Analyse the internal and external environment of Aldi and the UK supermarket industry using Pestel, Swot, Porters five forces & BCG

• For Sainsburys Pestle and Swot analysis, see Sainsburys Pestle & Swot Analysis .
• For Tesco Pestle and Swot analysis, see Tesco Pestle & Swot Analysis

1.0 INTRODUCTION 

Aldi is a German international discount store opened in the UK in 1990 and in Ireland 9 years later. Aldi has experienced rapid growth in the UK becoming the fifth largest grocer over taking co-op (Butler 2017).The company owns more than 726 stores only in the UK with market shares of approximately 6.9% ahead of co-op which has 6% as of 2017( Davay 2017; BBC 2017).

2.0 Aldi Pestel analysis 2017-2018 (Opportunities and threats)

PESTLE is used as a strategy to analyze the macro environment and identify how future trends in political, social, economic, environmental and legal environments may impact on the company (Johnson et al.2008).This analysis helps identify the key drivers of change; These key drivers constitute of opportunities and threats in the firm’s external environment and they can be overcome by focusing on the opportunities to overcome the threats. PESTLE can be used alongside SWOT to utilize the core competences of companies like Aldi so as to take advantage of emerging opportunities and overcome any threats.

2.1 Political environment

2.1.1 The impact of Brexit on Aldi operations in the UK

According to Mintel (2017a), Brexit uncertainty has continued to plague most UK supermarkets even post Brexit. In 2017, the weakening Sterling came with rising inflation which forced UK customers to cut back on their spending especially on non-essentials, with their biggest worry being the increasing retail prices post Brexit (Mintel 2017a; Mintel 2017b). There was an increase from 45% in February 2017 to 49% in May 2017 with customers thinking Brexit would impact prices negatively (Mintel 2017a). However, even with the tough times characterised by post Brexit jitters, discounters like Aldi and Lidl were impacted positively as customers shifted to hard discounters for cheaper products (Mintel 2017a). Nevetheless, what is less certain is how leaving the single market may impact Aldi in the near future.

2.2 Economic environment

Following Brexit, the pound plunged to its lowest since 2010 with the resulting weak pound translating into a price hike, which meant consumers were less willing to spend on the high prices. The weaker sterling also led to an increase in the price of imports to the UK, a big issue for the British retail sector since Britain imports most of its food from abroad (Inman2017). According to the Office for National Statistics, there was a noticeable decrease in retail store sales which fell in the first quarter of 2017 as consumers bought fewer goods across most retail sectors apart from footwear, clothing and textile (ONS 2017). 

But while consumer spending was curtailed in general in 2017, discounters such as Aldi benefited, and will continue to do so for the foreseable future since most customers look for discounted prices which are guaranteed by Aldi, thus presenting the company with an opportunity to further increase company sales and maintain high sales (Fletcher and Bond 2016).

2.3 Social environment

The macro social environment can include changes in people’s lifestyles, fashion, labour composition, or other demographic trends that have the potential to be threats or opportunities for businesses. One of the more notable social change that’s already affecting many supermarkets or food and drinks companies in general is the shift to healthier eating habits by many consumers especially rejection by sugary foods and drinks, a trend discussed in other pestle analysis including Nestle pestle, Coca Cola pestle, or Pepsi pestle.

This shift to healthier eating habits by many customers is changing grocery retail in not just the UK but other major markets too including the US. According to Heller (2017) there has lately been more emphasis on fresh foods, especially organics, ready prepared foods, sugar free foods and foods free of artificial additives and sweeteners. This has already started negatively affecting retailers that haven't followed the trend; retailers like Aldi have increased their offerings in these categories, driven their prices lower and made easy access to healthy foods to customers but for Aldi, this may not be enough since its emphasis on low costs doesnt leave room for the more premium market of organics or foods free from sugars and additives.

2.4 Technological environment

With most businesses adapting to the on-going digital revolution, technology has become entrenched in most retail businesses for more efficient work. Customers shopping habits too have changed, shopping more on digital shopping channels because they consider them more convenient. While most of Aldi’s competitors have adopted the digital revolution of online delivery, Aldi has been reluctant to introduce the service in the UK market despite having it in the US (The Telegraph 2017).This is costing the company substancial sales since most customers in the UK are going for online services instead of queuing in supermarkets. This is nevertheless a potential opportunity in the future for Aldi UK to introduce online shopping.

2.5 Legal environment

Aldi has had a few legal issues with workers unions in the UK. In June 2017, the retailer was for instance accused of wage theft and breaking the law after claims by worker’s unions that its employment arrangements were not good for workers with Aldi accused of not respecting workers’ rights, such as making them work when it suited the company. One of the grievances is that the discounter chooses when workers should go home, early or late without respect for their private schedules (Taylor 2017). The company was also accused of wage theft whereby it does not pay the workers for negative hours (which refers to contract working hours which get postponed and the worker has to be compensated for them). Aldi had the same cases with the workers union in 2015 when the company was accused of trying to force employees to work for 38 hours (Radulova 2015). Cases like these damage the company’s reputation and efforts to build positive brand awareness.

2.6 Environmental factors

The UK Climate Change Act came into force in 2008 aiming to reduce UK carbon footprint by 80% by 2050 (legislation.gov.uk 2018). Emphasis has been put on big companies and in response, Aldi has worked on reducing its carbon emissions. The company has saved 6498 of carbon through UK and Ireland up to date. This has been achieved through monitoring the energy performance of the different stores, lighting, ventilation, and even air conditioning (Aldi 2018). The company has also worked on reducing its carbon footprint by reducing fuel consumption through using lighter vehicles with more fuel efficient tires and investing in the latest fuel management systems; the company has also introduced energy saving technology in all its stores across UK and Ireland (Aldi 2018).

3.0 Aldi Supermarket BCG Matrix Analysis 2018

The BCG matrix below analyses which major areas Aldi group should heavily invest in to facilitate future growth based on Aldi’s market share, revenues and market growth in the different countries where it is established. However, it also shows countries in which Aldi should not invest in based on low market share and grocery market maturity.

3.2 Cash cows

Aldi Germany is categorized as the cash cow for Aldi supermarket chain because given the mature grocery industry, Aldi has a market share of 11.9% market share of Germany’s retail market and had a revenue of 30,453 million Euros in 2017 (Statista 2018). Aldi German has managed to invest in the establishment of Aldi supermarket chains in other countries like UK, Slovenia, Italy, Ireland, Austria, USA, among others to increase its distribution channels and increase revenue. Therefore, Aldi Germany needs to invest little to maintain its high revenues but invest more in struggling Aldi chains in countries like Slovenia, Italy, extra, to facilitate future growth. 

3.2 Stars

Aldi UK and Aldi Ireland are considered stars for Aldi group because given the fast-growing grocery markets in UK and Ireland, Aldi has managed to scoop 7.3% and 11.6 market shares in UK and Ireland respectively with a combined revenue of £8.7bn. Through offering discounted products, Aldi managed to increase its market share by 0.3% in UK, in 2017. Given the market opportunities in the UK and Ireland grocery markets, Aldi is more likely to increase its market shares in both markets resulting in steady income for Aldi Group. Therefore, Aldi should invest heavily in its UK and Ireland markets to obtain larger market shares and sustain high revenues (Deegan 2017).

Question marks

Aldi operates in Slovenia as Hofer supermarket chain accounting for a 10.86% market share of Slovenia’s grocery market with approximately £417.2 million revenue in 2017. Hofer Slovenia is categorized as a question mark because despite the heavy investments by Aldi, Hofer has failed to gain popularity like UK’s based Aldi and attain a significant market share. However, given the competitive and fast growing Slovenian grocery market led by giant Mercatar, Aldi can heavily invest in Hofer supermarket chain to increase its market share and secure future steady revenues (ESM Magazine 2018).   
Dogs
Aldi France and Aldi Austria are categorized as dogs because despite Aldi’s huge investments, they are dubious about future development. For example, Aldi France established in 1988 with an average of 891 stores accounts for a 2.1% market share of France’s grocery market with no significant revenue. However, France’s grocery market has matured over the years hence its slow growth. Therefore, Aldi should not invest heavily in Aldi France but in other emerging markets (Statista 2018). 

4.0 Aldi Supermarket Swot Analysis 2018

4.1 Strengths

• The supermarket’s low costs are its greatest strength. The constantly increasing number of customers who are switching from competitors like Sainsbury’s because of the low prices the company is offering, is a great strength for the company (Samson 2017). This is mainly because consumers are opting for cheaper alternatives. Price cutting by Aldi and Lidl has changed the competition landscape of UK food retailing in the last 10 years, reducing the returns of their rivals (Davay 2017).
• Another major strength of Aldi is convenience. Despite offering lower prices, Aldi’s convenient stores are almost in every corner, making it hard for customers to ignore.The retailer had 700 stores by February 2017 with plans of opening more in all UK towns (Turril 2017). While not as many as rival stores like Tesco or Sainsbury's, plans for further expansion is a strength at a time when rivals like Tesco are cutting back.

4.2 Weaknesses

• The company’s lack of online delivery services in UK is one of its greatest weaknesses mostly in the digital world of today where customers associate these online services to convenience. This will automatically affect the company’s sales since all its major competitors like Tesco, Sainsbury's or Asda offer online services.
• Aldi has a limited assortment of products. According to Mintel (2017), the retailer’s products are so limited that it’s hard for buyers to do full shopping at these discounters especially when it comes to some basic foods and household products. This forces buyers to visit other supermarkets like Tesco which offer more variety and different products (Mintel 2017c).

4.3 Opportunities

• Changing consumer habits to healthier eating habits is an opportunity for the company in the UK. Healthier eating habits have become a new trend across different demographics and this is a great opportunity for Aldi to introduce more product assortments that are organic, fresher or sugar free (Heller 2017)
• 300 stores planned in the UK by 2022

4.4 Threats

• Aldi’s legal issues with its workers unions are causing negative publicity with many equating its employment conditions to Walmart, notorious for poor working conditions.

5.0 Aldi Supermarket Porters Five Forces Analysis 2018

The UK food retail has seen dramatic changes over the last decade with the structure of the industry dramatically altered by the emergency of German food retailers Aldi and Lidl. Aldi has grown so fast in the last couple of years that it is currently on the cusp of breaking the traditional Big Four oligopoly that hold more than 70% of the UK food retailing market share. While Aldi currently holds 6.8% market share, the analysis below discusses and analyses how the five forces of competition - buyer power, supplier power, threat of entry, threat of substitutes and industry rivalry –have driven the traditionally oligopolistic structure of the UK food retailing industry into a hypercompetitive state where the five forces are now so strong they are driving profit margins down and leading to mergers, acquisitions and divestments for the first time a longtime as rivals engage in what has essentially become a price war in the UK food retailing industry.

5.1 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.

5.2 Bargaining power of suppliers

Aldi supermarket suppliers have low bargaining power due to the relative buying power of Europe’s second biggest food retailer thus Aldi suppliers fear to lose big business 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). 

5.3 Threat of 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 outcompete 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).

5.4 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 Aldis, is very low.

5.5 Rivalry among existing firms

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 Sainsburys 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.

Conclusion

Pestel, Swot, BCG and Porters five forces are some of the most popular strategic tools used by businesses to analyze the micro and macro environment and how it may impact on any particular company. As seen from the analysis, Aldi has been perhaps the biggest winner in the UK food retailin industry.  For the last couple of years, the major UK supermarkets especially the principle Four have all lost market share mainly because of the hard discounters such as Aldi and Lidl who have doubled in growth.Price cutting by Aldi (and Lidl) has changed the competitive landscape of UK food retailing in the last 10 years, reducing the returns of their rivals and may continue to do so for the foreseable future if Britain further experiences a post-Brexit hard landing that can further affect the economy pushing even more consumers to the hard discounters including Aldi. For the first time since 2004 when Britain saw Safeway merge with WM Morrisons, 2018 has far seen a flurry of mergers and acquisitions with Tesco acquiring Bookers Wholesale in March 2018 while Sainsburys is seeking to merge with Asda to create 'Sainsda'. If this 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 with these two controlling atleast 60% of the UK food retailing industry.

References

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Mintel (2017b) “European Retail Handbook September 2017” Mintel Academic

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Mintel (2017d) " Supermarkets - UK- November 2017" Mintel Academic

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