1.0 INDUSTRY ANALYSIS: PESTEL FRAMEWORK
1.1 Political Factors
Aldi, short for “Albrecht Discount”, operating in a globalized environment with stores all around the UK. It is a German multinational headquartered in Essen. Hence Aldi’s performance is highly influenced by the political and legislative conditions of these countries, including the European Union (EU).
Political situation in UK is stable. Her Majesty’s Government, led by Prime Minister, David Cameron, from the Conservative Party is mainly concerned about the financial crisis affecting economies all over the world and to strengthen the economic position of UK globally
For employment legislations, the government encourages retailers to provide a mix of job opportunities from flexible, lower-paid and locally-based jobs to highly-skilled, higher-paid and centrally-located jobs (Balchin, 1994). Also to meet the demand from population categories such as students, working parents and senior citizens. Aldi understands that retailing has a great impact on jobs and people factors (new store developments are often seen as destroying other jobs in the retail sector as traditional stores go out of business or are forced to cut costs to compete), being an inherently local and labour-intensive sector. Aldi employs large numbers of; student, disabled and elderly workers, often paying them lower rates. In an industry with a typically high staff turnover, these workers offer a higher level of loyalty and therefore represent desirable employees.
1.2 Economical Factors
UK’s economy is strong and have been able to avoid recession in 2008, but there are high unemployment and uncertainty in the economic conditions. UK’s economy will grow 0.2 % in 2012 and 2 % in 2013 said CBI Director-General John Cridland (Hamilton, 2012). GDP down to -0.4 % in 2008, Recovery is in full swing, with 1.1 % GDP in 2011 as per the data by OECD (OECD, 2012).
The GDP will grow to 2.5 % in 2012 as per data by BCC (British Chambers of Commerce), Quarterly report of BCC states that growth is slow in short term but will eventually pick up for the end of 2013. It also indicated the unemployment to peak 2.62m in quarter 4 of 2012 from 2.6m in quarter 2 of 2012 (BCC, 2011).
Banks may increase rate of interest by the end of 2013 to safeguard their interest (Pettinger, 2012).
Economic factors are of concern to Aldi, because they are likely to influence demand, costs, prices and profits. One of the most influential factors on the economy is high unemployment levels, which decreases the effective demand for many goods, adversely affecting the demand required to produce such goods.
These economic factors are largely outside the control of the company, but their effects on performance and the marketing mix can be profound. Although international business is still growing (Appendix A), and is expected to contribute greater amounts to Aldi’s profits over the next few years, the company is still highly dependent on the UK market. Hence, Aldi would be badly affected by any slowdown in the UK food market and are exposed to market concentration risks.
1.3 Social/Cultural Factors
UK’s population is shrinking and aging Impact of population shrinking on UK could lead to shortage of labour in the market place and rising expenses in services like medical services, education services. Eventually government will have to cut down on benefits and pension, or increase tax to provide to pay higher contributions and health insurance.
The trend of rising expenses is affecting UK’s shoppers buying behaviour, and affecting their nature and forcing them to compromising on quality
Current trends indicate that British customers have moved towards ‘one-stop’ and ‘bulk’ shopping, which is due to a variety of social changes. Aldi have, therefore, increased the amount of non-food items available for sale.
Demographic changes such as the aging population, an increase in female workers and a decline in home meal preparation mean that UK retailers are also focusing on added-value products and services. In addition, the focus is now towards; the own-label share of the business mix, the supply chain and other operational improvements, which can drive costs out of the business. National retailers are increasingly reticent to take on new suppliers (Clarke, Bennison and Guy,1994; Datamonitor Report, 2003).
The type of goods and services demanded by consumers is a function of their social conditioning and their consequent attitudes and beliefs. Consumers are becoming more and more aware of health issues, and their attitudes towards food are constantly changing. One example of Aldi adapting its product mix is to accommodate an increased demand for organic products. The company was also the first to allow customers to pay in cheques and cash at the checkout.
1.4 Technological Factors
Consumers need more convenient and high tech experience while shopping and technology plays a vital role in enhancing user experience and cost effective. Self checkout, in store media, intelligent scales and shelves, electronic advertising displays- these are just some recent innovations in retailing (Fiorito et al., 2010).
The internet plays an increasingly important role. Therefore, retailers need to attract new customers via e-commerce or the web2.0 (blogs and community networks). Smart phones and tablets have become integral part of our life mobile app’s should be created for customers. A further trend is “green” IT. Changing the way energy in buildings is monitored, controlled and consumed can bring down CO2 emissions and reduce costs (Faucheux & Nicolaï, 2011) .
Technology is a major macro-environmental variable which has influenced the development of many of the Aldi products. The new technologies benefit both customers and the company: customer satisfaction rises because goods are readily available, services can become more personalised and shopping more convenient.The launch of the Efficient Consumer Response (ECR) initiative provided the shift that is now apparent in the management of food supply chains (Datamonitor Report, 2003). Aldi stores utilise the following technologies:
- Wireless devices
- Intelligent scale
- Electronic shelf labelling
- Self check-out machine
- Radio Frequency Identification (RFID).
The adoption of Electronic Point of Sale (EPoS), Electronic Funds Transfer Systems (EFTPoS) and electronic scanners have greatly improved the efficiency of distribution and stocking activities, with needs being communicated almost in real time to the supplier (Finch, 2004).
1.5 Environmental Factors
Exhaustive cultivation and mismanagement in terms of energy consumption and resource extraction dangers life on our planet. UK stands on 9th position in 2008 by data provided by US Energy Information Administration (see Appendix 1, Page 6) (The Guardian, 2011). To cope with the increasing risks of climate change UK “The Carbon Plan” (see Appendix 2, Page 6), published in December 2011, sets out the Government’s plans for achieving the emissions reductions committed wants to reduce CO2 emission by 60% until 2013 (DECC, 2011).
The percentage of renewable energies to generate power shall increase to 31 % by 2020 (see Appendix 3, Page 6) (DECC, 2011). CSR (corporate social responsibility) plays an increasingly important role in gaining consumer’s trust.
In 2003, there has been increased pressure on many companies and managers to acknowledge their responsibility to society, and act in a way which benefits society overall (Lindgreen and Hingley, 2003). The major societal issue threatening food retailers has been environmental issues, a key area for companies to act in a socially responsible way. Hence, by recognizing this trend within the broad ethical stance, Aldi’s corporate social responsibility is concerned with the ways in which an organization exceeds the minimum obligations to stakeholders specified through regulation and corporate governance. (Johnson and Scholes, 2003)
Graiser and Scott (2004) state that in 2003 the government has intended to launch a new strategy for sustainable consumption and production to cut waste, reduce consumption of resources and minimise environmental damage. The latest legislation created a new tax on advertising highly processed and fatty foods. The so-called ‘fat tax’ directly affected the Aldi product ranges that have subsequently been adapted, affecting relationships with both suppliers and customers
1.6 Legislative Factors
The UK market is highly regulated which makes market entry for Multi-national difficult. European commission has made displaying nutrition facts of eatable products mandatory for retails industry. EUwide standards will help consumers to a more balanced diet. Most companies already show nutrition facts on their products. Government legislations and policies have a direct impact on the performance of Aldi. For instance, the Food Retailing Commission (FRC) suggested an enforceable Code of Practice should be set up banning many of the current practices, such as demanding payments from suppliers and changing agreed prices retrospectively or without notice (Mintel Report, 2004). The presence of powerful competitors with established brands creates a threat of intense price wars and strong requirements for product differentiation. The government’s policies for monopoly controls and reduction of buyers’ power can limit entry to this sector with such controls as license requirements and limits on access to raw materials (Mintel Report, 2004; Myers, 2004). In order to implement politically correct pricing policies, Aldi offers consumers a price reduction on fuel purchases based on the amount spent on groceries at its stores. While prices are lowered on promoted goods, prices elsewhere in the store are raised to compensate.
2.0 INDUSTRY ANALYSIS: PORTER’S FIVE FORCES
2.1 Threat of New Entrants
The UK grocery market is primary dominated by few competitors, including four major brands of Tesco, Asda, Sainsbury’s and Safeway that possess a market share of 70% and small chains of Somerfield, Waitrose and Budgens with a further 10%. Over the last 30 years, according to Ritz (2005), the grocery market has been transformed into the supermarket-dominated business. Here are some points to ace market position and provide barrier to any further entries.
1.1.1. Economies of scale:
UK food retail industry make use of “economies of scale” to great extent, by . Especially the major chains have economies of scale, which improves their market position (Datamonitor, 2010).
1.1.2. Capital requirements of entry:
Entry and exit costs are no barrier to enter the market. Therefore, many small and local retailer take the opportunity and go into competition with the majors competitors (Datamonitor, 2010).
1.1.3. Access to supply or distribution channels:
The distribution system is well-developed, with a large number of small suppliers.
1.1.4. Customer or supplier loyalty:
Most UK customers are brand conscious, brand is more important than price. So competitors like tesco have loyalty incentives like club card to attract customer and encourage them to be brand loyal. (Datamonitor, 2010).
To compete with the market leaders as well as with smaller companies, addressing niche segments, great knowledge of the market and its consumers is needed .
1.1.6. Expected retaliation:
The industry is characterised by strong rivalry and price sensitivity. Therefore, new entrants may well face retaliation (Datamonitor, 2010).
1.1.7. Legislation or government action:
Legislation and government action are not prohibit for market entry. Still there are a couple of regulations e.g. on spatial planning or environmental protection that companies need to comply with (see 1.1.5).
There are opportunities for small companies to operate in niche markets, due to growth in awareness on healthy diets and organic food (Datamonitor, 2010).
2.2 Bargaining Power of Suppliers
This force represents the power of suppliers that can be influenced by major grocery chains and that fear of losing their business to the large supermarkets. Therefore, this consolidates further leading positions of stores like Tesco and Asda in negotiating better promotional prices from suppliers that small individual chains are unable to match Ritz (2005). In return, UK based suppliers are also threatened by the growing ability of large retailers to source their products from abroad at cheaper deals. The relationship with sellers can have similar effects in constraining the strategic freedom of the company and in influencing its margins. The forces of competitive rivalry have reduced the profit margins for supermarket chains and suppliers.
2.3 Bargaining Power of Customers
Porter theorized that the more products that become standardized or undifferentiated, the lower the switching cost, and hence, more power is yielded to buyers Porter M. (1980). Tesco’s famous loyalty card – Clubcard remains the most successful customer retention strategy that significantly increases the profitability of Tesco’s business. In meeting customer needs, customizing service, ensure low prices, better choices, constant flow of in-store promotions enables brands like Tesco to control and retain their customer base.
In recent years a crucial change in food retailing has occurred due to a large demand of consumers doing the majority of their shopping in supermarkets that shows a greater need for supermarkets to sell non-food items. It has also provided supermarkets with a new strategic expansion into new markets of banking, pharmacies, etc. Consumers also have become more aware of the issues surrounding fairer trade and the influence of western consumers on the expectations and aspirations of Third World producers. Ecologically benign and ethically sound production of consumer produce such as tea, coffee and cocoa is viable, and such products are now widely available at the majority of large chains.
2.4 Threat of Substitutes
General substitution is able to reduce demand for a particular product, as there is a threat of consumers switching to the alternatives Porter M. (1980). In the grocery industry this can be seen in the form of product-for-product or the substitute of need and is further weakened by new trends, such as the way small chains of convenience stores are emerging in the industry. In this case Tesco, Asda and Sainsbury’s are trying to acquire existing small-scale operations and opening Metro and Express stores in local towns and city centres Ritz (2005).
2.5 Bargaining Power of Competitors
The grocery environment has seen a very significant growth in the size and market dominance of the larger players, with greater store size, increased retailer concentration, and the utilisation of a range of formats, which are now prominent characteristics of the sector. As it was mentioned above, the purchasing power of the food-retailing industry is concentrated in the hands of a relatively small number of retail buyers. Operating in a mature, flat market where growth is difficult (a driver of the diversification into non-food areas), and consumers are increasingly demanding and sophisticated, large chains as Aldi are accruing large amounts of consumer information that can be used to communicate with the consumer Ritz (2005). This highly competitive market has fostered an accelerated level of development, resulting in a situation in which UK grocery retailers have had to be innovative to maintain and build market share. Such innovation can be seen in the development of a range of trading formats, in response to changes in consumer behaviour. The dominant market leaders have responded by refocusing on price and value, whilst reinforcing the added value elements of their service.