9.9 liquor is a big hit, and the "poor man's supermarket" Aldi is trapped in the extreme low price

In the tide of consumption downgrade, Aldi has become popular with its positioning as a "poor man's supermarket" and its extremely low-price strategy. However, facing competitors such as Hema, Aldi's store scale and bargaining power seem to be unable to cope with it. How should Aldi seek breakthroughs in its low-price strategy, and what challenges does the brand itself face?

Accepting the fate of "low price", but Aldi is no match for Hema. In the era of consumption downgrade, the "poor man's supermarket" Aldi has become popular.

Image source: Aldi

Recently, a new liquor brand launched by Aldi was snapped up by consumers, sparking heated discussions among netizens. It is reported that the 52-proof liquor is Aldi's own brand, made from five kinds of grains and based on the traditional solid-state liquor process, and the price of 500 ml is only 9.9 yuan.

In fact, Aldi, known as the "poor man's supermarket", not only has low-priced liquor products, but also other products with great cost-effectiveness. At the end of 2023, Aldi launched a lower-priced "super value" series, with 400 grams of pork belly with skin priced at 14.9 yuan, 800 grams of carrots priced at 2.8 yuan, and a 980-gram bottle of yogurt priced at only 10.9 yuan.

Although Aldi has won the favor of many consumers with its extremely low prices, for supermarket companies at the end of the industrial chain, only massive channels can improve their bargaining power and thus enable companies to have stronger risk resistance.

At present, the number of Aldi stores is extremely limited, and more powerful companies such as Hema, Sam's Club, and Yonghui are also increasing their investment in low-price supermarkets. As competition gradually intensifies, Aldi may find it difficult to continue to maintain a strong appeal to consumers.

1. Catering to the consumption upgrade trend, Aldi, which just entered China, wants to "go high"

Although it is known as the "poor man's supermarket", in fact, when it first entered China, Aldi did not want to continue to focus on low prices, but instead targeted middle-class consumers, hoping to impact the mid-to-high-end market.

Official data shows that Aldi was founded in 1913 and is a German discount retail giant that has always adhered to the low-price discount business model. Wolfe Research data shows that in markets such as Houston and Chicago in the United States, Aldi's prices are about 15% lower than Walmart.

In April 2017, Aldi officially entered the Chinese market, providing Chinese consumers with a range of expensive imported products through its Tmall flagship store. Two years later, Aldi opened a store in Shanghai, positioning itself as a community boutique supermarket and community canteen serving the middle class.

After entering China, Aldi no longer focuses on extremely low prices. On the one hand, it hopes to open up profit margins by selling mid- to high-end products. On the other hand, it is also because the changing trends in China's consumer market have provided it with a unique opportunity to develop into the mid- to high-end market.

Image source: Suning Financial Research Institute

Around 2018, with the rise of the middle class, China had set off a consumption upgrade boom, and mid-to-high-end products continued to sell well. The "China Resident Consumption Upgrade Index Report (2018)" released by Suning Financial Research Institute shows that China's comprehensive consumption upgrade index has accelerated, rising from 0.341 in 2013 to 0.376 in 2018.

In response to this, in early August 2018, the National Development and Reform Commission held a special press conference on improving the system and mechanism for promoting consumption, stating that in the next three years, it is necessary to focus on the upgrading of residents' food, clothing, housing, transportation and service consumption, and strive to form a number of new consumption growth points with good development momentum and strong driving force.

In this context, not only Aldi, but many supermarket companies have begun to focus on mid-to-high-end retail, trying to seize market dividends.

Image source: Hema

For example, as a sample of Alibaba's new retail, Hema Fresh has been mainly engaged in mid-to-high-end products such as fresh food and imported snacks since its launch. In 2018, Hema took the lead in testing the "X Membership Plan", with an annual fee of 188 yuan, providing many exclusive benefits for high-net-worth members.

Coincidentally, Yonghui Supermarket, a representative of traditional retail enterprises, has also launched a super species since 2017, which integrates high-end supermarkets, high-end restaurants and Yonghui Life App, with an average customer spending of about 200 yuan.

If China's consumption upgrade boom continues, Aldi will compete with local retailers such as Hema Fresh and Super Species in the mid-to-high-end market. However, in recent years, the trend of China's consumer market has changed abruptly, and Aldi has had to make adjustments.

2. Consumption downgrade has become a general trend, and Aldi has no choice but to pick up its "old business"

As we all know, in the post-epidemic era, due to many factors, China's economy is facing certain downward pressure, and residents are becoming more cautious in their consumption. The "2023 China Consumer Insight White Paper" disclosed by iResearch Consulting shows that more than 92% of consumers said that their consumption concepts are more conservative and need to plan more carefully or reduce consumption.

Image source: iResearch

In this context, not only are mid- to high-end retail products no longer popular, but even the performance of most affordable supermarkets is sluggish. According to incomplete statistics, in 2023, among the 13 listed supermarket companies in China, eight companies, including Yonghui Supermarket, Lianhua Supermarket, and Jiajiayue, saw a decline in revenue; six companies, including Yonghui Supermarket, Lianhua Supermarket, and Bubugao, were mired in losses.

This largely shows that Chinese consumers are currently extremely sensitive to the prices of goods. Not only are they no longer willing to pay for mid- to high-end goods for no reason, they are even no longer interested in affordable goods, and instead pursue the ultimate value for money.

In response to this, in April 2024, Nielsen IQ released the 2024 China Retail Industry Development Report, stating that "China's retail market will gradually transition from a consumption upgrade model to a new era oriented towards cost-effectiveness." Consumers are increasingly pursuing the ultimate cost-effectiveness, and the direct result is the booming discount retail market.

According to statistics from Guanyan Report Network, in 2010, the scale of China's discount retail market was only 56.5 billion yuan. By 2021, the relevant market scale has grown to 1.62 trillion yuan, nearly 30 times in 11 years. During this process, discount supermarkets such as Haotemai, Hitego and Xiaoxiaohenmang have emerged.

Taking Snacks is Busy x Zhao Yiming Snacks as an example, in 2023, its total revenue exceeded 20 billion yuan, it served more than 600 million consumers annually, and had more than 7,500 stores nationwide, and it is moving towards the goal of 10,000 stores.

Image source: Aldi

As the trend of China's retail consumer market changes, Aldi naturally can no longer continue to "push higher", but needs to return to its "old business" of low prices and discounts.

In December 2023, Aldi held a media exchange meeting and announced a series of brand actions around the brand slogan of "good quality, low price": launching a new Aldi "super value" series, iterating hundreds of self-branded products, and optimizing and upgrading the store guidance system.

In short, Aldi is accelerating the adjustment of its positioning, from a boutique supermarket targeting the middle class to a discount store focusing on "high quality and low prices". It is also in this context that many low-priced products launched by Aldi have aroused heated discussions among netizens, and Aldi has also been dubbed the "poor man's supermarket".

3. Limited store size makes Aldi difficult to compete with its competitors

Although prices can be lowered through wholesale, traditional supermarkets do not have high bargaining power due to their location at the end of the industrial chain, making it difficult for them to provide the consumer market with cost-effective products.

The reason why Aldi can provide goods at extremely low prices is mainly because it has greatly streamlined its SKUs, focused on its own brands, reduced intermediate circulation links, and iterated express delivery based on consumer data, thereby improving turnover efficiency and passing on profits to the consumer market.

Image source: Aldi

It is understood that in the Chinese market, the number of SKUs in Aldi's offline stores is less than 2,000, of which about 1,500 are daily necessities, and the remaining products are adjusted dynamically according to the season and festivals. Compared with the tens of thousands of SKUs in traditional supermarkets, Aldi's limited SKUs can reduce consumers' decision-making costs on the one hand, and it is easier to achieve economies of scale on the other.

Research data shows that although in some markets, Aldi's product prices are about 15% lower than Walmart's, its annual sales of a single SKU is more than 12 times that of the latter.

Image source: Kearney

Fewer SKUs can ensure higher sales. Based on this, Aldi has focused on its own brands, purchasing goods directly from suppliers, eliminating the suppliers' price markups, and selling goods at lower prices. Data disclosed by global consulting firm Kearney shows that Aldi's own brand sales account for more than 90%.

In fact, as consumers pursue high cost-effectiveness, Aldi is not the only company that has stabilized the market by relying on refined operations. Retail giants such as Hema, Sam's Club, and Yonghui are also committed to providing high-quality and low-priced goods by optimizing the supply chain.

For example, at the end of 2023, Hema started a discounting reform, lowering the prices of more than 5,000 products in offline stores, and reducing the SKU from more than 5,000 to more than 2,000. In this regard, Hou Yi, founder and CEO of Hema Fresh, explained that Hema mainly optimizes the supply chain, controls the pricing power of products, and ultimately feeds back low prices to consumers.

Coincidentally, although Sam's Club mainly relies on membership fees to generate revenue, it has also moved to the "front" of the merchandise, customizing different SKUs based on market demand and relying on a low-profit + high-turnover model to supply differentiated, low-priced products.

By comparing the two, we can find that although there are some differences in details, overall, the operating strategies of Aldi, HEMA, Sam's Club and other companies are highly similar. They have all extended their tentacles to the upstream industrial chain, reduced the interference of the intermediate transmission chain on commodity prices, and given concessions to the market.

Under this model, if supermarket companies want to supply extremely low-priced goods and build a deep business moat, they cannot just reduce SKUs. They also need to have a large number of channels, improve their bargaining power, and spread the costs of logistics, operations, etc.

Unfortunately, Aldi currently has only 53 stores in the Chinese market, all located in Shanghai. The small number of stores and the overly concentrated store distribution characteristics have determined that Aldi's bargaining power has reached a bottleneck, and it is difficult to capture suppliers who are farther away and have richer supply categories and differentiated low-priced products.

Image source: Hema

In contrast, as of June 2024, Hema has opened 400 stores in more than 30 cities in China. Based on the huge scale of stores, Hema can launch more products with price advantages.

For example, at the beginning of 2024, Hema purchased Norwegian salmon through source cooperation and large-order purchases, and ensured that salmon products could reach consumers' tables within 72 hours through a dedicated cold chain. Official data showed that in July 2024, the price of 290g Norwegian salmon slices at Hema fell by 30% year-on-year.

Thanks to this, in the first half of 2024, the number of salmon consumers in Hema stores increased by 60% year-on-year, and sales volume increased by more than 70% year-on-year. From this point of view, although the most prominent label of Aldi is low price, the small number of stores and overly concentrated store distribution determine that it is difficult for it to launch more differentiated low-priced products like Hema, Sam's Club and other brands, and continuously expand the company's basic market.

This not only determines that Aldi's imagination space is very limited, but also indicates that Aldi's ability to resist risks is very poor. Once the consumer market trend changes and pursues more personalized products, Aldi may be abandoned by the market.

Author: Wu Zi; WeChat public account: Xinzhai Business Review (ID: xinzhainews)