Aldi: A Low-Cost Retail Giant's Distinctive Business Practices

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Case Details:

Case Code : BSTR252
Case Length : 16 Pages
Period : 1945-2006
Pub Date : 2007
Teaching Note :Not Available
Organization : Aldi
Themes: Business Strategy
Industry : Retail
Countries : Germany

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"There are people who say there is no room to compete with Wal-Mart on price, but Aldi has figured out a way to do it."

- Russ Jones, Vice President at Cap Gemini Ernst & Young,¹ in 2002.²

"We certainly recognize Aldi as being a tough competitor."

- Bill Wertz, a spokesman for Wal-Mart, in 2004.³

"We run our businesses extremely efficiently and reflect that in the price. There is no such thing as a free carrier bag or a free loyalty point. The cost is always passed on to the customer."

- Tony Baines, Head of Buying for Aldi in the UK, in 2005.⁴

The Land of the Hard Discounter

In July 2006, Wal-Mart Stores Inc. (Wal-Mart)⁵, the largest and most successful retailer in the world, announced that it would close down its retail operations in Germany and exit the market. At the time of the exit, Wal-Mart operated 85 stores in Germany. The company announced that it would sell its operations to German retail major Metro AG⁶. The financial details of the agreement were not disclosed, but Wal-Mart reportedly booked a $918 million pre-tax loss on the venture.⁷

Other than the South Korean market (from which Wal-Mart exited in May 2006)⁸, Germany was the only other international market in which the company had faced major problems.

Wal-Mart had entered Germany in 1998, but had found the going tough from the very beginning. The main reason for this was the clout enjoyed by hard discounters⁹ like the Aldi Group (Aldi) and Lidl & Schwarz Stiftung & Co (Lidl) in the country.

Wal-Mart, known worldwide for its low prices, had not been able to match the prices offered by the German hard discounters. This, combined with the cultural roadblocks it faced in the country, eventually led to Wal-Mart leaving the country (Refer to Exhibit I for a note on Lidl).

In the early 2000s, Germany was the third largest retail market in the world behind the United States (US) and Japan.¹⁰ However, the dynamics in the German retail sector differed considerably from those in other major markets. Germany was thought to be the home of the hard discounter.

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1] An international retail consultancy based in Paris.

2] John Karolefski, "Aldi,"Brandchannel, July 10, 2002.

3] "The Next Wal-Mart,"BusinessWeek, April 26, 2004.

4] Carol Midgley, "The Bargain Hunters,"Times Online, October 31, 2005

5] Wal-Mart based in the US, operated discount stores, combination discount and grocery stores, and Supercenters in most of the major markets around the world. In the fiscal year ended January 2006, Wal-Mart had sales of $315 billion and employed more than 1.8 million people. The company operated more than 6000 stores around the world.

6] Metro was the biggest retailer in Germany. In the fiscal year ended December 2005, the company had revenues of $65.9 billion. The company operated around 2,100 wholesale stores, supermarkets, hypermarkets, department stores, and Media Markt and Saturn consumer electronics stores around the world (although more than two-thirds of its operations were in Germany). (www.hoovers.com)

7] "Wal-Mart F3Q07 (Qtr End 10/31/06) Earnings Call Transcript,"http://retail.seekingalpha.com, November 14, 2006.

8] Wal-Mart exited South Korea, selling its 16 stores to a local retailer, the Shinsegae Group, for $882 million.

9] Hard discount stores are those which sell products at prices that are even lower than those in traditional discount stores like Wal-Mart. They are characterized by a limited assortment of products, small stores, and prices which are below the market average.

10] Mark Landler, "Germany: Wal-Mart Decides to Pull Out of Germany,"The New York Times, July 28, 2006.