Aldi - Hard discounters 2012: the winning format. ResearchFARM

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1 Aldi - Hard discounters 2012: the winning format A completely underestimated and misunderstood business model the Anglo Saxon expansion the introduction of FMCG A brands ResearchFARM INCLUDED: Access to our online database with 500+ pictures September 2012

2 AN INSIDER VIEW OF ALDI An unprecedented growth story is unfolding, as austerity bites across the west and food price inflation will filter through into higher retail prices next year. One retailer that stands to benefit hugely from this changed macroeconomic environment is Germany s Aldi. The retailer currently achieves record growth rates in the UK (sustained at well above 20% year on year) and in Australia, where further expansion is already financed out of the cash flow generated in the country. The huge opportunity going forward for Aldi Sued s stores as well as for Trader Joe s, Aldi Nord s premium organic discounter is the US, where the efficiency of the business model meets a consumer willing to trade down as never before. Meanwhile back in the old world, Aldi Nord is rapidly updating its stores and investing heavily into making the format fit for the next decade. The big questions rippling through the sector is the introduction of more FMCG A brands across a number of markets, which the two businesses coordinate tightly. We predict that a more attractive SKU proposition increasing frequency (if not necessarily penetration) combined with the store updates from both Nord and Sued will ensure that Aldi will continue to outperform. This data rich report from the EU s premier experts on hard discounters goes behind the facade and analyses the business model and the poorly understood proposition and success factors of the discounters, with key insights and learnings for other businesses. It argues that Aldi s principles need to be understood in the original context of Germany s retail sector of the 1950s and subsequent development that has created the company s unique culture and business practices, which have proven to be easily replicable and exportable around the globe.

3 AN INSIDER VIEW OF ALDI This report... analyses the complex interplay between relentlessly optimised and standardised business principles, extremely lean ranges, leading to fewer production runs, leaner supply chains, less floor space requirements and fewer shop floor staff explains the strengths of a unique private label proposition that disables easy price comparison and often sets the bar in terms of quality/price ratios, winning accolades from consumer watchdog organisations shows how a honest and simple offer that builds long term loyalty and customer relationships founded on lowest possible price and highest possible quality works without couponing, special offers and loyalty cards demonstrates how a product centric discounter can outperform the leading customer centric retailers without much cutting edge technology, by operating according to the principle that less is more, reducing complexity and by flawless execution and timely exploitation of trends

4 METHODOLOGY The report is based on unprecedented access to the company, stores and DC visits and one to one interviews with former and current high-level executives, in some cases the report reflects the view points of the company. It includes an extra chapter on the introduction of brands into the discounter, analysing what the sales potential is by country, what it means for the rest of the retail sector and the FMCG industry, where the pitfalls are for manufacturers and how long term this latest move will turn out to be The report also contains a chapter on Europe s macroeconomic outlook and grocery markets and the general context the discounters operate in.

5 FIND OUT... ABOUT ALDI S GROWTH OPPORTUNITIES in which markets Aldi sees more potential for the introduction of FMCG A brands and in which private label will remain the main focus in which markets Aldi Sued is investing going forward and why filling in opportunities around existing infrastructure have trumped expansion into new territories for now find out how successful Aldi is with a move away from EDLP and a new good/better/best approach to its private label proposition and whether this will be the future or not which markets promise the best returns for both Aldi Sued and Nord and which criteria need to be fulfilled for the discounters to open their distribution centres and stores what sales levels Aldi should achieve over the next 5 year period

6 KEY QUESTIONS ANSWERED How much of Aldi s range is local and its sourcing influenced by the respective store manager? How big is Aldi s global range? Is Aldi due to its limited range assortment and SKU count still the biggest global buyer ahead of Wal-Mart? What are the average sales per SKU per country? How high are sales densities in the countries the discounter operates in? What is the potential for FMCG A brands at Aldi? What is the brands percentage of the total range at Aldi Sued and at Aldi Nord now? Where can it go? Where will Aldi draw the line? What are the learnings from Lidl and the more distant past in regards to the introduction of brands? What are the dangers and risks of a brands in discounters strategy? Does the 80/20 rule to SKUs sales apply at Aldi, what lines underperform? What market share can Aldi reach in the UK? What does the retailer have to do now, to maintain growth rates of more than 20% year on year? Why is the discounter changing now? What is the strategy evolving to now? What are the main differences between the two businesses (Sued and Nord)? How much money is earmarked for expansion into Anglo Saxon markets? What emergency cash facilities is the discounter holding back for eventual price wars and foreign expansion?

7 500+ STORE PICTURES AVAILABLE ONLINE Tagging Navigation system Hi-def pictures With this report you will get a one year access to our online picture database. Every week we are visiting retailers so that you don t have to. In our new section you ll find in-depth store visits with sets of photos and commentary from our team of experts that will help you capture product and competitive information pictures tagged by our analysts New visits every month Interactive links with the report High definition pictures available for download

8 TABLE OF CONTENTS (1/5) Executive summary Context the Macro-economic outlook for the EU GDP sizes: EU 27, 2011 in bn, the structure from Germany to Malta GDP sizes: EU 27, in 000 bn GDP sizes: EU 27, 11 countries still lagging behind their 2008 levels GDP sizes: EU 27, Currency devaluations, Poland keeps momentum going, ECB action Unemployment: EU 27, annual average 2011 (%) from Spain to Austria Unemployment: EU 27, Misery in the periphery while Unemployment: EU 27, Germany roars on due to the right policy mix Inflation: Euro Area and EU27, (HICP), % Inflation: EU 27, deflation avoided, lost decade in store? Inflation: Euro Area 17, (HICP), %, welcoming Estonia Interest rates: ECB and BoE, record low rates and quantitative easing Interest rates: breathing space for southern Europe, LTRO Context EU Retailing in 2012 Retail sizes: EU 27, in 000 bn Retail sizes: EU 27, crisis has left a deep, deep scar Retail sizes: EU 27, growth in %, CAGR Retail sizes: EU 27, a sector in turmoil, e-commerce, housing markets, ageing populations Per capita retail spend: EU 27, 2011 in, from Luxembourg to Romania p17 p20 p21 p22 p23 p24 p25 p26 p27 p28 p29 p30 p31 p32 p33 p34 p35 p36 p37 p38

9 TABLE OF CONTENTS (2/5) EU Grocery Retailing in 2012 Grocery sizes: EU 27, in 000 bn Grocery sizes: shoppers cut back, shop around, trade down and go to hard discounters Grocery sizes: EU 27, growth in %, CAGR Grocery growth rates: EU in %, growth in Poland, decline in Ireland Grocery growth rates: Ireland as a template for the rest of the periphery? Grocery sizes: The leading countries, Top 3 take one of every 2 spent Grocery share of total retail: EU 27, in % Grocery share of total retail: Clear crisis impact - all but four show higher share again Grocery per capita sizes: EU 27 in 2011 in, from the UK to Bulgaria Hard discounters, Aldi Sued & Nord Aldi: A completely underestimated business model Aldi: Simplicity, simplicity, simplicity fine tuning a single format over decades Aldi: efficient layout and product presentation and the all important SKU count Aldi: Lean SKU count means bigger buying power than Wal-Mart Aldi: Supplier relationships and the quality focus Recent developments Aldi: recent developments, truths, brands, store modernisation p39 p40 p41 p42 p43 p44 p45 p46 p47 p49 p50 p51 p52 p53 p54 p55 p56 p57

10 TABLE OF CONTENTS (3/5) Financials Aldi: the original split into two, an organising principle to manage complexity Aldi: figures, international contributions now more important than domestic Aldi: benchmarks, sales densities per country, Sued ahead of Nord Aldi: a word on Aldi s profits and margins Aldi: the store estate, rapid internationalisation Aldi: 10,000 stores, more international openings to come Aldi Sued and Nord in Germany Aldi: Germany, data, benchmarks, reaching saturation Aldi: Germany, tweaking the store network, organic ranges, convenience Aldi: Germany, organic, in store bakeries outlook Aldi: exporting a modus operandi, the direct comparison to the competition Aldi Sued Aldi Sued: Countries, benchmarks, sales, stores, sales densities Aldi Sued: 2011, sales per country in m, market shares of total grocery universe in % Aldi Sued: rapid growth in recession plagued Anglo Saxon markets, retreat from Greece Aldi Sued: shift from entering new markets to saturating existing markets, the US opportunity Aldi Sued: Investing in Australia, UK, stellar growth, the figures Aldi Sued: UK, choosing poor site locations in the 1990s, store disposals Aldi Sued: UK, the golden opportunity, record market shares, future plans, where s the ceiling? Aldi Sued: UK, new private label launch, moving towards good, better, best, a good idea? Aldi Sued: Hungary as the test bed for new developments, 6 P&G brands, an end to EDLP? Aldi Sued: Hungary a template for the rest of the group? Aldi Sued: Switzerland market entry lowering price points of the entire retail universe p58 p59 p60 p61 p62 p63 p64 p65 p66 p67 p68 p69 p70 p71 p72 p73 p74 p75 p76 p77 p78 p79 p80 p81

11 TABLE OF CONTENTS (4/5) Aldi Nord Aldi Nord: Countries, benchmarks, sales, stores, sales densities Aldi Nord: 2011, sales per country in m, market shares of total grocery universe in % Aldi Nord: Trader Joe s highest sales density in the USA Aldi Nord: Trader Joe s serving the organic and natural trend, a honest proposition Aldi Nord: France, rapid space growth as the LME opens the market to discounters Aldi Nord: France: the introduction of Coke, Netherlands: still ahead of Lidl, Poland Location, format and expansion strategy Aldi: Store expansion strategies, Sued to fill in, Nord to modernise Aldi: The expansion into Eastern Europe, East Germany as a test case Aldi: expansion financed out of cash flow, location choice criteria Aldi Nord: innovating the format, raising the average space above Aldi Sued Aldi Nord: new generation, new thinking, new location choice criteria Aldi Sued & Rewe: teaming up in Germany, creating destination status Aldi Sued & Rewe: From competition to cooperation Aldi Sued: Sale and leaseback deals, funds earmarked for Anglo Saxon expansion Aldi Sued: standardisation and internationalisation, exporting a success model Aldi: the non food footfall driver, spend migrating online, redundant space can be recycled Aldi: Logistics and the back end, standardisation and keeping it simple p82 p83 p84 p85 p86 p87 p88 p89 p90 p91 p92 p93 p94 p95 p96 p97 p98 p99 p100

12 TABLE OF CONTENTS (5/5) Strategy Hard discounters: Strategic bifurcation process between two business models Aldi: The exception Aldi: going hard, minimising complexity, keeping OSA simple, product centricity Aldi: always the late, second mover, social media, only one can be the cheapest Aldi: The business model Actionable recommendations: learning from the hard discounters Outlook and forecast Aldi: a new generation in charge, adaptability, tailwinds from the economy Aldi: international expansion and private ownership benefits Aldi: a debt free business, excess liquidity and emergency cash facilities Aldi: doubling share in growth markets, stable in mature, where will it be in terms in 5 years? Brands in discounters the data Aldi: average per SKU per country in 2011, massive opportunity in DE and the US Aldi: Does the 80/20 principle apply at Aldi? Loss leaders, global synergies Aldi: Sued ahead on average SKU per store basis, how big is the global range in? Brands in discounters Brands in discounters: the introduction, a win-win or a clear threat to the model? Brands in discounters: Lidl, Edeka s Netto, Aldi s FMCG brands, Aldi Nord s big opportunity Brands in discounters: 8 reasons to be skeptical, reverting to type, limited space Brands in discounters: 8 reasons to be skeptical, conservatism, cannibalisation Brands in discounters: 8 reasons to be skeptical, Lidl s cut backs, organisational set up Brands in discounters: 8 reasons to be skeptical, strategic fit, the control issue Brands in discounters what FMCG companies need to consider Brands in discounters: questions from retailers, just a short term tactic, not a strategy? Brands in discounters: FMCG brands, price points and pack sizing Brands in discounters: lessons from Hofer Austria and Lidl Germany Sources p101 p102 p103 p104 p105 p106 p107 p108 p109 p110 p111 p112 p113 p114 p115 p116 p117 p118 p119 p120 p121 p122 p123 p124 p125 p126 p127 p128

13 TABLES & CHARTS Table 1: GDP sizes: EU 27, 2011 in bn Table 2: GDP sizes: EU 27, in 000 bn Table 3: Inflation: Euro Area and EU27, (HICP), % Table 4: Inflation: Euro Area 17, (HICP), % Table 5: Retail sizes: EU 27, in 000 bn Table 6: Retail sizes: EU 27, growth in %, CAGR Table 7: Per capita retail spend: EU 27, 2011 in Table 8: Grocery sizes: EU 27, in 000 bn Table 9: Grocery sizes: EU 27, growth in %, CAGR Table 10: Grocery share of total retail: EU 27, in % Table 11: Aldi s total and domestic sales in bn , growth Table 12: Aldi Sued, Aldi Nord, global sales, outlets, sales per store, space, average footprint, sales densities in 2011 Table 13: Aldi s Sued and Nord, store estate by country, growth 2008, 2011 Table 14: Aldi Sued, Aldi Nord, Germany, sales, outlets, sales per store, space, average footprint, sales densities in 2011 Table 15: Aldi Sued, sales, outlets, sales per store, space, average footprint, sales densities by country in 2011 Table 16: Aldi Sued, sales by country and grocery market shares in 2011 Table 17: Aldi Nord, sales, outlets, sales per store, space, average footprint, sales densities by country in 2011 Table 18: Aldi Nord, sales by country and grocery market shares in 2011 Table 19: Aldi Nord s sales in 2011, sales per SKU in in 2011 Table 20: Aldi Sued s sales in 2011, sales per SKU in in 2011 p21 p22 p28 p30 p34 p36 p38 p40 p42 p46 p60 p61 p63 p66 p71 p72 p83 p84 p114 p114 Chart 1: Unemployment: EU 27, annual average 2011 (%) (1) Chart 2: Unemployment: EU 27, annual average 2011 (%) (2) Chart 3: Interest rates: BOE Chart 4: Interest rates: ECB Chart 5: Grocery growth rates: EU in %, (1) Chart 6: Grocery growth rates: EU in %, (2) Chart 7: Grocery sizes: The leading countries Chart 8: Grocery per capita sizes: EU 27 in 2011 in (1) Chart 9: Grocery per capita sizes: EU 27 in 2011 in (2) Chart 10: Aldi Sued grocery market share by country in 2011 Chart 11: Aldi Nord grocery market share by country in 2011 p25 p25 p31 p31 p43 p43 p45 p49 p49 p72 p84

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15 SAMPLE PAGES Zoom in to read Brands in discounters: 8 reasons to be skeptical, Lidl s cut backs, organisational set up 5) Lidl has cut back on brands in store in Germany again - as it impacted the bottom line too much. The discounter has found a stable equilibrium between branded and own ranges now. In the last years at times there used to be many more brands pushing Lidl s private labels off shelves, however this impacted margins too much, so Lidl cut back on the branded offer again. This means for Lidl there is a clear limit to what can actually be achieved from a cooperation between the FMCG industry and hard discounters. We believe that the same will the case for Aldi. 6) A discounter operates a different business model from a supermarket, i.e. the organisational set up, supply chain, warehouses, processes etc are unique and geared toward low costs and efficiencies. This means discounters such as Aldi will not turn into supermarkets, they are set up in such a way that this is impossible to do. Discounters are focussed on driving down price - from buying to returns. They are simply not focused on offering choice, convenience, attractive store environments, brands and so on. Aldi Nord: Trader Joe highest sales density in the USA 122 ResearchFarm - Retail Analysts No part of this report may be reprinted or reproduced in any way without the written permission of ResearchFarm. In the USA, Trader Joe s is owned by Aldi Nord, but is strictly independent operationally from the discounter indeed Aldi Nord does not have a presence in the market with its discount outlets, as the USA is Aldi Sued territory. Trader Joe s had the highest sales density in the US grocery sector of all retailers at around US$1,560 per sq ft in It should be noted that sales densities (other than Trader Joe s) in the US skew towards the lower end, when compared with Europe, as space is that much cheaper, more widely and freely available in the US at least outside the major metropolises. Trader Joe s only sells natural and organic products, with around 80% of the range being private label. The retailer edits the range according to shoppers tastes, offers a few quirky recipes and formulations and there is a strong focus on costs just as at Aldi s. While the store layout is more inviting and friendly than at no frills Aldi, much of the in store presentation is also quite Spartan, with one crucial difference, at Trader Joe s the shelves etc have a natural, organic feel, many products are offered from wooden boxes for example. All natural ingredients and the in store presentation all play up the natural and wholesome image of the retailer, with hand painted boards advertising deals and pricing information. Staff all wear Hawaii themed attire to maintain the original laid back surf style of the first West coast store. 85

16 SAMPLE PAGES Zoom in to read Aldi: expansion financed out of cash flow, location choice criteria The discounter follows a clear template in entering a market. First Aldi builds a DC, then Aldi stores appear and locations pop up around the centre, until full capacity for the warehouse operation has been reached then the original cell splits into two new subunits and a new DC with its own infrastructure and organisational set up is opened. This methodological approach, which historically was usually not debt financed, but paid out of cash flow, is also being used for the US strategy. The first Aldi Sued store opening in Washington DC in November 2011 was initially supported by operations from Virginia and Maryland, where Aldi has an established infrastructure. Traditionally Aldi s preferred location strategy was always in secondary or tertiary locations, often out of town or at the outskirts. Shoppers rarely find the discounter in prime locations, that said depending on the country and store network density in question, Aldi operates a lot of smaller neighbourhood outlets as well particularly in Germany often the smaller footprints are legacy stores from the past. Recently the discounter has begun to move into shopping centres, where it is usually one of the main footfall drivers. Crucial for Aldi are car parks and space for deliveries, as stores get daily truck deliveries. Aldi prefers locations near to high footfall hot spots or traffic routes. The stores do not need to be new built, Aldi Nord is perfectly happy to use buildings that are already there. Aldi Nord: Countries, benchmarks, sales, stores, sales densities Table ResearchFarm - Retail Analysts Table 17 shows Aldi Nord s sales in m in 2011, its number of outlets, sales per store, selling space, average space per store and sales densities per country where the retailer operates in. Aldi Nord operates some 5,350 stores in 10 markets comprising Belgium, Denmark, France, Germany, Luxembourg, the Netherlands, Portugal, Poland, Spain and the US. We estimate the retailer s sales in 2011 to have reached 26.1bn, with a global average of 4.9m generated by outlet from an average selling space of 883 sq m. The sales density on average stood at 5,527 per sq m. These figures include the stellar performance of Trader Joe s in the US, without which the benchmarks would be considerably lower. 83 ResearchFarm - Retail Analysts No part of this report may be reprinted or reproduced in any way without the written permission of ResearchFarm.

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