While Aldi and Lidl entered some foreign markets via acquisitions (for instance, the acquisition of Hofer by Aldi in Austria in 1967), they mostly opted for greenfield investments as their entry strategy.
Discuss the reasons why Aldi and Lidl choose Greenfield investments as primary market entry strategy.
Aldi's position as the low-cost leader almost exclusively dictates their entry strategy. Being the low cost leader is a remarkably sound business strategy because of the steady demand of price conscious customers. This is especially true in times of a recession. It was noted that when the recession hit, Aldi's sales spiked in the United States where they are accelerating their expansion efforts (Gray 2008). For customers who are budget shoppers, Aldi and Lidl offer a products that can save the customer money hence this is responsible for their competitive advantage.
Since both retailers are low cost leaders then it is obvious why they have chosen the same entry model. The greenfield model is the most suitable such a position because they don't have to establish brand equity with their consumer base; the low price has some amount of equity inherently built in. However this strategy is currently disputed among some in the industry (Killian Branding 2010). This can also be illustrated by the fact that Aldi has undergone some efforts to reposition its brand so that customers in the UK lose the image of Aldi being a "lower class" brand (Derrick and VanAuken 2008). However, this position in branding only appears to be applicable in certain cultures and Aldi as a whole performs extremely well without and advanced marketing activities.
Another aspect to Aldi and Lidl business operation strategy that makes the greenfield entry the best option, is the fact that their entire model is based on low cost and efficiency. For example, Aldi and Lidl have no-frills stores that follow a generic template and are based on a small retail footprint (Retail Angle 2008). The minimal overhead gives these retailers much more flexibility than other larger retailers such as Wal-Mart. For the latter to break even, it must aggressively drive business. While the former doesn't require nearly as much consumer activity or promotion to reach its break-even point.
Analyze the advantages and disadvantages of such an entry strategy?
The advantage to these retailers in their greenfield strategies is that there business model is unusually nimble and the low cost position doesn't require a great deal of promotion to attract customers. Therefore they do not have to endure the lengthy period normally associated with building a brand image. The demand for inexpensive products is, at least in most cultures, inherent in the population; large percentages of consumers view groceries as more of a commodity than something more fashionable. Thus when the purchase saves the consumer money and is content with the quality the position is successful.
Another advantage to the rather bland store setup and using cardboard boxes as display fixtures is that the model can expand extremely quickly. The stores don't take long to construct or to setup and thus new stores can be opened at an incredible pace. In the U.S. alone, Aldi has opened over 1,100 stores in a relatively short period of time and projects that nearly 100 more will be added this year -- nearly three a day (Ruane 2011). "Aldi is rapidly expanding in several areas of the country, including the East Coast areas of Connecticut, Maryland and Virginia," said David Behm, the Aldi vice president in charge of the new expansion (Brown 2006).
Not only can this business model expand very rapidly, but each individual location doesn't represent as much of a risk in terms of investment. Since the stores are small and the fixtures are keep to a bare minimum there isn't much to lose if a store doesn't operate well in the particular location. Since the risk is relatively minimal, this translates into less preparation time to research and structure deals. When contrasting this to the mega-retailers, they spend years preparing all the details of new expansions given the enormous amounts of investments that are required in each new location.
In an attempt to improve its image of an 'underclass-discounter' in the UK and in Switzerland, Aldi enlarged its product range and offered a higher level of service to the customers.
Explore the rationale behind such a strategy in the UK and in Switzerland?
The rational in these two locations is based off of the cultures that the consumers have within them. Some consumers equate value with price or quality with price. For example, a consumer might pay more in the UK and in Switzerland for a brand that is priced higher even though the quality is the same. The expectation is that the high price also means better quality; even though this may not be true. Several companies operating in different international markets face similar problems. One example is Heineken Beer. In the United States Heineken is regarding as a "premium" beer and one of the reasons that it has gained its representation is through its higher price in that market. However, in other markets, such as Mexico and Germany, Heineken represents an average or even sub-quality beer and thus cannot charge a premium price.
The rationale behind Aldi's decision in these markets is similar to that of Heineken. It must differentiate its product in markets that have unique consumer cultures that are different than its domestic operations. Therefore Aldi must redesign it operation to fit the culture it is operating in. This is the very thing that Wal-Mart failed to do in Germany (Foley and Mesure 2006). One analyst illustrates this very point nicely in the following passage (Derrick and VanAuken 2008):
The major challenge that Aldi now faces in the UK is convincing the British public that a century of branded advertising has misled them, and that generic, unbranded consumer goods can be as good, if not better, than the more expensive and more familiar brands they usually buy. It's a concept that German consumers have embraced wholeheartedly. Many of them believe products can be very good quality and very cheap. We British, on the other hand, have been more susceptible to the art of branding.
Discuss the risks associated with this approach?
The risk associated with approach is that it significantly adds complexity to the business model. Aldi will have to reinvent themselves in this market and develop a unique model. Since this is a deviation from their "tested" model, then this deviation carries some risk with it. If Aldi's doesn't not meet the intended consequences with its new strategy then it could diminish its representation in these markets even worse than was already perceived. For example, if Aldi's lost touch with its low cost appreciative consumer base while trying to reach out broader market then such a customization could end in failure.
However, in this situation the potential rewards more than likely outweighs the risks associated creating a new strategy that is fine tuned for these markets. As long as proper marketing research is conducted it is reasonable to suspect that Aldi's will be able to better able to meet the needs of the consumers in these unique markets. After Wal-Mart failed in Germany, it internalized this lessen and became more flexible with its operations when it entered the Chinese market which has resulted in a successful strategy.
Until 2009 Lidl restricted its internationalization to countries within Europe. Aldi, in contrast, decided to open stores in Europe, Australia and in the U.S.A.
3A Discuss advantages and disadvantages of Aldi's strategy?
One advantage of Aldi's strategy is that it has opened its self-up to a plethora of new markets that contain a lot of opportunity. For example, since the economic downturn arouse and more Americans became price sensitive, Aldi's has seized this opportunity to rapidly expand in the U.S. market (DW staff (jen) 2009). If Aldi's wasn't already positioned in this key market with its distribution channels already developed then it could of never capitalized on the opportunistic position the recession offered. Furthermore, this opportunity allowed Aldi's the leverage to tackle the giant Wal-Mart on its home territory of Oklahoma and Texas.
Another illustration of the opportunities that can be found in international markets can be exemplified by Aldi's growth in Australia. Australia has a billion-dollar grocery sector annually and in 2008 Aldi's was able to claim over seventy two million in profits alone from this market (Greenblat 2009). Aldi has acquired over two hundred stores in this market and is expanding rapidly there as well. A spokeswoman for Aldi's made the following remark about its positioning within the Australian market, "We have strong expansion plans for Australia and we are growing by at least 25 new stores a year along the east coast," she said. "In addition, we will be opening two new warehouse and distribution centres, at $150 million each, to support our growth…