Aldi’s love affair with suppliers is killing Coles and Woolies

Alan Kohler
SEPTEMBER 02, 2015
THE AUSTRALIAN
It was telling that Aldi announced plans for 80 new store openings in 2016 in a note to its suppliers, not a press release.
Aldi is often described as secretive, but it talks to its suppliers all the time: they are like its shareholders and its relationship with them is one of the foundations of its success.
The shareholder, by the way, is Germany’s richest man, Karl Albrecht, who split the business with his brother Theo in 1966. Theo got northern Germany plus Denmark, France and Poland; Karl got Ireland, Switzerland, UK and Australia, among other countries. They both operate in the US, Theo as “Trader Joe’s”.
Both Coles and Woolworths have finally cottoned onto the subversive danger of the Aldi business model and specifically its rapport with suppliers and its disregard of brand power.
But it’s hard for them to fight it. The business model of Australia’s supermarket duopoly is based on a combative, almost master/slave relationship with suppliers, especially those that don’t have a powerful brand.
The supermarkets are basically shelf space landlords, renting their in-store real estate to tenants according to the money they have invested in brands and how successfully they’ve done it. Prices are dictated to suppliers and for the past decade, food deflation has been a crushing (for suppliers) 4-5 per cent.
With Aldi, brand power is irrelevant because each line only has no more than two house brands.
Suppliers are given one price — no shelf space or marketing fees — and they are always paid on time. Sure their margins are tight, but volumes are growing, they trust Aldi totally and can plan their businesses accordingly.
Suppliers to Coles and Woolworths are serfs, living in fear of getting the lords of the buying department off-side and are constantly subject to new taxes (shelf and marketing fees) and edicts on volume, price and payments.
Aldi’s suppliers simply get a cheque each month, on time, and requests to supply more please, as they did recently from buying director Jordan Lack foreshadowing a 20c per cent uplift — disclosed in a report yesterday by Eli Greenblat in The Australian.
“This should be considered in addition to any current growth rates you are experiencing on the basis of revised retails, packaging changes, case mix variations etc,” he added.
Happy days. Australia’s food and grocery manufacturers are falling over themselves to supply Aldi.
The problem for Coles and Woolworths is this is unfamiliar turf.
If it was purely a price war, well that’s a battleground they know. Red spot specials, everyday low prices, $1 a litre milk — these things are in their DNA.
And it’s not as if Aldi is fighting them on profit margin anyway: its gross margin is a moderate 5.2 per cent while Coles’ is 4.7 per cent and Woolworths is 7 per cent (that number is Woolworths’ second big problem by the way — the first being the Master’s home improvement disaster).
But the big two don’t know how to be nice to suppliers, not convincingly, or for long, and they don’t really understand the modern world of social media, where product quality and price matter more than brand, and word of mouth matters more than advertising.
Aldi doesn’t advertise, and it certainly doesn’t spend money marketing its house brands — establishing Westacre cheese, Choceur chocolate or Expressi coffee in consumers’ minds. The brands are on the jars and packets, but they don’t matter.
Moreover, there aren’t many of them: Aldi stocks an average of 1,350 lines compared to 15,000 to 25,000 in “full service” supermarkets, so in a world where everyone’s too busy to wander around vast, complicated supermarkets, its stores are small and simple — in and out.
And more broadly, as discussed here recently, the business of creating and maintain powerful brands through mass interruption advertising is coming under increasing threat from the growth of social media and more targeted advertising.
Aldi’s model is part of that revolution: no brands, word of mouth marketing and an almost loving relationship with suppliers. And like the Australian government, it doesn’t talk about “operational matters”.
Suddenly the supermarket duopoly looks vulnerable to disruption, but not the one they expected — online shopping.
Maybe that will come with groceries in future, but for the moment the challenger is just opening stores.