Introduction

The UK food retail industry is highly competitive with four major players Tesco, Sainsbury, Asda and WM Morrison supermarkets controlling a 69.8% of the UK’s grocery market. Aldi supermarket on the other hand is one of the fast-growing supermarkets in the UK with a 6.8% market share, making it fifth biggest supermarket in the UK, up from 11th (Mintel 2017b; Statista 2018). With over 700 stores currently across the UK and Ireland and a further 300 planned by 2022, Aldi's aggressive expansion plans are changing the industry structure of the UK food retailing industry and nature of rivalry (Mintel 2017b; Cox 2018). The analysis below shows how different competitive points affect Aldi supermarket.

Bargaining power of buyers

Aldi customers have relatively high bargaining power due to low switching costs associated with shopping among the low priced supermarkets like Tesco, Asda, Iceland or other convenience formats such as Spar and Londis. Such a wide choice gives food retailing consumers a lot of power to choose between various supermarkets when shopping around, which is exactly what they do. According to a Mintel (2017d) survey, less than one in ten food customers shop with one retailer in the UK with just 7% sticking to one single food retailer in a typical month, which shows the high level of promiscuity amongst grocery shoppers who are clearly happy to shop around among different rival offers.

Bargaining power of suppliers

Aldi supermarket suppliers have a low bargaining power due to existence of many suppliers in the grocery retail industry thus Aldi suppliers fear to lose their business contracts with such a big supermarket to other suppliers. This gives Aldi the power to get products from suppliers at the lowest possible prices to improve its profit margins (Rodionova 2017).

Threat of new entry/Barriers to entry

In the UK food retailing industry, threat of entry is high due to the relative ease with which any firm with can enter food retailing. While the big multiples especially the Big 4 have always protected their profits with massive investment in distribution, marketing and branding, the commoditization of food retailing has lowered the entry barriers which means any competitor who can offer the lowest possible price can enter the market and compete with the big multiples. This is exactly how Aldi and Lidl have managed to compete with the traditional Big 4, since Aldi has been able to offer product price discounts of up to 40% below most competitors’ prices for similar products (Hance 2017). 

Threat of substitutes

The threat of substitutes for the grocery market is very low for food items because food substitutes would be products that consumers would eat that don’t come from grocery retailers e.g. herbs, supplements etc. These are niche food products and in any case supplement foods from supermarkets rather than act as substitutes. Unless people start eating herbs and supplements as a substitute for food, the threat of substitutes for supermarket food (including Aldi) is very low.

Competitive rivalry

Competition in the UK food retail industry is high. The intense competition has led to price wars, massive discounting and a flurry of mergers and acquisitions culminating in Tesco merging with Bookers Wholesale as well as the upcoming merger of Sainsbury’s and Asda (Sainsda). The price-based nature of competition is causing further consolidation of what was already a highly consolidated industry where the top 4 controlled more than 70% of the food retailing market. But if the “Sainsda” merger is successful, it may change the structure of the UK food retailing industry from the current oligopolistic structure towards a duopoly of Tesco versus “Sainsda” where these two control 60% of the UK food retailing industry.

Competition in the food retailing industry in UK is relatively high because other supermarkets like Tesco, Asda, also have similar quality products at low prices, giving customers the power to choose between a variety of rival offers within the same price ranges hence Aldi faces stiff competition. This intense competition has led to price wars, innovation of new products, excessive advertisement, among others. For instance, Aldi and Lidl supermarkets have promised to slash prices to beat that may arise from the proposed merger of Sainsbury’s and Asda (Sainsdas) in order to retain customers (Rodionova 2018).

Conclusion

The above five forces of competition analysis shows the different threats and challenges that Aldi supermarket faces in the market including customer’s ability to easily shop at cheaper rivals due to low switching costs as well as the possibility of substitute offers from existing players in other non-food markets. However, Aldi’s biggest threat is competition from existing rivals including Tesco, Sainsdas, Cooperative and growth of discount convenience stores within the UK. Nevertheless, as detailed in Aldi Pestle and Swot 2018 analysis, Aldi is actually positioned to fare better than many rivals as evidenced by plans to open another 300 stores in the UK by 2022.

References

Barrie Joshua (2017) “The staggering amount more you pay on food at ‘convenience’ supermarkets” Mirror [online] at https://www.mirror.co.uk/money/shopping-deals/staggering-amount-more-you-pay-10227899

Cox Josie (2018) “How Aldi went from small-town German supermarket to major threat to rivals such as Tesco and Sainsbury” The Independent [online] at https://www.independent.co.uk/news/business/analysis-and-features/aldi-supermarket-latest-how-grow-small-germany-discount-why-uk-us-tesco-sainsbury-rival-a8142066.html

Hance Mary (2017) “Aldi’s low prices keep customers coming in” Tennessean [online] at https://www.tennessean.com/story/life/shopping/ms-cheap/2017/04/07/aldis-low-prices-keep-customers-coming/99972512/

Ho Geoff (2018) “Aldi and Lidl take 2017 growth by storm at the expense of major competitors” Express [online] at https://www.express.co.uk/finance/city/904602/aldi-lidl-sales-figures-growth-tescos-shopping-figures 

News Desk (2018) “Aldi launches more than 60 food products in Germany” Foodbev.com [online] at https://www.foodbev.com/news/aldi-launches-60-new-organic-products-germany/

Rodionova Zlata (2017) “Supermarket suppliers underpaid ‘millions of pounds’ every year by UK’s biggest retailers, says watchdog” The Independent [online] at https://www.independent.co.uk/news/business/news/supermarket-suppliers-underpaid-millions-pounds-groceries-farmers-groceries-code-adjudicator-a7677831.html 

Rodionova Zlata (2018) “Lidl and Aldi to slash prices to beat ASDA and Sainsbury’s merger” The Sun [online] at https://www.thesun.co.uk/money/6242511/asda-and-sainsburys-merger-could-reignite-price-war-and-lidl-and-aldi-will-fight-back/ 

Statista (2018) “ Market share of grocery stores in Great Britain from January 2015 to March 2017 ” Statista [online] at https://www.statista.com/statistics/280208/grocery-market-share-in-the-united-kingdom-uk/  

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