The world of retail is constantly changing. Retailers, big and small, are trying new tactics to add value to the typical shopping trip. As competition increases and consumer preferences evolve, retailers continue to advance the way consumers browse, shop, and buy. Total retail sales in the United States amounted to approximately USD 6 trillion in 2017. Table 1 identifies the largest retailers around the world based on publicly available data for fiscal year 2017.
Source: Deloitte (2019) Touche Tohmatsu Limited. Global Powers of Retailing 2019
The food retail sector comprises a decent share in the industry with USD 700 billion or about 12%. In 2017, average food at-home expenditure of U.S. households was almost USD 4,400 (Conway, 2019). Retail grocers carry a broad line of fresh, frozen, canned, and other prepackaged foodstuffs. Many of these stores also sell a variety of nonfood items such as health and beauty products, paper goods, and cleaning supplies. However, food items constitute the majority of their product lines and sales volumes.
On average, groceries are purchased five times per month. Traditionally, this meant visiting a brick-and-mortar store. However, a new trend that the market cannot overlook is that consumers are growing more comfortable ordering groceries online. During the five-year period leading up to 2019, industry revenue has grown at an annual rate of 16.5% to USD 33.4 billion. The two companies dominating the online grocery industry are Amazon and Walmart.
Amazon and Walmart: Let’s Talk Groceries
Amazon.com, Inc., doing business as Amazon, is a multinational technology company focusing on e- commerce. Founded by Jeff Bezos in 1994 to sell books online, the company turned into the largest e-commerce marketplace and cloud computing platform in the world as measured by revenue and market capitalization.
When Amazon first started, groceries were not even on its radar. It was a small company in Seattle, Washington, and Bezos would drive the packages to the post office himself in his 1987 Chevy Blazer. The breakthrough took place 23 years later when Amazon acquired Whole Foods for a staggering USD 13.7 billion in 2017 (Bhattarai, 2017). The acquisition instantly added 460 physical stores in hundreds of communities across the United States and gave Amazon a foothold in the grocery business.
The Whole Foods purchase provided Amazon with direct access to consumers, and their information, as they shop in stores for their foods. The technology giant was able to leverage such information and access to develop a number of grocery delivery programs over the past two years (Perez, 2019).
By August 2019, the company offered four different grocery delivery programs, depending on how quickly consumers needed their groceries and what they were shopping for (Table 2).
Table 2. Amazon’s Grocery Delivery Programs (2019)
USD 14.99 per month + Prime membership (USD 119/year)
Free for orders over USD 35, otherwise USD 9.99
Same-day and next- day delivery in major cities
Fresh groceries, such as produce, meat and dairy
Included in Prime membership (USD 119/year)
Free for 2-hour delivery on orders over USD 35, otherwise starts at USD 4.99
1-hour and 2-hour delivery windows available in major cities
Whole Foods groceries
Included in Prime membership (USD 119/year)
Free for orders over USD 35, otherwise USD 5.99
1–4 business day shipping available in 48 states
Shelf-stable products such as snacks, cereal, condiments, and cleaning products
Subscribe & Save
5–8 business-day shipping available anywhere Amazon delivers
Frequently purchased non-perishable groceries (e.g. coffee pods)
The versatility and reach of these programs provide Amazon with a lead in the online grocery market. Online grocery sales are expected to exceed USD 100 billion by 2025, and Amazon is already ahead in the online grocery battle with 100-plus million Prime customers (Danzige, 2018).
Walmart Inc. is a U.S. multinational retail corporation that operates a chain of discount department stores, supercenters (hypermarkets), and membership clubs. The company was founded in 1962 by Sam Walton in Bentonville, Arkansas. As of August 31, 2019, Walmart had 11,766 stores and clubs in 29 countries. Walmart is the largest company (and hence retailer) in the world, with revenues exceeding USD 500 billion in 2018. For decades, Walmart focused on logistics efficiency and supply chain management as its core competencies. Walmart was not known for selling groceries. However, the sheer size and power of the big box retailer made it a leader in that market. Since groceries make up more than half of Walmart’s annual sales, the company is the world’s number one grocer.
Although Walmart has reigned as the largest retailer in the world since 2000, the company recognized the significance of groceries only a decade or so ago. In 2010, Walmart began adding an economy supermarket to existing stores and building supercenters across the country (Table 3).
Table 3. Walmart U.S. Stores (2012–2019)
Source: https://www.statista.com/statistics/269425/total-number-of-walmart-stores-in-the-united-states-by- type/
Walmart operates more than 3,500 supercenters in the United States. By offering a broad assortment of grocery and general merchandise products under one roof, Walmart provides a one-stop shopping experience. General merchandise (nonfood) items are often purchased on impulse when customers’ primary reason for coming to the store is to buy groceries. General merchandise enjoys higher margins, enabling the supercenters to price food items even more aggressively. By serving customers seeking “everyday low prices,” Walmart was able to dominate the grocery brick-and-mortar realm.
In the online realm, Amazon is every company’s biggest competitor. “Every company’s competitor” sounds like a big claim, but when we study the breadth of Amazon’s offerings, it makes sense. Remember, Amazon not only sells its own products online, it also acts as a broker for others to sell their products through its Amazon Marketplace, taking a fee with each transaction.
Walmart knows that it cannot simply ignore the online channel. It claims, however, that shoppers want a hybrid offering, so they can order online and pick up items in stores. In 2016, Walmart paid USD 3 billion to acquire Jet.com, an American e-commerce company headquartered in New Jersey. The startup has pioneered a pricing algorithm that adjusts the price of the contents in the cart based on distribution centers the items come from. The move was a bold attempt to battle with Amazon in the online dominion. However, the acquisition failed to live up to expectations, and Walmart resorted to overhauling its own website rather than depending on Jet.com (Bose, 2019). Walmart started by revamping its website, allowing shoppers to place orders online and pick up groceries at physical locations. Although the new business model saves customers the hassle of browsing the massive stores, it still requires them to make the trip. In most stores, shoppers have to interact with an associate to pick up their orders. The company is experimenting with pickup kiosks, and even robots, to expedite the process and eliminate human interaction. The pickup kiosks are part of a comprehensive effort by Walmart to seamlessly integrate its online and offline services and leverage the power of its vast footprint of stores to better compete with Amazon (Ryan, 2018).
In summer 2019, Walmart introduced an unlimited grocery delivery service called “Delivery Unlimited” that costs USD 98 a year or USD 12.95 a month. To use it, shoppers place their order on Walmart’s website or app, and can choose a delivery window for when they want their order delivered to their doorstep (Liptak, 2019). The grocery giant is also experimenting with an in-home delivery service that will allow Walmart employees into customers’ homes to place groceries directly into their refrigerators. Walmart’s associates will wear a camera when they enter customers’ residences, allowing customers to watch the delivery live from their smartphones. Shoppers won’t have to pay for a camera, but they will have to install a special door lock (Meyersohn, 2019b).
To make online grocery shopping even easier, Walmart partnered with Google to order groceries using voice commands. The partnership works with any device the features Google Assistant, including Google Home, Android devices, and iPhones. The decision to partner with Google makes sense not just because of Walmart’s ongoing battle with Amazon, but because 12.6% of Google Home owners already order groceries via voice, compared with 4.6% of Alexa owners. To use this new feature, consumers must first link their existing Walmart accounts to their Google Home account and select their default pickup store (or let Google do it, and have it find the closest store to a user’s registered address). Shoppers can initiate their order by saying “Okay Google, talk to Walmart.” Then they can add items to their cart, which can be done over different shopping sessions. Shoppers may opt to pick up their orders at the store, or choose a delivery option (Meyersohn, 2019a).
Aldi: The Underdog
Aldi, a German discount supermarket chain, operating over 11,000 stores in 18 countries, generates USD 100 billion in estimated annual revenues. Aldi began humbly as a tiny shop in Essen, run by two frugal brothers, Karl and Theo Albrecht, who founded the company in 1946 in the aftermath of World War II. Looking to reduce waste and costs amid the ruins of postwar Germany, the brothers established a bare-bones model at their store, selling only nonperishable food items at low prices. By keeping their prices lower than competitors the discount store earned a favorable reputation, and by 1948 the Albrecht brothers managed to open four more stores around Essen. By 1955, the chain had more than 100 stores throughout Germany and the brothers’ thriftiness had become an integral part of the company’s culture. In 1961, the brothers changed the name to Aldi, short for the original name Albrecht Diskont (Albrecht Discount), and the business continued to thrive. In 1966, they cordially split the company into two divisions: Karl led Aldi Sud that controlled the stores located in the southern half of Germany, and Theo took over the stores in the country’s northern half under Aldi Nord. The first Aldi store opened in the United States, in Iowa, in 1976, with Karl’s Aldi Sud expanding throughout the Midwest and Eastern United States. In 1979, Theo’s Aldi Nord acquired a small California grocery chain, Trader Joe’s, primarily because he liked the chain’s commitment to low prices and the stores’ loyal customer base.
By 2019, Aldi operated almost 2,000 stores in 36 states, employed over 25,000 people, and served more than 40 million customers each month (Pomranz, 2019).
Aldi sells frequently purchased grocery and household items, mainly under its private brands, which aim to meet or exceed the national brands on taste and quality. Ninety percent of all products are Aldi-exclusive brands, procured primarily from the same manufacturers that make national brands. This helps provide high- quality products without the additional costs of advertising and marketing usually associated with national brands.
The company thinks grocery shoppers are moving toward easy-to-traverse stores instead of roaming warehouses-like supermarkets that take longer to navigate. The majority of Aldi’s stores are around 12,000 square feet with just five aisles and are designed to stock merely 1,000 SKUs or stock keeping units. In contrast, a conventional supermarket tends to carry 40,000–50,000 SKUs, while a Walmart Supercenter might have over 140,000 items, spanning an average of 187,000 square feet per store. Smaller stores and fewer SKUs help cut operating costs and generate faster returns. Instead of 12 varieties and brands of eggs, Aldi sells only one type at a ridiculously low price (Figure 2).
Figure 2. Eggs at Aldi
Aldi is known for its limited assortment of products and discounted prices. Photo of Grade A eggs display at an Aldi store in Florida (taken by author in July 2019).
Besides, Aldi locations operate during peak shopping hours, which means they aren’t open as early or as late as larger competitors. A typical Aldi store, for example, opens at 9.00 a.m. and closes at 8.00 p.m. (11 hours). In contrast, a conventional supermarket is open 18 hours a day and a Walmart supercenter is likely to be open 24 hours a day. Meanwhile, staffing levels are much lower than a classic grocery chain. As part of its low-cost business model, Aldi keeps a limited number of staff on the clock at any given time (just three to five people). Shoppers are expected to bring a quarter if they want to utilize a shopping cart. They deposit USD 0.25 and get it back when they return their cart (Harding, 2018).
Aldi products arrive at store locations in boxes with one side missing, so that they can be put onto a shelf without having to be unpacked, thus saving the company having to pay an employee to stock shelves.
Figure 3. Shelving at an Aldi in Australia
Also, all of Aldi’s private-label products have multiple barcodes on them. The design allows for a quicker checkout, since cashiers don’t have to waste time searching for a single barcode to scan.
Figure 4. Checking out at an Aldi in the Netherlands
Note the multiple bar codes on the box of cookies.
Source: Tijmen Stam. Wikimedia Commons.
Finally, shoppers can use contactless payments; and need either to bring their own bags or buy reusable bags at the store. They are expected to bag their own groceries.
In 2018, Aldi announced it was expanding its online grocery delivery service to all of its stores in the United States (2,000 stores in 36 states). Aldi has partnered with Instacart offering grocery delivery. Customers can place orders online by going to Instacart.com/aldi (there’s a USD 10 minimum) or by downloading the Instacart app to their smartphone. Shoppers can have their orders delivered within one hour for USD 9.99 fee (Cahn, 2018). Undoubtedly, Aldi is growing into an increasingly annoying threat to American grocery leaders Walmart, Kroger, and Whole Foods, among other national and regional grocery store chains. Its success has forced large chains like Whole Foods, and even Walmart, to lower their prices to compete. Aldi is investing USD 5 billion into new stores as it aims to be the third-largest grocery chain by 2022, behind Walmart and Kroger, with 2,500 stores (Kim, 2019).
Who Else Is Contending?
Two more players cannot be overlooked in the grocery landscape: Kroger and Target. Founded in 1883 and headquartered in Cincinnati, the Kroger Co. (Kroger) is a U.S.-based retailer operating primarily in the food and beverage stores subsector. Kroger sells a range of private brands as a way to differentiate its supermarket operations and compete against other industry players, with each store stocking about 15,000 private-label items. In total, the company employs 450,000 workers throughout its nearly 2,800 supermarkets. Most of the company’s supermarkets offer personalized online grocery ordering and pickup, with many also providing delivery services.
Target Corporation (Target) is a large-format general merchandise retailer, headquartered in Minneapolis operating 1,844 stores across 49 states. Since it was incorporated in 1902, the company has evolved into one of the largest retailers in the country, employing an estimated 360,000 people. Target offers daily essentials and consumables at low prices, and the company has carved out a niche market by focusing on fashionable and trendy products. Target’s retail business has traditionally comprised two distinct store formats: general merchandise stores that carry apparel, jewelry, shoes, home appliances, housewares, and electronics, while excluding groceries; and SuperTargets that carry a wider selection of such goods, in addition to a full line of perishable groceries. In recent years, Target has been aggressively adding groceries as part of its general merchandise stores’ product offerings. This transition has allowed the retailer to capture more consumer dollars by providing a complete one-stop shopping experience. A major industry development occurred in late 2017 when the retail giant paid USD 550 million to acquire Alabama-based Shipt, a membership-based grocery delivery startup established in 2014. The deal allowed Target to introduce same-day delivery services at virtually all its stores by the end of 2018. Shipt, which became an independent subsidiary of Target, used a network of independent contractors to make deliveries from Target and other retailers.
In 2017, Lidl opened its doors in the United States for the first time. Lidl is a family-owned German discount grocery chain, which naturally draws comparisons to Aldi. In 2019, Lidl increased its store footprint to nearly 100 locations. Only time will tell if Lidl can be a real competitor to Aldi in the United States as it has been in Europe. The two companies have a similar business model and they do compete fiercely in many markets overseas (Ladd, 2018).
In conclusion, there was a period in time when Walmart was David, and Sears was Goliath. Arguably, it is more fun to be David as consumers tend to empathize with the underdog and dislike the giant. Twenty years ago, Walmart turned into Goliath and Amazon turned into David. Today, the two retail mammoths are taking stones from other Davids such as Aldi. The battle between David and Goliath is revolutionizing the grocery industry and the bottom line is that if you become big and stagnant, you will end up taking a lot of hits.
All questions should be answered in the context of the Case Study.
Part 1: Retail Strategies (35 Marks)
Question 1: Target Market, Retail Format, and Sustainable Competitive Advantage
1a. Who might be Aldi’s target market(s)? Describe their behaviours. (10 marks)
1b. Describe Aldi’s retail format (e.g. type of merchandise and services offered, pricing, visual merchandising, location, and customer services etc.) (15 marks)
1c. What can be regarded as sustainable competitive advantages for Aldi that help it outcompete other competitors? (5 marks)
1d. What could have been the growth strategies applied by Aldi? Justify your answer. (5 marks)
Part 2: Merchandise and Inventory Management Strategies (40 Marks)
2a: Describe Aldi’s current merchandise and inventory management strategies. (14 marks)
2b: Evaluate Aldi’s current merchandise and inventory management strategies by identifying at least two positive and negatives aspects of the strategies. (16 marks)
2c: From the above evaluation of the current strategies, recommend strategies that might help Aldi improve its current strategies’ efficiency and effectiveness. (10 marks)
Part 3: Information System Management, Integrated Marketing Communication (IMC), and Future Opportunities for grocery retailers in Australia (25 Marks)
Think about Aldi in Australian market and the current Australian grocery retail industry.
3a: Currently Aldi does not offer online shopping in Australian market. Why do you think it is the case? If Aldi is to offer online shopping in Australian market, how would you recommend the firm to manage its customers’ online purchase experience? (10 marks)
3b: What are the current IMC strategies applied by Aldi in the Australian market? Evaluate them by identifying at least two positive and two negative aspects from the current strategies. Suggest some solutions in order to eliminate the current negative aspects of the strategies. (10 marks)
3c: What would be implications now for Coles and Woolworths from this battle of Aldi against the giants in grocery retail industry in the United States? (5 marks)