I found a gem: InPractise

Today, I ran into a very awesome website called InPractise. InPractise is a treasure trove for nerds or curious minds like myself. It interviews folks, mostly former & current executives at major firms with tribal and insider knowledge as well as domain expertise, to shed light on great business insights, practices and strategies. The content is delivered in audio and text format, which I appreciate greatly as while I sometimes like to listen to interviews, taking my eyes away from the screen, I mostly consume content better by reading. For $20/month on a monthly basis or $200/year, subscribers gain access to 10+ interviews per month. If you do the maths, it comes down to $2 per interview, which is quite cheap for valuable insights. Another cool thing about InPractise is that they let you try it out for two weeks first for free without asking your credit card details.

I gave it a try today and have been spending hours reading the previous posts. I am talking about it here as a token of my appreciation to the website for letting me read their stuff for free for two weeks, even though I have every intention of becoming a subscriber already. Below are a few insights that I found very helpful

Aldi: Hard Discounter Business Model – With Former CEO of Aldi UK

Finally, as a hope, I would say, a discounter like Aldi when entering a market would prefer that its competition is stock market listed. Stock market listed companies have programs, management incentive schemes, which means that the management is not likely to react to a new threat until the last minute. They’re whole compensation package, what is expected of them as a management team, their contracts, their job descriptions are all based on maximizing shareholder value, maximizing profits.

Source: InPractise

Basically, we did everything out of those first 15 years to get ourselves what our goal was. Which is to match the quality level of the best-selling brands on the market. Now, some of that was easy. We could do it within four or five years. Some of it was dreadfully hard. You try making a KitKat even in a normal chocolate factory, which rivals a KitKat. It is really difficult to do. Either the chocolate mushes into the biscuit, or the biscuit is too hard and breaks your teeth. So on. It was really a journey to end up with a thousand products, which truly were rivals for the best-selling brands on the market under the private labels which the company was doing. Enormous fun. I never had a corporate lunch in 25 years because every midday, I was involved in testing product to see whether or not you could tell the difference between the Aldi version of Cornflakes and Kellogg’s. Or the Aldi version of Ketchup up and Heinz. Eventually, we got there. It was truly very difficult to tell the difference. That’s when you’ve got a business concept, which the majority of consumers will not turn their noses up at.

Source: InPractise

Scale means purchasing power with an individual supplier. You can’t have hundreds of suppliers all making one product and just selling it in different places. You actually have very few to start with one, maybe two or three in the future who are producing enormous scale. If you lost one of those, it’s an absolute catastrophe. First of all, it won’t be possible for the other suppliers, even if you have a dual supply, to make up another 50 percent overnight. Secondly, you run the risk that the quality is not the same. 

Thirdly, you have the situation where your reputation is put at risk with companies that would have to make serious investment decisions to be able to make your private label to the same quality as brands. We were always incredibly protective over the suppliers. Quite actually forgiving when mistakes were made, so long as they weren’t made on a constant basis. Tried to be more than fair with that supply base. What does more than fair mean? To be people who agreed things on handshakes and don’t need 50-page contracts to endorse it. Secondly, to pay on time. The biggest single question every supplier will have about its retail partner is: Am I going to get the money for the product that I’ve put all the investment into and delivered to their warehouse 15/20/25/30 days, whatever the contract actually says, later. I will tell you, you’d have got fired in Aldi if you paid one day late. A CEO would get fired if he deliberately paid one day late a supplier.

Source: InPractise

After only a few years, most Aldi management can tell you exactly how long it will take to clean a store in minutes. How long it will take to merchandise a pallet. How long it will take to unload a truck. How long it will take to process a hundred customers through the cash registers. There are prizes given for people who can invent a small change to the business process that can quicken something up even if it’s only a few seconds because that few seconds is multiplied by thousands of stores and hundreds of days per year.

The final bill for this super, little idea is often worth an astronomic amount of money in terms of cost reduction. That’s the philosophy for which the business is built on. A nice little example. If you pick up a product, I don’t have one in front of me, but if you pick up a product and you show it to a normal food retailer, he will look at the colors. He will look at the messages that the product has on it. He will look at how beautiful this item is. He’s thinking how many of those I can sell. I’ll tell you, you put this product in front of any Aldi operating manager and the first thing he’ll look at is, how big is the barcode? If that doesn’t scan with one sweep of the arm across the cash register, that’s going to cost me money. That’s just one of a thousand examples I could give you of how this cost mentality is built in from day one.

Source: InPractise

Netflix Business Model & Economics – With Former Director of Financial Planning and Analysis at Netflix

I’ll take the other side of it. I don’t think they want to move into it, nor do they need to for growth. I think to further saturate the US, they would probably move into news and sports more aggressively. They are growing just fine in the US and are growing even better internationally, so I don’t think they have to. I think they would do that as a distraction tax for a few reasons. If they were to move into news and sports, live is largely supported by advertising. Advertisers pay a premium and people don’t skip the commercials as much. Do they want to go out and build an ads sales force of hundreds and thousands of employees, insertion of dynamic ads, data which Facebook and Google have been collecting for years to do this at scale? It is beyond their focus right now, especially when they have this massive opportunity to take what they’ve already done and port that over to new countries with different content. They’re dabbling with news and sports and reality and other categories and they’ll push those. But you’ll see non-scripted, the reality competition shows they’re doing, before news and sports. Sports is extremely challenged and maybe that will shake out over the next three years, but I don’t see it as a near term focus.

On the question of whether Netflix should move into sports. Source: InPractise

The real question, if you look at more of a five-year view, is do they have pricing power domestically? I absolutely believe they do. They’re going to continue to accelerate their spend, the number of shows and categories such as unscripted theatrical movies they are investing in. I think that will, eventually, result in what Disney is now doing. Disney is experimenting with bringing a $30 super premium movie, like Mulan, which was supposed to go to theaters, and bringing it onto Disney Plus and expecting consumers to pay a regular subscription fee, plus $30 on top. Netflix would take that same movie, that is maybe on a par with Mulan or The Irishman, and give it to users for free.

Eventually, they are going to say, you are getting these movies at Disney – who are charging you $20 to $30 – so we are going to increase our price from $13 to $15. They are still not the price leader, as they are behind HBO Max which is $15. Netflix has a $15 price but its average user is not there, as they are on a lower tier. They have a chance to move people up those price tiers, but I don’t foresee that happening in the near term. They have that option when they choose to exercise it and I expect them to exercise it very diligently and thoughtfully.

Source: InPractise

Lidl in Ireland: from 0 to 12% market share in 20 years – With Former Head of Sales Organisation, Lidl Ireland

It is very difficult to give a percentage on that because it is a changing product group. Some items are discontinued and some are coming in, so every day or every week that changes, but probably around 10% to 15% as a rough guide. When you look at the shelf. you have your top shelf, middle shelf and bottom shelf. Sometimes there are four or five shelves, but the own brand will always be at eye level, first in flow. The brand will be on a shelf but always hidden. It might even be on the floor. I remember Nescafe coffee never ever made it off ankle height, but there’s a reason for that, that was always to promote the own brand and give it the best possible chance.

Source: InPractise

This grocery chain is considered “good and fierce” by Walmart

“They are fierce and they are good.” – The then-President and CEO of Walmart US, Greg Foran, said this about Aldi, a hard discounter hailing from Germany.

A little bit of history. The original Aldi was founded in 1946 by Karl and Theo Albrecht in Essen, Germany. The name Aldi combines the first two characters of their last name (“Al”) and the first two characters of the word Discount (“Di”). The company was split about 2 decades later into Aldi Nord and Aldi Sud when the founding brothers disagreed over the sale of cigarettes in their stores. Aldi Sud made inroads into the US grocery market first in 1976, keeping the brand name. Aldi Nord followed through the acquisition of Trader Joe’s. Although Aldi isn’t a household name like Costco, Walmart or Target in the US, the chain has been in the US, actually, for quite some time with the first store opened in Iowa in 1976.

How has Aldi been doing in the US?

By the latest estimate, Aldi has about 2,000 stores in the US. In 2017, the chain announced a $5.3 billion expansion plan that is focused on remodeling existing stores and opening new ones. Aldi expects to have 2,500 stores in the US by 2022, making it the 3rd largest grocery chain only behind Kroger and Walmart.

Figure 1 – Source: Red Lion Data
Figure 2 – Source: CNN

Aldi was reported to have a tad over 2% of market share in the US grocery segment in 2018. Morgan Stanley estimated that in 2019, Aldi’s YoY growth surpassed that of Kroger, Target, Whole Foods, Publix and only trailed behind that of Walmart. Supermarket News said that the German-native discounter recorded about $18.4 billion in revenue in 2018, up from $16.8 a year prior. Since the company is privately held and does not have to report its financial data, these figures cannot be confirmed for 100% accuracy. In an interview in 2018, the CEO of Aldi revealed that the company’s US sales doubled in the previous 5 years leading to 2018 and added that “our same-store sales over the past several years has been much more than the industry has realized.”

In the same interview, the CEO, Jason Hart, said that in 2017, 40 million households shopped at their stores every month with 7 new million households added to the customer base. Aldi expects the figure to grow to 100 million customers every month by the end of 2022.

Apparently, shoppers love Aldi. According to the study by Bain & Company in 2018, a known consulting firm, Aldi leads all discounters in Net Promoter Score, which is a metric for customer advocacy, and is a top 3 in the grocery segment overall. A high Net Promoter Score is important as promoters are much more loyal and spend more. Per Bain, “promoters in general spend much more—$111 vs. $39 on average per month—and give retailers a higher “share of wallet”—28% for promoters vs. 11% for detractors”. A study by Morgan Stanley revealed that in 2018, 19% of shoppers who switched retailers began shopping at Aldi, second only to Walmart. Walmart got 30% of switchers, but the figure was flat from a year prior while Aldi’s number increased.

Figure 3 – Source: Bain & Company
Figure 4 – Source: Bain & Company

Given what we have seen so far, Aldi has done quite well for themselves in the cut-throat grocery market. What is their secret sauce?

What makes Aldi competitive?

Aldi is known for its thrifty culture and approach. The company works aggressively in cutting costs and passing on savings to shoppers as much as possible. On average, an Aldi store’s size is about 12,000 square feet, compared to Walmart’s 178,000 and Costco’s 145,000 square feet. The smaller size helps drive down either leasing expense (if the land is leased) or depreciation (if the land is owned), as well as energy costs. Regarding SKUs, an Aldi store, on average, carries 1,400 items compared to 40,000 items by a traditional supermarket. The much smaller store size and more limited item selection lead to fewer staff required. An Aldi store usually has only 3-5 employees, a significantly smaller number compared to how many employees are present at a store like Walmart or Costco. The limited item selection enables Aldi to focus on its offerings and negotiate favorable deals with suppliers to keep costs and prices low. Another benefit is that a limited assortment doesn’t require complex marketing promotions, meaning that there will be no cost on marketing materials and labor.

The way Aldi operates its stores also contributes to cost savings and lower prices. Walking into an Aldi store, you won’t notice many decorations. It looks like an ordinary, no-fancy store and it’s by design to keep costs low. At Aldi stores, there is no free bag. Customers are encouraged to bring their own bags. Carts can only be used with a quarter coin. Customers retrieve the quarter upon returning a cart. This policy has long been part of Aldi’s signature operations. Additionally, customers have to bag their own groceries. A cashier will scan items and put them in a cart, but shoppers will have to take it from there. It speeds up the checkout process, increases efficiency and reduces the need for additional staff. As far as I know, there is no self-checkout.

The book Retail Disruptors mentioned the thrifty approach codified into what is known as Aldi’s “Doing Without Checklist”. The checklist consists of rules such as “no external market research, no customer surveys, no budget forecasts, no public appearances, no publicity, no PR departments, no sumptuous business offices, no company cars, no gifts accepted or invitations for dinners from vendors.” If you are not familiar with Aldi, perhaps this may be the reason why.

For example, each product has a bar code on each side of its package so cashiers can scan items quickly. The company recently took two years to develop a new milk bottle and transporting system that swapped out metal for polystyrene crates, allowing it to get more milk on a single truck because it weighs less, which saves on transport costs.

Source: Inquirer

About 90% of Aldi’s items are private labels. This private label centric approach allows Aldi total control over its selection and reduces the cost as well as complexity that comes with national brands. Private labels used to be unpopular among shoppers due to their cheap image. However, consumer preferences have changed. Astute shoppers, especially millennials, now have a much more favorable view on private labels because they are cheap and provide best value for money. According to Bain, 85% of American shoppers are open to buying private labels.

All together, Aldi’s culture and operational philosophy lead to lower prices and value for money for shoppers, especially in fresh groceries and staples. I switched to Aldi from Walmart a few months ago. My shopping habit is pretty consistent as I only need a few vegetables, some nuts milk and fruits, all of which can be found for a cheap price at Aldi. For instance, I have bought a lot of fresh grapes for 79 cents per pound for the past 4 weeks, a price much lower that what other grocers can offer. A bottle of soy or almond milk costs only around $2.4 at Aldi.

Figure 5 – Source: CNN

Of course, Aldi isn’t for everyone. There are a lot of things unavailable at Aldi and so are other convenient add-ons. If you want to buy a TV or an appliance or want a self-checkout, chances are that you won’t find either at Aldi. However, if you only want to buy fresh produces and staple food consistently at cheap prices without having to deal with complexity that comes with various choices, then Aldi is for you. Also, not many people enjoy spending a lot of time at a store. Personally, I can go in and out of an Aldi in about 5 minutes, if in-store traffic is light. I know what I want to buy and the store’s 5-aisle layout makes it super easy to navigate. In fact, Aldi seems to resonate well with high earners. Aldi’s new stores are in zip codes that have more than $65,800 household income on average, about $4,500 above the national average.

Figure 6 – Source: Bain & Company

Grocers in the US certainly noticed the German brand’s presence. Since 2017, Walmart has closed the price gap to Aldi. Retailers also invested heavily in eCommerce and delivery options such as pickup or to-door delivery. Aldi responded by:

  • Increasing its fresh food offerings by 40% in 2018 and adding new vegan and vegetarian options
  • Launching a nationwide marketing campaign, something that is unusual for the discounter
  • Introducing a partnership with Instacart for pickup and delivery

The company has performed well so far in the US. It’s expanding and has its own legion of fans, including myself. However, that’s not a guarantee for future success. The grocery market is notoriously low-margin and littered with aggressive competitors who have vast resources at their disposal. Also, changing customer preferences can go against Aldi. Case in point: Covid-19 has driven consumers to shop online more, even for groceries. If Aldi is forced to steer away from its bare-bone approach, it will eat away the discounter margin, but Aldi may not have a choice. There are several ways that Aldi can unlock growth that I can think of:

  • Expanding geographically to new market, especially into West Coast
  • Adding more convenient services
  • Expanding its item selection. Since it doesn’t carry too many items, there is a lot of opportunity here
  • Going after more affluent customers who value what Aldi has to offer

I am excited to see what the future holds for Aldi. I don’t know how it will go for the discounter. Given my personal experience as a shopper and the company’s performance after being in the US since 1976, I think it earns a bit of our confidence.

Book: Retail Disruptors: The Spectacular Rise and Impact of the Hard Discounters

For the past two months, I lost interest in picking up a book for some reason. Nonetheless, the streak ended today as I finished this book.

The book offers a detailed and insightful view on hard discounters which usually act as disruptors in a local retail market. The book defines hard discounters as follows:

Hard-discount retailers offer basic goods and daily necessities at the lowest possible prices, while maintaining high-quality standards. A hard-discounter store differs from discount supermarkets or hypermarkets like Asda, Kaufland, or Walmart. Hard-discount stores are typically about 8,000-15,000 square feet, less than one-tenth the size of a Walmart Supercenter, with probably lower staffing levels.

To reduce costs, hard discounters often display items on shipping pallets and in the boxes in which they arrive. The store is minimally decorated and offers a limited assortment of consumer packaged goods and perishables – typically less than 2,000 stock-keeping units (SKUs). In contrast, the average US supermarket carried 40,000 to 50,000 SKUs in 2017, while a Walmart Supercenter sells over 100,000 grocery and non-grocery items.

Here is what I learned from it

Beware of potential threats in the market. The book told stories of retailers around the world that paid the price for under-estimating hard discounters. They dismissed the arrival of hard discounters at first and when they realized the threat was real, it was already too late to stop the hard discounters.

Benefits of offering a limited assortment of SKUs. I am usually overwhelmed by a plethora of choices at restaurants or supermarkets. As the book says, to shoppers who are under time pressure or who intend to buy rather than browse, a better shopping experience is to be offered streamlined options or a limited range of choices. Plus, retailers who sell a limited assortment, especially private labels, can negotiate a better economic deal with suppliers due to economies of scale. A better deal will help the margin of hard discounters. Additionally, a limited assortment of goods means smaller stores – lower rent, saved costs on logistics and staff.

Go-to-market strategy. Hard discounters tend to enter a new country through a specific market first. Get the foot in, the logistics and operations in and then expand. Also, each go-to-market strategy varies from one country to another due to a host of factors such as household income per capita, economic growth, shopping preferences. Blindly adapting a blanket strategy to different markets may lead to failures.

The book offers a comprehensive view on different aspects of hard discounters and retail in general. It confirmed my belief that a competing strategy can be made up of so many factors that are intertwined together, including to not limited to:

  • The size of assortments
  • Whether a retailer carries more private labels or national labels
  • How man perishable items a retailer carries
  • Whether it has a good brand name
  • Whether it has economies of scale
  • Whether the shopping preferences of local shoppers are a good fit
  • How much a retailer spends on marketing, promotions and discounts; and for how long it can sustain the effort.
  • A retailer’s culture

After penetrating a market, whether a retailer can survive the competition depends on the retailer’s ability to carve out a niche in the market where it can be competitive, using a combination of the above factors or more.

A few notable stats

  • Private labels account for somewhere between 70-90% of hard discounters’ assortment
  • In 2017, middle-class shoppers in the UK account for 60% of shoppers at Aldi and Lidl
  • In Germany, hard discounters accounted for three out of every ten euros spent on grocery purchases or 60 billion euros in 2017
  • Aldi entered Australia in 2001, and by 2017, had cost conventional retailers like Woolworths and Coles AU $16 billion in lost annual revenues
  • Trader Joe’s offers around 3,500 different items, Lidl between 1,500 and 2,000 while Aldi carries between 1,200 and 1,400 products
  • In Germany, Lidle was the largest advertiser among grocery retailers in 2017 (almost 280 million euros) and the sixth-largest advertiser in the country ahead of McDonald’s, Daimler, Unilever and Samsung
  • Trader Joe’s sales per square foot is $1,633, twice that of Aldi and Lidl, four times that of a Walmart supercenter and 8 times that of Dollar General
  • In Australia, 26% of Aldi shoppers were from high-income families in 2006. The figure shot up to 50% in 2014
  • For the average US grocery retailer, a loss of 1% in sales leads to a loss of 17% in operating profit