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International marketing case study on the expansion strategies adopted by Aldi and Lidl. Case study from: Ghauri, P., Cateora, P., (2010) International Marketing
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Aldi and Lidl: International Expansion of Two German Grocery Discounters: Case study
Answer 1
Greenfield Investment strategy is one of the routes that companies prefer
when it comes to making a Foreign Direct Investment (FDI). As the term
suggests, it is associated with companies expanding its business outside its
national borders. greenfield investment is one such example where the company
sets off in an endeavor to establish its business operations from the scratch. An
alternate way of engaging in FDI could be via Mergers & Acquisitions or Joint
Ventures. However, the degree of flexibility and ease of conducting business
varies between the three.
From the case study of Aldi’s & Lidl’s international expansion it can be
seen that the company has engaged in both acquisitions as well as Greenfield
investment. However, in recent years it is evident that the strategy of these two
companies has tilted in favor of the Greenfield investments. Aldi and Lidl are both
efficiency seekers and more focused on supplying Fast Moving Consumer Goods
(FMCG) at the lowest costs possible. They plan to capitalize on an increased
number of units sold rather than the profits realized on a per unit basis. Tesco,
Sainsbury and other such chains are more focused on the latter factor to realize
profits.
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The two German companies had to look for international prospects as the
market in Germany was on the brink of market saturation as well as negligible
growth in the economy. Apart from this there are various factors that the two
companies could have fancied which lead to the decision of FDI’s via Greenfield
investments. Some of these factors are as mentioned below:
Degree of freedom: Greenfield investment involves setting up
business in the manner as perceived by the investors. They are free to
choose their own suppliers, channel of distribution and so on, and not
have to make do with pre defined operating procedures. This freedom
allowed the two companies to change required strategy whenever
required in order to adapt to different market conditions in different
countries. They have very few rules, regulations, licensing issues as
compared to those entering in a joint venture. This allowed the
company to cash in on the brand name which was synonymous with
low costs and attract further customers.
Resource & efficiency: As the two grocery discounters found it
difficult to expand its base in Germany as most of its market had
already been exploited, the companies’ seeked for ways of acquiring
resources at other arenas at much lower rates. This in turn, would help
them to compete in the markets with major supermarkets and
hypermarkets as they could drive down the costs of products due to
low costs of production. This degree of freedom would cause
consumers to switch loyalty and see them migrate to low cost grocery
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discounters like them. This would help Aldi & Lidl acquire a sizeable
chunk of the market share. Apart from this the company could also
cash in on economies of scale once it had established firm hold over
the market.
Political developments: Germany saw the end of communism
towards the 1990’s. This allowed for privatization and expanding their
business in international waters had become much easier as a result,
providing added encouragement.
Technological aspects: Developments in technology over the years
had made it possible to reduce the time and effort for conducting
business overseas. The utility of internet, telecommunication and
Information Technology in particular made it easier to venture in
emerging markets.
Government regulations: Since the establishment of The World
Trade Organization in 1995, the barriers to entry in the International
markets have been reduced by a great deal. Competition within
sectors such as financial services, telecommunication and transport
ensured that the costs were driven down further in favor of companies
seeking Foreign Direct Investment opportunities. (Griffin & Pustay
2007 pp.27-31)
Emerging markets: Globalizations positive effect on the emerging
markets has seen the standard of living raised considerably. The
demand has been on the rise which allows for the scope of
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establishing business in these emerging markets. Some countries
have witnessed major expansion in a very short duration which
increased the appeal for the likes of Aldi and Lidl.
Economic Factors: In recent years the impact of recession has had a
considerable effect on the consumers spending patterns and
disposable incomes. The ‘no- frills’ approach and the resultant
reduction in product prices offered by Aldi & Lidl during such times has
witnessed migration of consumers from supermarkets such as
Sainsbury’s & Tesco to the heavy discounters such as Aldi & Lidl. For
instance, Lidl was able to drive down the prices of its product by as
much as 30% during the times of the economic recession as compared
to the other supermarkets. (www.thetimes.co.uk) Another instance of
this is evident where Aldi & Lidl experienced approximately 13%
increase in volume of sale in March, 2011 due to the inflation and the
rising fuel costs etc among others. (Banks, 2011)
Closure of cultural gaps: Another benefit of rapidly increasing
technology, especially the likes of the Internet and Satellite and
Television has seen the barriers of social differences getting smaller
and less intimidating. This could have helped both Aldi & Lidl in
developing a perception and gather information of the markets
specifications.
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All these factors were responsible for both Aldi & Lidl in choosing Greenfield investment
as a primary market entry strategy. Griffin and Pustay (2007) pp.27-31
Answer 2
Aldi & Lidl are both essentially ‘No-Frills providers.’ Their target market is
the price sensitive customers who usually have a limited budget whilst shopping
or choose not to buy better quality and expensive products. Aldi therefore has to
sacrifice on the stock of brands that it makes available for sale. More reputed the
brand, the more expensive it gets and hence they opt out of this. Instead they
award contracts to local suppliers and also reduce the carbon footprint in the
process. (Johnson, G., et others, p.227, 2008)
When Aldi entered the UK market in 1990 (Birmingham) with the same
strategy that was popular in Germany, it faced quite a few barriers. They
introduced the same low cost products in the UK market. However, the
perception associated with UK implied that low cost products were related to low
quality. Many consumers were reluctant to try Aldi for this reason. Aldi’s floor
space as compared to Tesco or Sainsbury’s was also lot lesser. They used own
branded products, invested less in décor, architecture of the store itself. All of this
made a poor impression in the consumer’s opinion in UK. Aldi stocked only 1000
lines of products and did not provide much variety and choice. In their defense,
this strategy was adopted because they realized that more products equated
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more overhead costs. The consumers in UK before the arrival of Aldi, which was
one of the first FDI’s, were used to shopping in larger supermarkets. These
supermarkets as opposed to Aldi’s 1000 stock-line, maintained an inventory of
almost 20,000 products.
All these factors went on to portray a poor impression of the company to
the UK market. Aldi, however, were always of the opinion that their products
were of good quality even though their prices were less. They defend it with the
theory of economies of scale.
Since, Aldi were being perceived as an “underclass –discounter’’, they set
about launching advertisement campaigns that showed Aldi in the same standard
as the rest of the supermarkets. They depicted quality of the products as their
major attribute as well as the discount feature. The campaign was fairly
successful and the investment in advertising had attracted a new set of
consumers. They also revamped their stock of meat and added more variety for
the consumers to choose from. Aldi by 2010 was successful in attaining 3% of
the UK market share. Aldi seems to have committed this mistake as it did not
consider the geo-demographical change in interests between Germany and UK.
In Germany cheap products are not viewed as low quality products, quite the
contrary as mentioned in the case. However, in UK, the consumer’s perceptions
are based on price, affluence, brand name, and size. Aldi has rectified these
concerns and currently supply high end products and extra customer service in
UK.
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However, Aldi’s Market growth share seems to have hit a glass ceiling. As
UK claws its way out of recession, competitors like Asda and Sainsbury’s are
providing branded products for less. Aldi seems to be losing the momentum it
gathered during the recession.
Aldi’s entry in Switzerland had similar barriers. It was well received in its
introductory stage. Aldi was again the first of the heavy discounters to enter the
Swiss markets. The supermarkets like Coop, Migros and Denner had most of the
market share split between them. However, just before the arrival of Aldi in the
Swiss market, the two local companies mentioned above started slashing prices
and offering discounts. Aldi had to face the intense competition which was one of
the highest barriers to entry. The customer perception of Aldi was very similar to
that of the customers in UK during Aldi’s introductory phase. They also had to re-
label their products in German, Italian and Swiss. Restrictions on site
development also made it tougher for Aldi. (Jenetes, J. et al 2007 p. 116, Schafer
2006 p.113)
Aldi also had to face criticisms from Migros, Coop and other local
supermarkets. According to Migros’s boss, Herbert Bolliger- price cuts offered by
Aldi came at a cost that was affecting the economy. He considered that the
repercussions of these cuts will have to be faced by producers and employees.
He also mentioned that the price wars would have a definite impact on the
economy and most of the tax payer’s money would therefore be utilized in benefit
of the unemployed.
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Aldi maintained that their Corporate Social Responsibility (CSR) in
Switzerland were evident where most of the products were procured from local
suppliers. They also brought out the issue that Aldi was a welcome respite to the
price sensitive customers. The prices of products were nearly two times more
expensive than the German counterpart. (www.swissinfo.ch)
Discuss the risks associated with this approach.
In order to satisfy the interests of markets like UK and Switzerland, Aldi
had to alter its strategy. This included heavy investment in media,
advertisements through pamphlets, new branded products of higher price range,
refurbishing the stores, added customer service support, increased product
range etc. All of this implied that the costs of production in terms of Land, labour,
material and overhead costs were adding to the cost of the product which was
being pushed to the customer.
Aldi’s global image recognition as a “No-Frills’’ heavy discounter could
change as they continue to provide high quality, high priced products. Following
in the steps of Aldi very closely, Lidl would then benefit from any migration from
Aldi’s price sensitive customers. Aldi stands to lose its brand loyal customers and
ultimately its majority of market share to its closest rivals.
Changes in the product ranges would also imply that some of the old products
that Aldi’s brand loyal customers have grown to like will be withdrawn from the
shelves. This will cause dissatisfaction and may lead to Aldi losing their clientele.
Aldi’s Corporate Social Responsibility of including local suppliers may have to
change in order to provide better brand products. The environmental effects -
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that of carbon foot print will also vary as a result of this approach as Aldi
continues to engage more suppliers from different regions.
Answer 3
I agree with the expert’s opinion on Aldi & Lidl’s expansion strategy as it is
evident in the case study.
Aldi’s “slow & well considered” internationalization approach: Aldi has been
using the “action & recovery” approach for its internationalization process. This is
evident in the case study which mentions that Aldi stopped its expansion activities
for about 10 years before launching another.
By adopting this strategy, Aldi gives itself a chance to scrutinize the market’s
reaction for scope of growth, product requirements etc. By giving itself time, Aldi can
adapt to the changing circumstances arising out of various controllable as well as
uncontrollable factors. These may range from adverse weather conditions, inflation,
Government regulations etc.
In recent years (2000 onwards) Aldi’s rate of expansion has been increased to
one new market per year in order to compensate for the stagnant growth in
Germany as well as the saturated markets for the heavy discounters. Due to this
well considered and slow approach the company also mitigates the losses that may
arise out of losses. By opening one or two outlets at a time, Aldi can minimize its
losses if they desire to pull out of the market. The cost of disposing the business will
also be under control and may not do much harm to Aldi’s overall profitability. Aldi’s
cautious approach is evident where they ventured into Switzerland. They opened
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their stores in the German speaking part of Switzerland before expanding in other
areas, in order to scrutinize the potential for growth.
Lidl’s “Fast & Pushing” strategy: According to me this strategy employed by the
German soft discounters is similar to a trial and error method and may not always
be effective. In fact it can account for major losses if not controlled in time. For
instance, Lidl’s aggressive expansion that saw the opening of outlets in 21 countries
in the span of 18 years is much faster than that of Aldi’s.
In Norway (2008) Lidl had to sell more than 50 outlets at the same time. Norway
already had the highest number of stores per million people in Europe. This implies
that Norwegians did not experience the lack of choice that Lidl could capitalize on
with its soft discount model (www.onwindows.com). If it were to open a few stores
like Aldi & waited a while to see the market reactions, it could have mitigated its loss
to a great extent. The cost of disposing of 50 stores in one go could definitely have
resulted in loss. Lidl’s image must have also suffered and the share values dropped
as a result. The fast & pushing strategy backfired on this occasion.
On the other hand the trial and error method worked for Lidl in Poland (2007)
where they recorded a profit of 759 million Euros. This justifies the expert’s opinion
of fast & pushing strategy. By establishing a hold on the Polish market before its
competitor Aldi could get there, Lidl was able to capitalize on the “first mover
advantage” & successful on this count. By entering in the Polish markets before
Aldi, the company had got a head start and was able to establish its name and
gather consumer loyalty.
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Answer 4
Advantages and Disadvantages of Internationalization by Aldi:
As is mentioned in the case, it can be observed that Aldi’s expansions strategy
although slower than that of Lidl, still encompassed internationalization to arenas
other than Europe. Lidl started taking it business outside the EU only in 2009.
The possible advantages of this strategy on Aldi:
According to Dunning’s, Electric theory of Internationalization, Aldi could have the
advantage of owner specific management, internalization and location benefits.
Owner specific management implied that Aldi’s trade secrets were safe and any
proprietary brand, patents, copyrights etc could give them a competitive
advantage over the others.
Internalization implied the channel of distribution could be trimmed down to
reduce costs, by cutting off intermediaries and capitalizing on the economies of
scale.
Aldi could also have the advantage of selecting an appropriate location to their
favor. They could benefit from setting up stores with fewer competitors, good
access to the labour market and suppliers and so on.
Apart from this Aldi could also have benefited from the ‘First- Mover advantage’.
As is evident in the case in countries like USA, Aldi had the first mover
advantage of being the only recognized heavy discounters. This gave them
ample opportunities to tap into the market with sizeable growth potential. Their
image and brand name could benefit from the first mover advantage.
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Disadvantages of Internationalization (Gupta, S. Randhawa, G., 2008 pp.67-78)
Underestimating culture differences, for e.g. in UK. (case study)
Establishing appropriate suppliers in the beginning is an issue and they might
have to import products until that happens. This leads to reduced efficiency and
increased price of products.
Added cost in the form of advertisements & promotions in order to pull customers
to switch brands.
Lack of local expertise and understanding of competitive forces.
Maintaining a link between the Home country and the Host country becomes a
complex affair.
Recommendations to Lidl on its geographical presence strategy:
Lidl has been entering International markets recently at about twice the speed
that Aldi employs. However, this strategy might not always be successful. If they
are not planned properly, Lidl stand the chance of failure as it witnessed in Norway.
It is important that before they enter into the market they carry out proper market
research. Even when the reports are in favor of expansion they should tread
cautiously and open few stores at a time and not use the strategy of opening many
stores together. This way the losses are mitigated if the company changes its mind
and its image in the eyes of the stakeholder are also maintained. Wrong strategic
decision like that which lead to selling off 50 stores in Norway could not have been
viewed favorably by the stakeholders.
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They should also utilize Line extension and brand extension strategies to
diversify into different markets just like Aldi. By doing this, they can introduce and
diversify into different products and services and capitalize on the brand name.
(Kotler, P., et.al 2005)
Lidl is yet to venture into the formidable markets that consist of Brazil, Russia,
India and China. These sectors are experiencing high middle class growth and the
demand for heavily discounted products is high. If they can overcome the
Government regulations and policies, and develop the retail market sectors further,
it could prove to be a profitable venture.
At present in a bid to keep their prices low, Lidl has been keeping a tight noose
around its employees and suppliers. There have been several controversies in the
past in this regard which might have tarnished its image. In the long run (up to
2020) the company should focus on other ways of cutting costs and not at the
expense of employees and suppliers. (www.guardian.co.uk)
They should also concentrate on cultural differences. For instance their decision
to support selling of Hare meat in its stores across UK attracted a lot of attention
and was criticized by animal rights activists and customers alike.
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