The Rise And Rise Of Aldi

“Real genius is found in simplicity”. Travel World co-founder, Gayle Rich

Aldi is a supermarket power-house rooted in simplicity. Its business model is simple enough to give it a genuine point of difference yet strong enough to bruise the duopoly of Coles and Woolies. David has Goliath in his sights and Goliath is nervous.

Aldi’s opened their first stores in Marrickville and Bankstown in 2001. Since then they have grown to 350 stores. Have you noticed the increased TV advertising recently? They now have the critical mass to pull in more customers and increase market share.

The shopping experience is unorthodox and even demands a level of respect from customers. I mean, who would have thought consumers would pay to hire a trolley and buy out of cardboard boxes. And by the way, bring your own shopping bags. No hand-outs here!

Importantly, Aldi understand a niche market is an inch wide and a foot deep. They focus on selling high quality products at discount prices. They prefer to build strong relationships with one supplier per product and pass on the savings. Their profitability is proof positive it works.

In sporting terms, they have mastered the art of playing on a pitch 40 by 17.5 metres. Every store must be exactly the same size. They play it tight and focus on 600 products only, compared to the 20,000 plus found at Woolies and Coles. They let the opposition do all the fancy stuff.

Meanwhile they’re quietly creeping up the premiership ladder, and its gathering momentum. They are the ultimate competitor and disruptor.

The Flywheel Effect

In his best-selling book, Good to Great, Jim Collins dedicates a whole chapter to the ‘fly wheel effect’. In short, he explains how every great business has an inflection point where their growth takes off and grows exponentially.

Aldi may have just approximated that mark. In the next 5 years they expect to build another 220 stores. A 62% increase. (Source: UBS)

However they desperately need to do something about the long queues at the cashiers. It’s akin to pushing a shopping trolley with three wheels. Customers want a quick and easy buying experience.

But I would rather be in Aldi’s head office than Coles or Woolies.

Why Coles and Woolies are Nervous

In 2014, Aldi outpaced Coles and Woolworths food and liquor sales growth almost threefold (Source: UBS). Coles and Woolworths still have a combined market share of approximately 80%, however the competition is white hot.

The problem for Woolies and Coles is they’ve now entered into a very aggressive price war against each other. And if there is one race you don’t want to win, it’s a race to the bottom. You can’t discount your way to greatness.

Woolies and Coles have another problem as well, their moral compass seems to be broken.

The ethics of both reside somewhere between the top and the bottom of the gutter. The way they screw suppliers and inflict predatory pricing on small business and drive them out of business is appalling. Ultimately we suffer because of diminished competition.

The upside to all this is the likes of Aldi see this as an opportunity to step in and offer the customer an alternative.

For years, many have argued Aldi would never deliver the knock-out punch for Coles and Woolies. They don’t need to now because Aldi are big enough to land both of them a good kick in the shins. You don’t need to drop them, just slow them down.

Aldi’s are beginning to tighten their grip on Coles and Woolies where it hurts most, right in the profit margins.

The question is, what will this do to their earnings and share prices?

Watch this space. It’s now gloves off and game on!

Have a great week and happy Australia Day!