Aldi: The Hard Discount Phenomenon

Nirmalya Kumar, Professor of Marketing, London Business School, UK talks about different ways to teach with his case Aldi: The Hard Discount Phenomenon.

Nirmalya Kumar I wrote the Aldi case1 with Professor Daniel Corsten given our interests in retailing and supply chain. However, after having written 40 cases and teaching notes previously, I was interested in seeing how one could write a case that could be flexible enough to be employed for multiple teaching purposes. By doing so, one increases the efficiency of the faculty member because, by preparing one case, he/she can employ it for a variety of classes, topics and executive education clients. Efficiency, of course, is what Aldi is all about!

In this article, I am not going to go into the details of the Aldi case or the teaching plan that is elaborated in the teaching note2. Instead my focus will be on how to use the Aldi case in different ways depending on the audience, the time available and the objectives of the session. The starting point that I always draw from the case is how Aldi represents a strategic innovation and overturned the assumptions of supermarkets by having a narrow range, focusing exclusively on private labels, small stores, and so on. Aldi created the hard discount format in retail. This takes about an hour. Where I go from here depends on the audience and objectives. Various options are listed below which can be mixed and matched depending on the time available.

Session on strategic innovation (strategy, innovation or retailing courses)

Follow the case discussion with a focus on the limits of Aldi and whether it should start selling manufacturer brands. One can use the private label strategy book3 to draw on research that indicates that introducing manufacturer brands allows one to reach a new segment and has helped Lidl grow faster. The flip side of this discussion is that the efficiency of Aldi may suffer. To conclude the session, students can be given the assignment of developing a strategic innovation in their own industries by formulating a new entrant and contrasting it with the traditional incumbents.

Session on low cost competitors (competitive strategy, marketing strategy or retailing courses)

Follow the Aldi case discussion with a focus on how one would combat low cost competition. If it is a retailing class, what a traditional supermarket should do becomes a vigorous discussion. Should it lower its prices, introduce a new range or launch a new chain to beat Aldi? The faculty member can then slowly guide the discussion to other sectors by discussing how low cost players exist in industries such as airlines and banking. Combating them is a challenge for many traditional incumbents. The article 'Strategies to Fight Low-Cost Rivals'4 elaborates the different responses available to incumbents and the limitations of each. If there is more time available, then I introduce the BT case5 that I wrote with Professor Marco Bertini on how an incumbent like BT could respond to a competitor's offer of 'free forever'. To conclude the session, students can be given the assignment of developing a response to low cost players in their own industries.

Session on manufacturer-retailer relationships (marketing channel/ supply chain/retailing courses)

Follow the case discussion with a focus on whether manufacturer brands should distribute products at Aldi. Of course, one easily finds students taking the two sides of this question. The article 'Don't Be Undersold!'6 elaborates a more nuanced answer of the conditions under which selling at hard discounters can be a win-win for both the retailer and the manufacturer. In addition, the article 'Profits in the Pie of the Beholder'7 suggests that manufacturers do benefit from collaborative relationships with retailers, though retailers gain disproportionately. Finally, the article 'The Power of Trust in Manufacturer-Retailer Relationships'8 can, if needed, take the conclusions to the higher level of how to build relationships in marketing channels. To conclude the session, students can be given the assignment of developing a response to hard discounters for their own companies if they are working for a manufacturer.

Session on private labels/store brands (branding/retailing courses)

Follow the Aldi case discussion with a focus on the broader question of how private labels compete and how manufacturer brands can compete against private labels. Aldi private labels represent a trend whereby retailers are matching the quality of the manufacturer brands at much lower prices. The private label strategy book presents the different types of private labels as well as how manufacturer brands win against retailer brands. The book also presents data that demonstrates that unless the manufacturer brand is number one or two in the category, or a premium niche brand, it has little hope. The implication of this is a ruthless culling of brands from manufacturer brand portfolios and the article 'Kill a Brand, Keep a Customer'9 outlines a process for doing so. To conclude the session, students can be given the assignment of formulating a response to private labels for their own companies or industries.

Resources

Click on the case title to view further details and, where available, an inspection copy.

1Aldi: The Hard Discount Phenomenon

Daniel Corsten, Nirmalya Kumar, Sophie Linguri Coughlan and Akhila Venkitachalam
London Business School
Ref 307-089-1
Also available:
2 Teaching note
Ref 307-089-8

 

3 Private Label Strategy: How to Meet the Store Brand Challenge
Nirmalya Kumar and Jan-Benedict E M Steenkamp
Harvard Business School Press
ISBN 978-1422101674

4 Strategies to Fight Low-Cost Rivals
Nirmalya Kumar
Harvard Business Review
Ref R0612F

5 BT Business: Responding to 'Free Forever'
Marco Bertini, Alastair Hirst and Nirmalya Kumar
Ref 509-036-1

6 Don't Be Undersold!
Nirmalya Kumar and Jan-Benedict E M Steenkamp
Harvard Business Review
Ref R0912K

Profits in the Pie of the Beholder
Daniel Corsten and Nirmalya Kumar
Harvard Business Review
Ref F0305D

8 The Power of Trust in Manufacturer-Retailer Relationships
Nirmalya Kumar
Harvard Business Review
Ref 96606

9 Kill a Brand, Keep a Customer

Nirmalya Kumar
Harvard Business Review
Ref R0312G

About the author

Nirmalya Kumar is Professor of Marketing, Director of Centre for Marketing, and Co-Director for Aditya V. Birla India Centre at London Business School. e nkumar@london.edu

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