Aldi

Aldi has achieved a 4.9% UK market share in 2014 with a very tight range of SKUs. This means that Aldi’s share within the categories the discounter actually retails in is already much higher than 5% and its impact felt much wider. We believe that going forward Aldi’s rapid growth will move it beyond both Waitrose and the Coop in the UK in market share and as a result the discounter will start to set the price floor in UK grocery more and more.

By doing so the discounter becomes an attractive retailer for the FMCG industry, and the major players (not just Coke) will try to list with Aldi, and not just in the UK but globally. After all on a SKU basis Aldi is still the biggest buyer on a global level ahead of WalMart.

In the UK Aldi’s rapid market share gains also mean that the discounter reaches shoppers the big four may not necessarily be able to. This is in turn makes the retailer so attractive to FMCG A brands, as listing in Aldi guarantees that they can widen their reach, drive penetration and sales.

For Aldi the attraction to gently evolve its strict private label and EDLP only strategy to actually listing brands lies in gaining new customers, especially younger families, in gaining a halo effect from the brands and moving its image more upmarket and of course in building basket size.

That said, there is a clear limit as to how far Aldi will go with listing FMCG A brands. Among these are firstly space restrictions, Aldi’s compact store footprint translates into stocking at most only one of the leading brands besides its private label proposition. Secondly, Aldi is of course loath to cannibalise its hugely successful private label range, so brands are only listed in categories where they promise a real sales uplift and contribution, in other words in categories where brands are simply too strong, such as baby care or some confectionery. Third, there are control issues from the logistics at the back end to on shelf presentation, with Aldi usually controlling all operational aspects entirely by itself – and fourth crucially Aldi enables price comparison by listing brands. Taken together with a number of other reasons, this means that FMCG A brands incorporated into the standard range in Aldi will remain more of an anomaly and Aldi will not even soften its image to the same degree as Lidl.

The interesting question though is what happens when an FMCG A brand does list with Aldi. Judging from experience elsewhere in the EU, other retailers will try to undercut Aldi on exactly this brand in weekly promotions to ruin Aldi’s price leadership image and they will ask for concessions from the FMCG producer for doing so. Some retailers will also respond by delisting the brand from their stores – so some sales volumes will be lost to the brand.

In time Aldi will have to respond to defend its core business principle, price leadership, and lower its pricing for the brand too, so price deflation sets in across the entire sector. This means brands need to calculate on a line by line basis whether listing with Aldi is actually worth it. The sales uplifts both in value and volume and new customer reach are clearly huge, but the wider effects should be taken into account.

While many FMCG producers will see the Aldi opportunity as simply beyond them, there is also the impact to be reckoned with when the key competitor achieves that elusive Aldi listing. In Germany for example one result of the Coke listing was price deflation for Pepsi, as the brand was dragged into the price war and retailers started to promote Pepsi to go head to head with Coke promotions run by the competition.

While there is a real opportunity for FMCG A brands to list within Aldi UK, we would sound a word of warning. At the end of the day listing with Aldi will only work for the very strongest brands that can manage the backlash from other retailers and the promotional storm and price cutting that will be unleashed on the sector. On the other hand at least one other concern about listing in a discounter has become outdated, that of brands cheapening their image by being associated with Aldi or for that matter Lidl. 30% y-o-y growth has seen to that.