July 4, 2012

Aldi was the brand

Aldi Süd (photo: Hans-Jürgen Schulz)
Germany's most trusted retail brand
Aldi’s vast, efficient and profitable business empire has always been German retail’s greatest exponent of hard discount according to first principles.

Thus, despite the occasional mild flirt with listing brands, Aldi has essentially always defined itself via own label.

This could be compared with a steady and loyal breadwinner, who has been married for decades, drinking an occasional espresso with a lady colleague in the staff canteen.

Now that Aldi Nord (Aldi North) has joined Aldi Süd (Aldi South) in dalliance, however, shock waves are being felt throughout the industry.

Both siblings are now actively sounding the market for further brands to list.

Weekly listings

There are now new listings virtually every week in Germany. No less than seven Ferrero brands, including Nutella, were listed in March. These were followed by Mars, Snickers, Balisto, and Wrigley a few weeks ago, and, most recently, by Haribo and various Storck products.

The listings in what has been called “a controlled breaking of the dike” have not been confined to Germany alone. Aldi Süd’s Austrian subsidiary, Hofer, now boasts Coke Zero, Coca Cola, Fanta, Sprite, Wrigley, and a further Danone "Actimel" line.

Copying Aldi Süd’s example in various countries, Aldi Nord has stocked Ferrero brands Nutella, Kinder Schokolade and Kinder Bueno on its shelves in France since June. However, Aldi Nord still seems reluctant to up its brand count in some other countries where the concept makes more money.

As shelf space is limited in the discount stores of Germany’s fifth-largest food retailer by annual revenues, own label suppliers from a broad range of categories are becoming increasingly nervous. They know perfectly well that, if a new brand is recruited, someone else has to exit.

Pressure on own label makers

This has come at the worst possible time for own label manufacturers. Generally rising commodity markets still mean high input costs, while a recessionary climate in Europe doesn’t bode well for pricing power.

Meantime, an increasing number of competitors are entering the market, including price-aggressive players from Eastern Europe and the manufacturing division of Swiss retail giant Migros.

One prominent victim of this combined pressure is cereals maker Dailycer (formerly De-Vau-Ge) who has just filed for Germany’s new equivalent to Chapter 11.

As always in the capitalist pecking order, the smaller manufacturers are most vulnerable, especially if their product does not provide much value-added to the raw materials they process.

However, even major long-term Aldi own label suppliers made it obvious at this year’s PLMA show in Amsterdam that they are touting for business. Stute, for instance, already has listings with Kaufland and Penny, albeit only for individual products such as iced tea in Germany.

Why let the genie out? 

The obvious question regarding all this: Why is Aldi letting the genie out of the bottle now? After all, brand manufacturers bold enough to knock at Aldi’s door were turned away politely, but firmly every year for decades.

Allegedly, they were confronted with the standard question: “What can your brand do that our own label can’t?”

Although a benchmark for the whole industry, Aldi never saw any particular charm in direct price comparability at brand level. Why let any competitor undermine one’s everyday low prices with special offers?

To an extent, the recent strategic departure from tenets that once seemed cast in stone could be due to a new management generation at Germany’s most traditional retailer. Here one could point, for instance, to Marc Heußinger, Aldi Nord’s new big boss since the beginning of 2011.

Management, whether young or old, has been faced with stagnating sales at Aldi Nord since 2004. It is also a fundamental rule of retailing that “the customer makes the assortment”. If a product like Nutella accounts for more than two-thirds of its category, why give competitors a free ride by not listing it?

Competitive pressure

Alarmingly for Aldi, arch-rival Lidl has increased brand presence over the years and has been taking business away where it most hurts: customers with young families. Fuelled by acquisition, Edeka subsidiary Netto has also become a national force within the discount arena.

According to Lebensmittel Zeitung estimates based on data compiled by business information service Preiszeiger.de/Unternehmensangaben, brand share in German discounter assortments is now: Aldi North (9%), Aldi Süd (11%), Norma (17%), Lidl (22%), Penny (30%), Netto Nord (40%), Netto Markendiscount (50%).

Parallel to the shift in the balance of power within the German discount segment, Edeka and Rewe have been expanding the national footprint of their supermarkets and superstores, leaving few gaps for discounters.

These developments have combined to reduce Aldi’s market share in such key product areas as dairy, health & beauty, soft drinks and sweets. From 2008 to 2010, estimated annual revenues at Aldi Nord have weakened by more than 3 per cent to €9.95bn.

Thus, as Aldi Süd and Aldi Nord huddle ever closer together, we have the unusual situation where the traditional leader of the German discount segment and the nation’s greatest retail brand is on the defensive.

Aldi is clearly paying the price for having underestimated Lidl and a growing consumer preference for brands. Its recent fate is also living proof that even good systems can mentally enslave their practitioners.

Perhaps one could argue that a retailer whose heart is essentially in food has been seeking its salvation for too long in non-food.

Younger customers

It could also be an understandable case of hubris. Knowing that your own label product is at least as good as its brand equivalent is one thing. However, this won’t help you if your (younger) customers don’t know this or don't even care.

After all, even top quality products don’t sell themselves. And, with a choice of more than 15,000 discount outlets in Germany, some consumers are inevitably going to buy the brands they can’t find at Aldi elsewhere.

Although Aldi’s move could well impact profitability at Lidl, will simply listing a few brands be a game changer for Aldi? And what will Germany’s best-loved discounter really gain by selling a brand toothpaste rather than an own label one?

As it moves conceptually more towards Lidl, Aldi is surely also treading a very fine line somewhere between the blurring of its legendary retail brand and higher handling costs.

Presumably there will be more clarity in a year’s time when one can see whether brands have been able to generate a sustained increase in profitable sales?

Meanwhile, Aldi Nord has decided to thoroughly modernise all its 5,000 stores. But that is not likely to be enough; Aldi will also have to revamp its marketing and advertising for those who cannot remember Germany’s economic miracle and who take it for granted.

 
Related article in German: Lebensmittel Zeitung, no. 25, 22.06.2012, by Hans-Jürgen Schulz & Andreas Chwallek


1 Comment (Write a comment)

  1. Mario
    Created 12 March, 2014 13:55 | Permanent link

    Interesting, I wonder if because of this Nutella's market share grew (while own-label shares decreased). At the same time, I can imagine Nutella's great marketing campaign boosted sales in 2013 -- possibly helping Aldi a tiny bit!

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