The market potential of the ALDI brand in Australia is subject to increasing scrutiny by the supermarket market majors and independents, pure online grocery players, suppliers, investors, property landlords, regulators and consumers! With such a long list of interested parties it’s worth understanding the reasons for ALDI’s success to date, and look at peer market development strategies to understand how it might evolve its current merchandise offer and proposition to maintain growth.
From its origins in 2001, ALDI has grown FMCG sales to approximately $3.5 billion (note this excludes special buys). ALDI’s growth is impressive because its market entry was from a greenfields base. However its success is even more remarkable when it is recognised that growth has not been achieved purely from opening 345 stores on the Eastern Seaboard over the last 13 years. Growth has also been driven by increases in the holy trinity of shopper metrics: more shoppers in stores, shoppers spending more, and shoppers visiting more frequently.
The rate of growth in ALDI’s shopper metrics is impressive. In the 12 month period ending October 2014, 52.8% of Australian households visited an ALDI store compared to just 7% in 2001. In markets in which ALDI operates e.g. along the Eastern Seaboard, 68.2% of households visited an ALDI store. Shopping occasions per buyer is at 19.3 – up from 7 in in 2001. Units per visit reached 23.2 compared to 20.5 in 2006. In October 2014, ALDI had a national market of 8.4% and on the Eastern Seaboard a market share of 11%.
Why are hard discounters successful?
The rise of ALDI in Australia and other markets begs the question of why hard discounters (such as ALDI and Costco) are so successful. The academic view about reasons for success is that overemphasis on price and promotion can turn brand buyers into promotional buyers and then into private label buyers and then discount buyers. The latter group has been traditionally viewed as a hard discounter’s core customer base.
While such analysis doesn’t include a socio economic filter, and therefore unsatisfied brand buyers could come from high or low income groups, there is evidence that earlier adopters of the ALDI brand in new markets tend to be low income families. Nielsen research shows that in 2006 for example, 38% of ALDI’s shoppers were from low income groups. And families (comprising start-up, small scale and bustling) accounted for 38% of shoppers as well. Eight years later, high income families – late adopters of the brand, now account for 50% of shoppers up from 26% in 2006. This group were slow to make the shift to those retailers said to offer “quality food” at discount prices!
Big growth and new market prizes
As recently as the third quarter of this year, ALDI continued to grow faster than the supermarket channel overall, the top two supermarkets, and independents. Despite a maturing Eastern Seaboard network, ALDI has grown on average three times as fast as the top two supermarket chains since 2009.
So what’s next for this German retailing giant? While ALDI has announced geographic expansion with plans to open stores in South Australia and Western Australia, growth in the existing network will tend to provide more leverage. What will drive growth from current levels? In predicting the future performance of ALDI you could be tempted to look at peer markets where ALDI has been established longer.
ALDI Australia is more advanced than ALDI in the UK
Findings suggest that ALDI in Australia is more developed in its market growth strategies than in the UK!
Nielsen’s head of retailer and business insights in the UK, Mike Watkins, has identified four phases of development for discounters (namely ALDI and LIDL, but there are others) in the UK. They comprise of market entry (1992-95), growth (1996-2008), consolidation (2008-2010) and the current phase – accelerate (2011-2015). What’s interesting about the evolution of the hard discounters like ALDI is that it took 20 years for it to establish a critical mass with its store network and, it took the 2008/09 recession to create breakthrough growth. Stagnate wages growth since 2008 has created an environment where shoppers have had to seek out opportunities to manage household spend on food as the cost of services continued to rise.
Despite acceleration in UK GDP growth from sub 2% levels in the fourth quarter of 2013, hard discounter market share has continued to increase. Between December 2012 and September 2014, the combined market shares of ALDI and LIDL increased from 7.7% to 9.4%. Driving growth across this period was not only store openings but continued improvements in customer metrics. For example, between 2010 and 2013, units per visit increased from 13 to 17 and penetration increased from 23% to 29%. Helping to drive these improvements was an increased range to help shoppers complete more of a full shop, the introduction of TVCs to drive brand perception and attracting higher income earners (known as ABC1). All of these strategies have been adopted in Australia as well.
Australia is the best benchmark for ALDI performance
However, comparing ALDI Australia customer metrics with ALDI in the UK, highlights why UK market participants perhaps should look to Australia for benchmarks, rather the reverse! Comparing 2013 metrics, ALDI Australia’s market share is 7.7% (5% in the UK), units per visit 23 (17 in the UK), penetration 52% (29% in the UK).
So where do we draw insight to understand the market potential of the ALDI brand in Australia? Here of course! Market structures tend to dictate profitability and a duopoly or highly concentrated market will perform differently to an oligopoly market structure. Australia is the former and the UK, the latter. One important distinguishing feature between Australia and the UK is wages growth. In Australia, growth is still around 2% to 3%, whereas in the UK it is below 1%. This is also a contributing factor to growth in the UK market.
Around the corner? New promotionally driven customers
What’s interesting about ALDI’s growth in Australia over the past five years is that wages growth has been relatively high so there hasn’t been the same economic imperative to shop at a discounter.
We think ALDI’s success is explained in part by the academic view discussed above – that is, overemphasis on price and promotion can turn brand buyers into promotional buyers and then into private label buyers and then discount buyers!
In our recent insights article, ‘Promotions Not So Special Anymore’ we revealed Australia and New Zealand were the promotional capitals of the world and shoppers were growing weary of promotions! This highlights a new source of shoppers for ALDI. It may also explain the recent launch of Coles’ ‘Everyday’ and Woolworths’ ‘Cheap Cheap’ initiatives to drive the value message harder.
By winning more disaffected heavily promoted brand shoppers we would expect ALDI to continue to grow its shopper metrics around penetration. Opportunities around frequency and items per visit also exist as these sit well below the top two majors.
About Nielsen’s Homescan Shopper Panel
Understanding how household shopping behaviour affects your store and brands’ sales will allow you to fine-tune your marketing decisions and ultimately yield the greatest return.
Our Shopper Panel is robust, trusted, credible and one of the biggest shopper panels per capita in the world. It monitors shopper behaviour across a panel of 10,000 households, which is projected to represent the Australian population and retailing landscape.
Shopper data is collected via handheld scanners that transmit data directly to us. This data can be used to identify key shopper behaviour across key grocery outlets. Our point-of-sale technology for our retail measurement services captures sales and price data from virtually every major retail chain.