Finance Your Budget How Aldi leeches off the big supermarkets

How Aldi leeches off the big supermarkets

Aldi holds just over 10 per cent of the Australian market. Photo: Getty Photo: Getty
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Global retail superpower Aldi deliberately “feeds off” large supermarkets in each of the countries it expands into, a UK expert has revealed.

Food retail consultant Steve Dresser, director of UK-based Grocery Insight, was responding to The New Daily‘s recent interview with an Australian expert who said Coles and Woolworths should stop trying to wage a price war with the German chain.

To explain why he thought this strategy would fail, Mr Dresser detailed how Aldi and other global discounters steal market share by leaching off the locations and fuller product ranges of bigger supermarkets.

“Typically discounters open near the already-existing larger stores to feed off the secondary footfall – customers who may shop at Coles but then pick up other items from the Aldi nearby,” Mr Dresser told The New Daily.

“The aim of Aldi is then to convert those shoppers to buying their bulk shop from the discounter, then going to Coles or Woolworths nearby for the specialist bits that a discounter cannot offer.”

Aldi and fellow German retailer Lidl have upended the UK grocery market in recent years by instigating a price war with the nation’s biggest chains, severely denting their profits and share prices. It is a story that will sound familiar to Australian readers.

But the revelation that Aldi relies on big retailers for its expansion may provide some consolation to the owners and dedicated customers of Coles and Woolworths. Like any parasite, the continued existence of the host is crucial. It needs them to provide the “specialist bits”.

‘Must fight on price’

Mr Dresser disagreed with the Australian retail expert’s opinion that Coles and Woolworths should focus less on price and more on premium in-store and online service. He said additional services are an important point of difference from Aldi, but price cannot be ignored.

Coles and Woolies cannot afford to not compete on price, says UK expert. Photo: Getty
Coles and Woolies cannot afford to not compete on price, says UK expert. Photo: Getty

“Where we have seen success in the UK, it’s centric towards lower, stable prices on the lines that matter to customers, whilst providing wider ranges in areas where discount cannot compete – categories like ‘free from’, home baking and also greater ranges of organic lines, for example. But lower prices have to underpin that, with margin invested to support, in the right areas,” Mr Dresser said.

“The reality is by just focussing on additional services, the larger stores will quickly become a ‘secondary destination’, with discount stealing customers, market share and, crucially, volume.”

His advice to Coles and Woolworths was to hold prices at low levels, reduce needless choice in their product ranges, and provide price certainty to customers by eliminating the “promotion high/low cycle” of multi-buy discounts.

“In the UK, only in the last 12-18 months have the larger retailers really got a grip of their situation and started to effectively compete against discounters, by tailoring their promotions and also flattening prices of numerous lines across the store to provide a level of price certainty.”

He said the big retailers in the UK and elsewhere are often too slow to implement this strategy after the arrival of discounters like Aldi and Lidl.

“By then, it’s a real battle to win customers back.”

Learn from Lidl?

There are hopes (and fears) that Lidl, another globally successful discounter, will enter Australia in coming months or years. This would put further pressure on Coles and Woolworths, but Lidl’s UK success might also teach them a valuable lesson.

Lidl. Photo: Getty
Lidl and Aldi are taking German efficiency to the world. Photo: Getty

According to Mr Dresser, Lidl seems to be overtaking Aldi’s sales in the UK thanks to a slightly different business model. Lidl markets itself on low prices, but talks up quality and ethical sourcing. And unlike Aldi, it offers more premium range products, premium-feel stores and additional services like customer toilets and self-serve counters.

This sounds similar to the model recommended by Australian expert Dr Gary Mortimer. And if Coles and Woolies are inspired, they may have some time to copy it before Lidl’s arrival.

“Their entry into Australia is questionable in the short term, and perhaps unlikely to be immediately imminent given their push into the USA, which will take considerable effort and cost to enter a new market,” Mr Dresser said.

“They will succeed if they choose to enter the market though. Their formula will remain the same and they’ll look at the market and how they can tweak things to capitalise. Customers want low prices and quality food – discount provides that.”

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