Why are Aldi and Lidl currently so successful?

A low cost business model that maintains strategic alignment is arguable at the centre of Aldi’s and Lidl’s success.

In September 2015 continuing strong sales saw Aldi and Lidl achieve combined sales of over 10% of the UK grocery sales. Since 2011 both companies have seen their UK sales more than double, as their ‘no frills’ strategy has resonated with consumers post global economic crisis. Aldi and Lidl offer a limited range of own branded products at extremely competitive prices, bucking the trend of other UK supermarkets who offer an increasingly broad range of products centred around a juxtaposition of own label and branded products. The other UK retailers have also supported strategies that until recently have been heavily reliant on price promotions. This has a disruptive effect on the demand pattern not only for the product on promotion, but other products in the same category, and often indirectly related products. This undermines the ‘Every Day Low Price’ (EDLP) strategies that supermarkets such as Tesco and Morrisons were based upon. A true EDLP strategy which strives to keep prices as low as possible, requires demand to be as ‘stable’ as possible to enable, the whole end-to-end supply chain to develop an efficient, lowest possible cost supply chain response. Promotions disrupt the supply chains ability to do this which is why in February 2016 it was announced many UK retailers would move away from the particularly disruptive multi-buy promotions.

At the heart of the Aldi and Lidl success is excellent strategic alignment between their commercial and supply chain strategies, which includes segmentation. This enables them to more effectively balance demand and supply. With a more stable and predictable under-lying demand pattern, this removes the need for costly buffers against uncertainty across the supply chain. They work closely with suppliers to minimise supply chain cost, so they are able to offer a genuinely low price to consumers. Both organisations recognise the need to offer the consumer some form of ‘excitement’ to create consumer interest and bring consumers to store. This is achieved through the sale of special products on designated days of the week. I first visited Aldi in response to one of their ‘camping’ sale days. The camping event was targeted at the start of the camping season, and offered a range of good quality, non-branded camping supplies, with a 3 year guarantee at a fraction of the price. I had to get there quick as the sale was on a ‘When-Its-Gone-Its-Gone’ or WIGIG basis. This is a smart promotional mechanism for a number of reasons. Firstly, it sets consumer expectations. You know you need to get to the store quickly or you will miss out. It puts the responsibility in the consumer hands. Secondly, it also enables the retailer to try and buy slightly ‘short’ (i.e. slightly less than they think they will sell) to avoid being left with costly inventory. Finally, as these events are planned months if not years in advance and are co-ordinated across all stores, it enables a different type of special event supply chain strategy to be deployed. The products are often bought in full container loads, from the Far East in high volume which ensures their price competitiveness.

Aldi and Lidl are testament to what can be achieved if strategic alignment is at the heart of the business model, with supply chain as an integral part of strategy rather than an afterthought.

Talking point

• Can you think of other business models that have achieved strategic alignment?
• Does this involve the identification of different demand patterns, and a segmented of differentiated supply chain response?
• Can you think of a company / industry that may benefit from this type of thinking?