreover the Swiss discounter Denner is constantly successfully expanding. The view put
forward above explains why Aldi had to take extra cautions to successfully compete with the
host country rivals. The German retailer kept the balance between standardisation and
product adaptation strategy, mainly opting for communication adaptation to persuade Swiss
customer of its attractiveness. However the unusual in store layout, cheap prices and very
low customer service were suspicious and generate the negative opinion about the quality
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of products. To changed that and meet customers’ expectation about the quality Aldi
launched the advertising campaign focusing on “Swiss quality guarantee” of their products
and services (Ellwood 2010).In addition to the previous argument why Aldi had to improve
their image in Switzerland as well as UK is that the both countries score very high on
masculinity dimension, that means that both countries expect more salary for fewer hours
(Parboteeah & Cullen 2011) and Aldi according to its salary system and practises has a very
bad reputation as it expect their employees to work long hours while performing very
efficiently.
Most of the arguments stated above also apply to the UK market. Aldi entered UK in 1990s
when food retailing industry has its ‘golden age’(in the late 1980s and early 1990s) and only
British retailers played a major role within the industry. The presence of Aldi store at that
time created a big threat to the three main retailers such as Sainsbury Tesco and Argyll
(Wrigley 1994). The competition rose and Aldi started to face problems with suppliers
because of the influence of the ‘big three’ companies. “A lot of pressure was brought to
bear on our suppliers in the UK to stop supplying Aldi, and when that happened I had a lot of
product withdrawn from sale. Fortunately, with our connections and buying power in
Because the German discounter operated in a niche market for people with the low income
the overall opinion about Aldi was that the company does not provide the quality products
and services. The same worries have been outline in Switzerland example above. The direct
competition and cultural values in Switzerland and UK forced the hard discount retailer to
increase their level of service to take the upper hand over the host country retailers (Colla
2003). In addition changes in customer service, product adaptation and marketing are
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related to visible change in Aldi’s international strategy that that will help expand their
market share by coming out of the niche market and trying to attract the customers from
other segments.
However, by applying those elements company is slowly coming out of the “hard discount
retailer” strategy. The changes with this particular approach are not that much visible now,
but looking in the future prospective Aldi could face many problems and risk associated with
this form of action. The reason why the German firm has succeed in that many countries is
that it kept the original prospect of hard discount retailer with “principles such as: simplicity,
high quality, frugality and confidentiality”. “Those principles have been translated into
1. Keep it simple
2. Strive to earn your customers' trust
3. Set clear goals and follow them rigorously
4. Improve details daily
5. Don't optimize, maximize
6. Know where you stand, but don't waste time on budgets and figures
7. Test now, perfect later
8. Be fair to your suppliers and help them improve their business
9. Practice management by trust and control
10. Talk in terms that people can understand
11. No matter how successful you are, stay thrifty and frugal “ (Sachon &
Mitchell 2009)
In most cases Aldi’s stores have now presents in centre locations, the marketing actions
increase and the company started to hire advertising agencies. As a result of that German
discounter started to be seen in outdoor advertising, television and other media. The
company does not provide only food anymore; it expanded their products to home
appliances, digital devices, flowers, verity of beauty house hold products and many more. In
addition company introduced new services such as Aldi travel, Aldi photo services, Aldi Talk.
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According to those arguments the difference in Aldi strategy is clearly visible. In addition
those elements could contribute to the price increase of their products, as for example
advertising mentioned before or rent in central locations is highly costly. In order to keep
the prices low Aldi could be forced to give up on quality at the same time losing customers.
In my opinion this is a main risk associated with this approach. On the other hand extended
product line “seems to be working, as 50% of Aldi's shoppers are now white collar (ABC1 in
the marketing jargon), and 55% of all households have now shopped in a food discounter at
some stage” (Lueck 2008). Moreover this could be an opportunity as the Aldi a financially
stable company can afford a long term losses in order to achieve a high position in food
retail industry while changing their strategy and become a leading supermarket not a
discounter. However this is only an assumption and it order that to happened more detailed
range of markets with the high costly entry mechanism (Burt 2008). The German discounter
North America and Australia). It enters the countries with the long term prospective;
prepare to grow with the host market. “You can’t go into an environment where successful
people have been operating for 30, 40, 50 years and expect to do it successfully in a very
short time. We are a different formula. We will be successful as well but that takes some
time. Eventually we’ll get our stores… because we are very long-term players.”(Michael
Kloeters, Managing Director, Aldi Australia, April 2000). According to Gielens and Dekimpe
(2001) and their study the main advantage in this type of approach is that the early entry to
the foreign country with substantial scale and individual strategy creates an advantage,
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higher performance and efficiency. In addition early presence helps with gaining larger
scope of the market share (Mullins 2005), building trust and relationship with the
customers. Expansion over different continents where the discount grocery retailing format
is not substantial, give Aldi the competitive advantage over other competitors and future
entrants. Yet the important point to note is that countries such as USA, Australia and
England are in the same societal cluster classification- Anglo Cultures (Gupta 2002). That
means they are similar in Power distance, Uncertainty avoidance, Individualism and
Masculinity (Hofstede dimensions). This could be a significant reason why Aldi decided to
explore and set up its presents in the United States and then while having a necessary
knowledge about the culture decided to enter UK and Australia. That strategy allows to
However, this pattern has not been applied when we take to a consideration all the
countries that Aldi has entered. Judged by the cultural criteria this could create many
position in foreign markets first while in most cases introducing the new form of retail “hard
discounter” could be very hard and time and money consuming. It that case the use of the
right advertising and marketing mix it seems to be necessary. Unfortunately Aldi’s hard
discount format seems to keep those actions to the minimum and that make breaking in to
the new markets very difficult and creates a disadvantage as the marketing strategy and
mode of entry are strongly connected. It should also been emphasized that Aldi’s strategy
mainly focused on already developed countries. That kind of approach narrows the
potential profit that could be made in developing markets, where population earn less
money and it tends to spend larger percentage of their salary on food. At the same time
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Aldi’s main competitor Lidl is using this advantage and position itself as a strong leader. In
addition Mature markets have demanding customers and offer a limited growth (Berman &
Evans 2007).
Leaving the Aldi’s strategy, this section will focus on my recommendation for Lidl
geographical presence strategy until 2020. Lidl is an excellent example of successful follower
as in some cases enter the countries just after ‘the pioneer’ Aldi (for example UK) and
expand rapidly gaining larger market share for example in Poland. In theories large
companies which adapt the followers approach often are trying to “displace the leader or at
least become the powerful competitor (Mullins 2005). Despite these criteria Lidl also
entered the developing countries as a pioneer. In my opinion this is a very clever strategy
and it seems to pay off in most of the cases. In order to think about the future expansion the
necessary.
-financial stability
-financial stability
-cost efficiency
-cost efficiency
-large number of stores (importance of convinience)
weaknesess
- wide expierience with dealing with foreign markets
-bad
-bad reputation
reputation as
as an
an employee
employee (Black
(Black Book
Book on
on th
th
-chepaer prices comparing with regular retailers Shwarz Retail Company)
(own brand + leading brands) -relatively
-relatively smaller
smaller market
market share
share (in
(in some
some countries)
countries)
--'soft discounter' format offers more variaty of products when
when compering
compering toto Aldi
Aldi
strenghts:: -not
-not attractive
attractive in
in store
store layout
layout and
and minimal
minimal customer
customer
service
-second or third position in most countries
SWOT
Opportunities
-reccession (is forcing customers to search for -
lower prices)
-The expansion of Lidl's main competitors
-further expansion to new markets
-the increase of stores
Threats:
-continue to increase quality
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The company’s strengths such as financial stability, attractive ‘soft discount’ format make
the further expansion possible. However, the external analysis of Political, Economical,
Societal, Technological factors (PEST analysis) is also necessary when choosing the new
market.
Taking to a consideration those facts I will recommend the further expansion to Australia
Politically stable (low risk involved associated with rapid changes in political
structure)
Economically stable (low inflation, relatively stable currency)
Already Introduced to discount format- more trust; increasing number of older
people with lower income (Appendix- Table 1) (Societal factor)
Technologically highly developed
Moreover the market share of discount retailers is constantly growing for example in New
Zealand by 24.5 % in 2008 (Datamonitor 2010). In addition New Zealand’s economy faced a
recession in a past few years (The World Factbook 2011) that fact has definitely made
‘discounters’ more desirable and needed as the population think carefully about their
spending, seeking for the most attractive price. According to those facts the Market
potential is large. However, Lidl could face a strong competition in Australia from
Woolworths, Coles, Kmart and Aldi (Table 4, Appendix). At the same time New Zealand’s
Foodstuffs as well as Australian company Foodland (the owner of three supermarkets chains
such as Countdown, Woolworths and Foodtown) play a major role in NZ grocery retailing
market share and could be hard to beat (Food & Drinks forecast 2005). In addition
Australian and New Zealand markets are to certain extend similar to UK one. In that case the
experience Lidl already have with English market could be used in those countries suggested
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before. In my opinion Lidl should enter Australia and New Zealand at the same time in few
years time, so that it could establish itself in New Zealand as a pioneer and a successful
follower in Australia.
Conclusion:
Constant grow of globalization lead two German discounters to further expansion. Aldi and
Lidl apply different internationalization strategies; however they are both very successful
creating high profit and revenue from foreign investments. Despite the fact that they mainly
opting for different strategies they both apply ‘organic growth’ as an entry mode, creating
even more profit. Their innovative approach to keep the prices as low as possible by saving
money in each sector of the company forced many international competitors to slightly
lower their prices too. In this situation customers worldwide benefit the most, as they can
purchase a higher quality product for the lower price. However, the tough competition leads
the two discounters to increase their marketing action (advertising strategies and product
adaptation), which changed the original concept creating many problems that could occur in
the future. Despite this threat in my opinion both companies should seek a further
expansion while trying to increase their market share in countries in which they are already
present.
Recommendations:
Taking to a consideration all the problems mentioned in this report that Aldi and Lidl had to
faced I will recommend for both companies to do not underestimated cultural differences
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and the power of suppliers and competitors. The future expansion should be undertaken
very carefully examining the firm financial ability as well as external factors of the host
country. Aldi and Lidl have to be aware of the constant changes in customers’ needs and
shopping habits. To stay ahead of the competitors I would advise them to launch a high
quality and value range so that they could compete with regular grocery retailers and attract
more customers. However, I will advice them not to vary they products as much as they
could lose they competitive advantage and discount status. Moreover in order to change
the customer perception about them being a bad employer, they should avoid any negative
scandals by treating they employees well. They right actions undertaken by both firms
should build the trust between them and customers leading to their loyalty and satisfaction.
As a final recommendation I would not changed they mode of entry as it is very profitable
and I would recommend them to focus they expansion in developing countries as well as
from my point of view they are the customers who are seeking for cheaper prices.
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APPENDIX:
Table 1
Source: Australian Governement, Projections of the number of Income Support recipients: 1999-2051 Retrieved from:
http://www.fahcsia.gov.au/about/publicationsarticles/research/austsocialpolicy/Documents/austsocpolicy_2001-
02/article3.htm
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Table 2
Table 3
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Table 4
Table 5
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Table 6
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