Case Study For Strategic Management

Chapter 5: Competitive Rivalry and Competotove Dynamics 169

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The Ripple Effect of Supermarket Wars: Aldi Is Changing the Markets in Many Countries

Aldi started as a small, family-owned grocery store located in Essen, Germany, in 1913. Two sons, Karl and Theo, took over the store from their mother in 1946; soon after doing so, they began expanding the business. They emphasized low costs fro m the very beginning, allowing them to offer their products to customers at low prices relat ive to competitors. Ove r time, Aldi expanded to other European cou ntries, and it entered the United States market in 1976. Currently, there are rough ly 11,000 Ald i stores located in 20 countries; 1,750 of these u nits arc in 35 states in the United States. In th e United States alone, the firm serves 4 0 million custom- ers on a monthly basis.

Aldi holds its costs down in a variety of ways. It largely sells its own brand-label products in “no frill” stores. The company limits the number of external brands it sells (usually one or two per product), and it has low packaging, transportation, and employee costs. To sell products in its stores, Aldi posit ions them in ways that are similar to the approach warehouse stores use, for example, placing products on pallets and in cut-away cardboard boxes. In Germany, Aldi advertises very little, but it does advertise in the United States. It produces its own ads in-house (no external agency) and advertises mostly through newspaper inserts and a few television commercials.

Aldi and another discount store, Lidl, have hurt the largest four supermarkets in the U. K. market- Tesco, Walmart’s Asda, J Sainsbury, an d Wm. Morrison Supermarkets. Ald i and Lidl have captured market share from these reta ilers, especially Tcsco and Morrison, and held approximate ly 8.6 percent of the U. K. market in 2016 . Aldi plans call fo r it to reach about 17 percent share of the market by 2021. Tesco has controlled about 30 percent of the discount supermarket market, but it has been declining. Morrison’s recent poor perform an ce has precipitated turnover in most of the firm’s top exec- utives. In addition, the new CEO, David Potts, has been making major changes-largely cutting costs in order to compete on prices. Because of reduced costs, Morrison cut its prices on 130 staple items such as milk and eggs. Likewise, Tesco reduced prices of 380 of its brand

products by about 25 percent. Yet, because of gains in its market share, Aldi plans to invest about $900 million to open 550 new stores in Britain by 2022.

Aldi is having similar effects on the Australian market. It has gained market share from the two largest supermarkets in Australia-Coles and Woolworths. In response, Woolworths ind icated that it plans to reduce its pr ices to avoid a perception among customers as the “expensive option.” Th is action docs not seem to con – cern Ald i in that the firm intends to spend $700 million to add 120 – 130 stores by 2020 to its cur rent number of 300 stores in Australia.

Aldi appears to be harming some competitors in the United States as well. For example, a rival discount food retailer, Bottom Dollar owned by Delhaize from Belgium, closed all of its stores (located in New Jersey, Pennsylvania, and Ohio) and sold the locations and leases to Aldi. Aldi does have stiffer competition in the United States from Walmart, Sam’s (Walmart’s ware- house stores), and Costco, among other discount food retailers. Yet, Aldi is not only surviving, but also flour- ishing and growing in the U.S. market as well. In early 2018, Aldi announced that it would spend $1.6 billion to remodel and expand 1,300 U.S. stores by 2020. Desiring to have 2,500 stores in the United States by 2022, the firm announced in 2018 that it would spend up to $3 billion to open new stores to reach this target. If reached, a total number of 2,500 stores would result in Aldi being the third largest supermarket chain in the United States.

In addition to affecting grocery store competitive r ivalry across cou ntry boundaries, Aldi’s actions (and those of others as well ) have an effect on wholesalers and other suppliers. For example, wholesale prices have been declining, and some of the m ajor supermarket chains, such as Tesco and Morrison, have been reduc- ing the number of brands on their shelves. Interestingly, manufacturers of popular products, such as Mr. Kipling cakes and Bistro gravy, stand to gain shelf space and increase sales because of stores’ decisions to take some rivals’ products off their shelves. Of course, the sup – pliers whose products lose their positions on stores’ shelves will likely suffer.

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170 Part 2: Strategk Actions: Strategy formulation

The bottom line is that Aldi is having a major effect on rivals in multiple countries and on many other com- panies that supply products to the industry. As a result, the grocery industry’s competitive dynamics are differ- ent today than they were before.

T. Hua, 2015. Tesco’s overhaul pomts to a pnce war, Wall Str-.t /o11rnal, www.wsj.com, January 5; L. Northrup. 2015. Bottom dollar food to dose stores~ sell chain to Aldi, Con.sumtriSI, www.consumenst.com, January 5; 2015, Mr. Kipling Maker Prem1er Foods S«> po>1t1ves m supermarket wars. S~w York Timts, www.nytuncs.com, January 23; 2015, Morrisons cuts prices on 130 grocery staple> hke m1lk, eggs.”””‘ York Tm~ts, www .nytimes.com. Februory 15: 2015. Bnllsh shop pnce dedme steepens in Februarr- BRC. .\’ew l’ork Tm~ts. wwwnyt1mes.com, March 3: K. Ross, 2015, Supermacket wars: Aldi takes on market share as Woolworths drops prices. Smart Company, ¥t·ww.smartcompany.com.au, March 9;

Sources: 2018. Ald1 unveils Sl.6 b1lhon natiOm.,de store remodel plan to enhance customer shoppmg expenence, Ald1 Homepage. www.aldi .com, Februory 8; 2017, Motley Fool staff, Setting the stage for grocery industry competition m 2018. Motley Fool Homepage, www.fool.com, December 24; 2014, Aid• torgets doubhng of UK stores with 600 million pound inve~tment, Xtw rork Timts, www.nyttmes.com, November 10;

A. Felsted, 2015, ~fornson ch1<fs take express checkout from strugghng supermarket, Fmancral Times. www ft.com, March 2·1; 2015. Ald1 Foods, W\\-“w.grocef}·.com, accened March 25.

Case Discussion Questions

1. Using mat erials In the case and item s to which you gain access through a search, describe how Aldi is creating competitive rivalry in the retail grocers’ industry.

2. As explained in this chapter’s Opening Case, Amazon pur-

chased Whole Foods. How will this transaction affect Aldi as it seeks to expand its pre54!nce in the United States? What

competitive actions might Aldi take in respon54! to Amazon’s purchase of Whole Foods?

3. Using concepts and actions explained in this chapter, decide if Aldi is more likely to respond to any strategic actions Amazon might initiate through Whole Foods or if Amazon through

Whole Foods is more likely to respond to any strategic actions Aldi takes. Be prepared to justify your decision.

NOTES 1. J. P. Eggen & A. Kaul, 2018, MotiVatiOn

and ab•hty? A ~hav•oral perspectiVe on the pursurt of radtcal•nventton 1n mutt•· te<:hnology •n<um~nts. Acadm~y of Management Journal, 61: 67-93; P. Karhu & P. R•tala, 2018, Dilemmas and paradoxes: How managen make the toughest de<:ISions, Journal of Business Srrategy, 39: 24- 31; M.·J. Chen & D. Miller, 2012. Competitive dynamics: Themes. trends, and a prospective research platform, Academy of Management Annals, 6: 135-210.

2. K.·Y. Hsieh & E. (EJ.) Hyun, 2018, Matching response to competitors’ moves under asymmetric market strength, Journal of Business Research, 82: 202-212; M. G. Jacobides & C. J. Tae, 2015, Kingpins, bottlene<:ks, and value dynamics a long a sector, Organization Sc~n<:e, 26: 889-907.

3. B. Power & G. C. Reid, 2018, DeCISion support for firm performance by real opt•ons analytks, Managerial and £Nr:rs10n Econamt<S, 39: 56-64; J. Luoma, S. Ruutu, A. W. K•ng. & H. Tikkanen, 2017, Time delays. compebbve •nterdependen<:e, and firm performan<:e, StrategiC Monag~nt Journal, 38; 506-525.

4. In a competitive rivalry sense. explain the actions (strategic

and/or tactical) you believe Walmart and Costco will take to respond to Aldi’s intentions to have 2,500 U.S. stores by 2020.

4. D. P. Hannah & K. M. Eisenhardt, 2018. How firms navigate cooperation and competrbon in nascent ecosystems. Strategtc Management Journal, in press; R. E. HoskiSson. E. Gambeta. C. Green, & T. U, 2018, Is my firm-specific investment protected? Overcoming the stakeholder investment dilemma in the resource based view, Academy of Management Rev1ew. in press.

5. M. W. Withers, R. D. Ireland, D. Miller, J. Harrison, & D. Boss, 2018, Competitive landscape shifts: The influence of strategic entrepreneurship on shifts in market commonality, Academy of Management Review, 43: 349- 370; P. J. Derfus, P. G. Maggitti, C. M. Grimm, & K. G. Smith, 2008, The red queen effect: Competitive actions and firm performance, Academy of Management Journal, 51: 61-80.

6. R. Katlla. S. Thatchenkery, M. Q. Christensen, & S. Zen los, 2017, Is there a doctor in the house? Expert product usen, organizational roles, and innovation, Academy of Management Journal, 60: 2415-2437; C. Giachetti & G. B. Dagnino, 2014, DetectJng the relatiomh•p between

compet•ttve tntenstty and firm product hne length: Evlden<:e from t he worldwide mobole phone Industry, Srrateg~e Monage,_t Journal, 35:1398-1409.

7. C. Glachetll, J. Lampel, & S. L P~ra, 2017, Red Queen ImitatiOn In the U.K. mobole phone industry. Academy of Management Journal, 60: 1992-2014; D. G. Sirmon, S. Gove, & M. A. H11t, 2008, Resource management in dyadic competitive rivalry: The effects of resource bundling and deployment, Academy of Management Journal, 51: 919-935.

8. T. Chen, M. A. Trlbbltt, Y. Yang, & X. Li, 2017, Does rivals’ innovation matter? A competi tive dynamics perspective on firms’ product s tra tegy, Journal of Business Research, 76: 1-7; R. Kapoor & N. R. furr, 2015, Complementanties and competition: Unpacking the drivers of entrants’ technology chatces m the solar photovoltalc Industry, Strategic Management Journal, 36: 4 t6-436.

9. M. Hughes·Morgan, K. Kolev & G. McNamara, 20t8, A meta-analytiC rev1ew of compehttve aggresstveness research, Journal of Busrness RtsMrch, 85: 71-82; W. Guo, T. Yu. & J. Grmeno, 2017, Language

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