Aldi starts to harmonise its private label ranges, FMCG brands, advertising, promotions

These changes mean a reorganisation of buying units and the business model to partly overcome the split between Sued and Nord. Aldi wants to reap the synergy benefits that increased scale will bring. These savings will ultimately be reinvested into the price positioning. This in turn has consequences for private label and brand suppliers. And crucially it means renewed pressure on other retailers. In future, it looks like further price deflation in the markets where the discounter has a meaningful presence.

As Lidl/Schwarz goes from strength to strength, now with €104.3m in net sales in 2017/8, Aldi needs to react. (Lidl grew by 10% to €81.2bn). And it is doing so by copying the former imitator of its discount business model. Lidl has been much more innovative in recent years. The retailer was first to modernise the store estate, adding FMCG A brands, (stop-)starting online initiatives and is now offering a loyalty app (to name a few examples). And now Aldi is following suit by carefully copying the steps Lidl has made.

There is a misconception about the discount model. This holds that – as the discounters have focussed on the best sellers and try to offer them at the best price quality ratio possible – that Aldi buyers buy across both companies and offer a standardised range in every country.

There are 4 reasons why this isn’t so:

1) Unlike Lidl, Aldi is split into two units, Sued and Nord. These two units operate independently of each other – and despite some commonalities the ranges differ significantly from country to country. Sometimes buyers from one of the companies will also negotiate for the other business. But this is more the exception and rarely ever the case for cross country deals.

2) The discounter is still predominantly selling private label products, accounting for around 90% of SKUs. Brands make up the other 10% – but already generate much more than 10% of Aldi’s sales. In general, private label manufacturers do not have the same operational capacities and capabilities as Unilever or Nestle. They often struggle to supply fast growing businesses, such as the discounters. (This also explains the move towards vertical integration by the discounters)

3) Apart from product quality, Aldi is keenly focussed on logistics best practise. The retailer also makes much of the fact that it is a local player in every country, with sourcing from national suppliers.

At Aldi shoppers buy the essential products that are pretty much the same everywhere (from bottled water, milk to coffee/tea, toilet paper and bananas etc). But in practise these are being sourced regionally, ideally from Aldi’s standpoint from a warehouse just across the road from its DCs. This keeps transport and transit costs low, emissions down and produce fresh. It also means that there is less risk, should the manufacturer get into trouble and not be able to supply and guarantee Aldi’s strict OSA levels. Other regional suppliers can then fill the gap.

Aldi is even splitting contracts on its private label ranges among suppliers in one geography. The retailer does so to offset bottlenecks and play different suppliers off against each other, when negotiating new contracts.

4) In theory an Aldi SKU (a single average SKU, not a brand) could generate on average around €55m per annum, if listed across Aldi Nord (excluding Trader Joe) and Sued . This is much, much higher than any other retailer could achieve, from Walmart to Amazon. In practise Aldi is loath to become dependent on any one supplier and hand out such massive contracts. So the retailer avoids partnering with suppliers across borders. Aldi then claims there are slight product variations reflecting local taste profiles and specifications. The obvious exception has been the introduction of brands from Coke to Ferrero to Nestle and so on.

Up to today, there has been considerable independence on the private label ranges at the two Aldis. The discounter is now starting to address this, as Lidl has significant synergy benefits on this measure. The discounter is now starting to identify opportunities where an Aldi Sued or Nord brand would do well in the other business. The same goes for the FMCG A brands that the discounter is now listing, at the same pricing level as the competition and discounting heavily in its weekly promotions. Again Lidl with its central buying has a head start on Aldi in terms of costs. This is a result of Lidl being much more standardised across the EU, and Aldi a lot more regional/national in its proposition.

What does this mean for the future? There are some consequences for private label and brand suppliers. Private label suppliers with the necessary financial muscle have an opportunity to get a listing in more Aldi geographies (including expansion into Italy and China). For some, this can then also make up for the sales declines they have witnessed in the wake of the brand introductions into their categories.

For branded suppliers a listing in Aldi is a golden opportunity to penetrate a shopper segment they might not have reached in the past or to increase frequency. There are also obvious drawbacks, when the brands get dragged into a price war and there will be push back from other retailers (but this is for another post).

Aldi’s changes will mean renewed pressure on other retailers. The discounter will reinvest cost savings into its price positioning. In future, this means further price deflation in the markets where the discounter has a meaningful presence.

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