Question
Using the rubric below, create your written analysis paper in Microsoft Word (.doc or .docx file type). The format is a maximum of three pages long, single-spaced, 12pt Times New Roman font, one-inch margins, and appropriately titled headings for paragraphs. The inclusion of an Appendix (maximum of additional two pages) is optional. Points will be deducted for failing to adhere to any of these formatting requirements.
1. What problem or issue is the central focus of this case?
2. How do the five forces apply to this case?
3. What are the broader environmental factors affecting the industry?
4. What is the focal company’s current strategy?
5. How well do the focal firm’s resources or capabilities (e.g. competences) distinguish it from its competition as well as contribute to value creation?
6. What is the focal company’s competitive advantage?
7. What should the focal company do and what are the main reasons for your recommendations?
8. What are the financial performance implications for your recommendations?
Solution
Common Case Analysis
Since the launch of the first store in 1913, Germany, Aldi has established itself as a reputable and competitive grocery retailer in America by offering low prices for its high-quality products. Compared to its peers, Aldi continues to maintain a smaller footprint in terms of store sizes, which allows the firm to save significantly on real estate, energy usage, and taxes (Rawaswamy 6). Despite having a unique market strategy, Aldi’s low pricing tactic appears to be weakening, as larger stores are slowly integrating low costs in their business model, posing a significant threat to Aldi’s competitive advantage and expansion plans to Western U.S.
Application of the Five Forces
Porter’s five forces play a significant role in shaping the state of competition in the global grocery industry. As scholars suggest, a decline in industrial rivalry enhances the ability of firms to raise prices and generate higher profits (Pervan et al. 2). A similar situation is prevalent in the case study, whereby there exist threats of new entrants and fierce competition among market participants, thus forcing firms to lower their prices to secure a considerable market share and attract customers. The race-to-the-bottom pricing may explain why profitability has been on a downward trajectory in the retail industry.
The bargaining power of customers is also among factors that shape competition in the industry. As observed by Pervan et al., increased customers’ and suppliers’ bargaining power lowers firms’ profitability (2). As is evident from the case, consumers have immense bargaining power as they have several alternatives when it comes to choosing stores where they can purchase their groceries. The high bargaining power compels retailers to compete based on pricing to remain relevant in the market, a practice that lowers their profitability significantly. Contrary, suppliers in the industry have lower bargaining power as retailers have the ultimate control over their chosen suppliers. As such, firms can bargain for lower costs and translate the value to even lower retail prices and profits.
Competition in the industry also depends on threats of substitute products. According to Pervan et al., easy substitution of a company’s products weakens the power of the latter and eventually reduces its profitability (2). A similar situation applies in the case study, whereby retailers stock goods that are close substitutes. For instance, Aldi manufactures and stocks new products after testing them in its product-testing facilities. Notably, the firm’s competitors have been introducing similar versions of products manufactured by Aldi (Ramaswamy 8). Consequently, threats of close substitute forces firms, such as Aldi, to adopt a low-pricing model for their new products to remain competitive, which in turn poses the threat of lowering the firm’s profitability.
Environmental Factors Affecting the Industry
Apart from the five forces that affect individual firms, there exist major environmental factors that impact the industry as a whole. Among the most predominant is social change, whereby customers’ shopping habits and product preferences keep shifting. For instance, the case study reveals that customer preference is slowly moving from national labels to purchase of private labels (Ramaswamy 10). The change has a significant effect on the profitability and revenue generation of firms that rely considerably on national labels. Technological change is also among environmental factors affecting the industry. Notably, the significant shift to e-tailing and consumers’ preference for online grocery shopping poses a considerable threat to firms that have a limited online presence, such as Aldi.
Focal Company’s Current Strategy
Aldi’s current merchandising strategy is based on broad product assortment, a distinct focus on healthier products, a mix of store and national branded offerings, and value-based low pricing. Notably, the grocery store increased its fresh food offerings by 40% and expanded its product selection, thus enhancing its total Stock Keeping Units (SKUs) significantly (Ramaswamy 10). The firm’s strategy is also based on a unique focus on healthier products, a segment that attracts a large number of health-conscious consumers. In addition, Aldi’s current merchandising strategy focuses on a mix of store and national branded offerings. The firm has been stocking national brands, such as Old Spice and Cole, to complement store-brands. Value-based pricing also forms part of the company’s current strategy. In particular, the firm enters into short-term contracts with suppliers, a practice that enables Aldi to maintain cost efficiency during sourcing of products and translate the low costs into low retail prices. Notably, the firm selects products that it believes to be of the best quality and popular size and charges a considerable price (Ramaswamy 8). Analysis of its pricing strategy reveals that Aldi sets its prices primarily according to the value that each product offers to consumers.
Aldi’s Core Capabilities and Resources
Aldi’s has a myriad of resources that distinguish it from its competitors. Among the most significant ones is a smaller footprint compared to its counterparts. Notably, Aldi’s stores average 12,000 square feet compared to big stores, such as Kroger, with an average of 80,000 square feet (Ramaswamy 6). The smaller footprint allows Aldi to not only physically distinguish itself from its competition, but also cut on its operational costs, such as real estate expenditure.
Aldi’s human resources also distinguish it from its competitors. As observed by Ramaswamy (8), Aldi employs a skeletal cross-trained workforce comprising four full-time positions complemented by part-time staffing for stockers and cashiers. The retailer’s workforce differs from its competitors, who hire several employees to fill different positions. In Aldi, few employees are trained to undertake a wide range of activities in the retail outlets. The fact that the company has few cross-trained employees enables it to save significantly on administrative costs, and offer higher wages to workers, which in turn lowers employee turnover rate. Besides, lower operational expenses enable Aldi to translate its savings to lower-retail prices, thus attracting more cost-sensitive consumers.
Aldi’s store structure also distinguishes it from its competitors and creates value among consumers. Unlike other large firms that use shelves, Aldi stocks its products in display-ready boxes, which saves on time and labor expenses required to sort the products on racks (Ramaswamy 8). The use approach also helps consumers save time that may have otherwise been spent in trying to locate products on different isles. Furthermore, the store has a special area where customers can bag their groceries after receiving cashier-services at the checkout point. The service-delivery process creates value by saving time and money required to bag the products at the exit (Ramaswamy 7). Generally, consumers are assured of saving time for every stop they make at Aldi.
Competitive Advantage
Aldi’s competitive advantage emerges from its innovative business strategy of retaining limited product assortment. Notably, by having a carefully and purposely assorted number of SKUs, Aldi can purchase large quantities per product (Ramaswamy 7). In turn, the firm takes advantage of economies of scale and incurs lower costs for every voluminous purchase from its suppliers, which facilitates low retail prices for its consumers. Furthermore, the company’s limited product assortment requires less display space, which enables the firm to maintain a smaller footprint and save significantly on real estate costs and energy expenses. Aldi’s limited product assortment qualifies as a competitive advantage since few firms, if any, can maintain such a low SKU capacity and small store space. Statistics show that some of the retailer’s closest competitors have an average of 40,000 SKUs (Ramaswamy 3). Therefore, as long as Aldi retains a purposely sorted product offering, it will remain competitive against its counterparts.
Recommendations
As is evident from the case study, Aldi’s low-pricing strategy is much threatened by firms that are integrating the concept in their business strategy. It is also rumored that the retailer will delay its expansion into other western U.S. states as earlier planned (Ramaswamy 1). The rumored delays may signify difficulties faced by the business in attempts to enhance its geographical presence in an industry that is highly competitive and characterized by narrow profit margins.
Aldi should establish an online presence in the industry in order to expand its operations effectively and avoid the downward trajectories of growth and profitability. E-tailing would be the ideal solution for Aldi to experience growth in a highly competitive sector. Notably, by adopting e-tailing, Aldi would reduce the costs associated with owning retail outlets, which contribute to higher operational costs and lower profitability. The concept would also be an ideal way for the company to enhance its strategy of “doing things better and faster than anyone else can” (Ramaswamy 11). Notably, e-tailing would facilitate value creation by minimizing the time required by consumers to visit retail stores.
Aldi should also invest in market research to strengthen its product offerings. As is evident from the case study, part of the primary policies and practices at the company are a total refrain from external market research (Ramaswamy 9). As the retail store continues to increase its product assortment and geographical presence, it may be challenging to maintain purposely selected SKUs. Additionally, customers’ grocery preferences may vary significantly across regions in the United States. Consequently, the organization should invest in external market research to identify consumers’ product preferences to ensure that the store continues to enjoy economies of scale and meet customer’s expectations. Notably, market research would assist Aldi eliminate additional holding costs associated with stocking slow-moving products.
Implication on Financial Performance
The recommended actions would strengthen Aldi’s financial performance by boosting revenue generation. As is evident from the case study, 9.7% of the grocery shopping in the United States will be done online by 2022 (Ramaswamy 5). Therefore, if Aldi establishes an online presence, it will attract a significant market share among internet users and generate more revenues from the avenue. Furthermore, the firm’s decision to adopt e-tailing will translate to better financial performance, as its products will be available for purchase to global consumers. Nonetheless, to experience the projected economic benefits, Aldi will have to spend significantly in supply chain management to eliminate any form of delay in the product delivery process. Besides, the firm will have to invest heavily in data analytics, which will aid in efficient product assortment at its retail outlets.
Works Cited
Pervan, Maja, et al. “The Influence of Industry Characteristics and Dynamic Capabilities on Firm’s Profitability.” International Journal of Financial Studies, vol. 6, no. 4, 2018, pp. 1-19.
Ramaswamy, Kannan. “Aldi and the Hard-Discounter March Across America.” ThunderBird School of Global Management, 2020, pp. 1-20.
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