One of the key requirements for achieving success as an ongoing price discounter is to create a cost leadership position. That means that the firm has built some cost advantages over their competition.
This activity quickly highlights some of the practices that Aldi Supermarkets (a relatively new discount supermarket in Australia) have adopted to achieve a cost leadership position and provide ongoing longer prices to customers.
Some of Aldi’s Practices – Designed to Reduce Costs
- They do not pack the groceries into bags – you have to pack yourself
- They do not provide free plastic bags – they sell plastic bags (for about 5 cents each)
- Most of their stores are in ‘low-traffic’ locations, which enables cheaper rent
- They do not spend much money on the look/design of the store
- They tend to operate their stores with a limited number of staff
- Most of their stores have little/no shelving (reducing set-up costs)
- They have limited packing/handling of merchandise (often leaving products on pallets)
- Most of their stock consists of lesser known (and therefore cheaper) brands
- They sometimes buy and resell liquidated ‘clearance’ stock
- The store manager tends to have a ‘hands-on’ role (such as helping sort merchandise).
- Do you agree with Aldi’s cost leadership strategy or was there a better entry strategy that they could have adopted?
- What else could they do to strengthen their cost leadership position?
- Do you think that their approach is simply a price penetration tactic and they will increase their prices over time?
- Do you think that the local major supermarket chains would be concerned about Aldi (either now or longer-term)?
- How can the local major supermarket chains defend against Aldi’s threat to their ‘budget-conscious’ shoppers?