Giles Hurley big interview: relishing Aldi's disruptor status

New Aldi UK & Ireland CEO Giles Hurley has watched with “interest” and “fascination” as the tectonic plates of British grocery have shifted. With the tremors still reverberating from the Tesco-Booker merger, completed days after he took the post in March, there’s been Sainsbury’s-Asda, Jack’s, the Tesco-Carrefour buying alliance, not to mention Amazon’s meteoric rise, the international deals Ocado has signed with the likes of Kroger and Casino, the demise of Poundworld and the Co-op/Nisa deal.

Is he losing any sleep? Which rival does he fear the most? And what’s he doing in response?”You know what?” he asks. (A question he asks over and over again in our interview, and in an excited way that makes you want to know what.) “It’s a fascinating time in the market right now and the developments are coming at pace between mergers and proposed acquisitions and alliances. As a business we watch with interest. We definitely have an eye on it. And we’ll be keen to see how it develops. But what it reminds us of more than anything is the size of the opportunity out there. Our competitors are consolidating because it’s a challenging market. We see that as our opportunity, our time to expand and develop our format to do more, to go, I would say, faster. Controlled, but faster.

“We’ve increased our property resource. Because our feeling is now’s the time. We’re seeing consolidation in the market. There’s an appetite for our offer from customers. Our stated aim is to put an Aldi store within easy reach of every consumer in the UK. We’ve got to strike while the iron’s hot.”

Slowing down?

So what does Hurley make of a recent report from UBS suggesting Aldi’s store expansion programme was actually slowing down? That’s “interesting” too. “Interesting because it’s not accurate. We don’t spend too much time speculating on where they get their information from or how they reach they conclusions. I suspect sometimes there are vested interests in playing down our expansion plans but we’ve been very consistent. We’ve said we’re going to hit 1,000 stores by 2022. We’re definitely going to achieve that. Our intention this year is close to 70 stores. The next two years we’re expecting around 65 stores. We’ve got 250 board packs which are approved for new stores.

“So far we’ve opened 19 stores so we have another 50 to go. It’s just an oddity of retail and our business that they tend to fall into the second half.

“We’re not in High Wycombe. We’re going to open there this year. We’re not in Tonbridge. We’re going to open there this year. We’re not in Sevenoaks. Those are big towns that we have no presence in and I could keep going. Watford, Slough. The list of towns we’re not in goes on and on.

So is he seriously not worried about the prospect of a Sainsbury’s-Asda merger, and the implications of those 10% price cuts it’s promising on 1,000 KVIs? Does it not give the fast-talking Irishman with the clipped Harrovian accent pause for thought about Aldi’s annual £1bn store expansion and refurbishment plans?

Hurley admits Aldi will provide a submission to the CMA. “We’re in dialogue with the CMA. The main thrust of our observations will be that competition is good for the UK consumer. The submission won’t go much beyond that. We’re confident those guys will be forensic in their approach and reach a conclusion that’s satisfactory for the British consumer.”

But he’s quite sceptical about the 10% discount Sainsbury’s CEO Mike Coupe is promising, as well as its impact on Aldi.

“It’s difficult to comment on whether that would actually be realised or what that would look like and on what array of products until details have been supplied.

“But fundamental to our offer is the contract with our customer that we’ll have a 15% discount on an average basket of goods. It’s a cornerstone of our business strategy. It hasn’t changed. It won’t change. That’s what we do.”

In any case Hurley believes volume is overrated. “Although we’re a volume business, and volume definitely helps, with the supplier base, there’s a point at which volume is no longer a cost benefit. It’s our lean operational model that makes the difference.”

That’s how Aldi is able to offer the new 36-day-aged Aberdeen Angus ribeye steak, for example, at such an incredible price. It’s in the DNA. “A core culture based on a core set of discount principles.”

Mind you. As the new steak initiative proves, the Aldi way has kicked on a bit in recent years, not only through its focus on premiumisation, but in embracing the inner Anglophile in Aldi. Aldi was the first supermarket to sign up to the NFU’s Fruit & Veg Pledge, and earlier this month it pledged to support the Prince’s Countryside Fund.

“I think we go toe-to-toe with the very best when it comes to British sourcing. We’re working with over 1,000 British suppliers and around 75% of our products are now from British suppliers. It doesn’t always mean you get the cheapest cost price when you buy British. There’s an investment in product, an investment in the customer. But we know customers want to buy British. British generally stands for quality, trust, an element of supporting our own as well, when we buy British. And that British piece is a really important part of our unique model and what makes us what we are.”

As a big supporter of Red Tractor, he’s also stuck up for the marque in the wake of recent scandals around animal welfare. While “these things need to be dealt with and dealt with appropriately it shouldn’t undermine confidence in the overarching industry because we have a great British food culture.

“Fundamentally British consumers rightfully believe there’s a quality and provenance that comes with British products that is hard to beat. And without casting aspersions on anywhere else in the world we probably know a lot more about our food chain at home than we do about elsewhere.”

Give a Jack’s?

This carefully considered, values-led evolution in the Aldi DNA, together with the enhanced offer (now 1,800-strong) gives Hurley huge confidence in Aldi’s ability to prevail. He’s again “interested” and indeed “excited” by Jack’s, the discount chain Tesco is widely reported to be readying to launch in 60 locations from September. “It’s exciting. It’s dynamic. Competition is good for us, it keeps us simple and lean and focused on the customer. And ultimately it’s got to be good for the customer.”

But the creation of Jack’s also signals to Hurley that “there’s headroom” for further growth.

“Imitation is the sincerest form of flattery. When we see Tesco decide to enter [the discounter] arena, that gives us confidence to keep on going. It’s a format that works.”

And despite the fact that recent Bernstein data found Tesco was undercutting Aldi and Lidl by as much as 22% on new brands introduced this year, he’s unconvinced the Aldi culture and model can in fact be imitated.

“It’s taken us 30 years to hone that in the UK, to get that formula absolutely right. So we have confidence that what we do will continue to be unique.”

In short, says Hurley, “there’s plenty of disruption now. But there was five years ago. And I don’t believe it will change because the market has always been competitive and you would best describe us a disruptor,” says Hurley. “So I would say it generally feels pretty much like business as usual. And as long as we are doing what we do best, we’ll continue to grow.

“That’s the strength of our businesses: that we tend to focus on what we’re doing, and it’s all-consuming. When you want an operating cost base like we do, it’s about being tremendously disciplined in keeping things simple. That requires most of our focus, so we don’t tend to look outside too much or worry about who’s the biggest threat.”

In fact, what’s “probably been more challenging” is “the backdrop of inflation: commodity inflation and currency fluctuations”, leading us to an area where business cannot be as usual…

Brexit

“We’ve inevitably been talking to our supply base,” admits Hurley of reports about an email to UK suppliers in which Aldi sought to ‘understand the potential implications’ and ‘mitigate any negative impacts’.

“The overriding concern about Brexit is, will our customers be affected by it? They may not be. I guess it depends what comes. This is not a doomsday scenario by any stretch. It’s about talking to our suppliers and understanding what potential hurdles or obstacles they see and effectively trying to work through those with them. That’s a big part of our model, treating suppliers as partners.”

Is there something the government should be doing that it isn’t? “Like any organisation, the reality is we’re keeping a close eye on developments,” he says. “We’re hoping more’s going to be communicated and once we know more, we’ll be able to do more.

“We have looked at the scenarios but as the days and weeks go by, they develop and change. We’re working with the BRC and engaging with the government to try to get clarity as quickly as we can, and once we know more we can do more.”

Hurley won’t be drawn into more direct comment on the government (“we’re pretty apolitical”), but he’s sceptical about the notion of the industry stockpiling produce, as mooted by Brexit secretary Dominic Raab in evidence to a Commons committee in July.

“By the very nature of the products, there’s a shelf life on them,” says Hurley. “So you have to consider that it has to be stored somewhere and for most large operators in the UK, at the volume you’re talking about, that might be challenging.”

Even among the challenges of Brexit, however, he believes Aldi has advantages over its rivals. “It’s a level playing field but 75% of our suppliers are British. The relationships are also “long-term partnerships”, with “transparent, open communication, to make sure we’re planning for the what-ifs”.

So what if fields of British produce are rotting because there is no EU labour to pick it?

“Through the BRC we’re able to engage on our concerns and, from what we understand, there’s a good deal of awareness about that challenge,” he says. “[But] we’re fairly confident there will be solutions.”

It’s also an advantage that, as part of an international business, “we operate in a number of jurisdictions. We operate in a federal system in the US, Australia, Switzerland, so we have some experience of what might happen and what it might look like and we’ll put plans in place accordingly.”

And last but not least, Hurley believes that being the best paying supermarket in retail is an advantage when it comes to Brexit. And he warns: “We intend to make sure that continues. Make sure we have the right people, the right number of people and the best people, and as always we’ll work with our suppliers to identify the challenges and see what level of support we can we can offer.

Amazon

Even when we touch on Amazon’s phenomenal growth and record $2.5bn profits, versus its own tentative and half-hearted online efforts, Hurley is quick to point out a) that Amazon is “primarily focused on the non-food business” and b) since launching its own online site in 2016, “Aldi’s transaction count online is up 60%”.

Though it’s yet to make a profit (“it’s a bit like opening in a new country, so the expectation of profitability from year one is unrealistic”), Aldi is approaching its “new enterprise” in a typically “forensic” manner, recently adding spirits to its online offering of wine, Specialbuys and non-food products such as batteries, candles and coffee pods. “It’s very much test, trial and learn. We’ve got a clear path to profitability and what we want to achieve.

“We want an online format that fits with our model, with our discount principles. But you know what? It’s been an eye opener because the principles of online are entirely different. With discounting the inception of cost base is the footprint. It’s the site, the building, the sku count and the number of people, and if you run it properly, it is going to be significantly less than a multiple competitor. With online, on the other hand, there’s limitless sku numbers you can install because you don’t have a store with rates and you can work in different ways.

“So what you’ll see in some areas of our online proposition is online exclusives. How we’re experimenting with online is saying, OK, here’s our core offer. Now let’s add and try new things which we perhaps wouldn’t do with the bricks and mortar model. So it’s definitely been a learning and development exercise.

As Hurley makes clear, however, and for all the “enormous” growth of Amazon, online is not the priority. It’s a project.

“The nice problem we have is that our bricks and mortar business is performing so well.

“While we very proudly say that half of UK households still shop with us, what we can also say is that half of UK households don’t.”

As Aldi has pushed south it’s had to flex its specifications. The standard Aldi formula is a two-acre site on a major A-road with planning permission for 100 parking spaces.

“But I think we recognised some time ago that if you want to have a presence in London you can’t expect the standard Aldi formula. We are more flexible because there are an enormous amount of people there who we can service with our offer, even without a car park. We have a store in Tooting which is high street. We have one in Kilburn, which is extraordinarily busy. And we’ve just acquired one from Waitrose in Camden.”

As well as expansion, Aldi is also spending £300m on refurbishing its existing estate, through Project Fresh. A further 90 sites have been retrofitted this year, and the refresh is “clearly resonating with customers”, with sales growth “significantly higher”. By the end of the year over 200 sites will have been upgraded, with a further 380 stores scheduled for conversion by the end of 2021.

Supply chain

There’s also a huge amount of work going on behind the scenes to support Aldi’s expansion. In May it started work on a new £50m distribution centre in Sheppey, and another in Sawley, just outside Nottingham, is expected to open in 2020. It’s also expanding its distribution centre in Darlington, servicing the north east. And at Bathgate in Scotland, it’s just started on a massive extension.

The biggest of the lot will be a new site it’s just acquired in Bedford - “one of the biggest RDCs we have worldwide” - again to support its expansion in the south east. It’s just going through the planning process and will complete the London jigsaw.

“It’s exciting times. With London you start to get a pincer because you’ve got Bedford, Chelmsford, Sheppey, Swindon. That gives us the right resource and infrastructure to support our expansion plans there but like all these things it’s one step at a time. We very carefully plan the opening of DCs because there’s an effect on your cost base. You need to have the right proportion of stores to make [these investments] work.”

Aldi’s business model is also an invaluable weapon in the fight again food waste, Hurley claims. The discounter signed up to the UN’s Champions 12.3 in 2017. And ambient redistribution in particular is “going really well”. Alid has working with Fareshare since 2013 and in the last 18 months it’s redistributed 1.8m meals through its RDCs. Now it’s working on addressing fresh and chilled waste. Its plans are further advanced in Ireland than the UK, with all its stores using FoodCloud, a system also used in the UK by Tesco but trials are now underway.

“This is something we’re really passionate about. We believe we can excel in this area and part of that is driven by our model and the very small range of products we have and our systems of control.”

Since March, it’s also started to reduce prices on the last day of shelf life for products. “It’s been very warmly received by customers.”

And it’s embracing wonky veg. “We’ve got 10 lines now. And plans to introduce more.”

Wonky veg also “opened our eyes” to other opportunities. This summer, for the first time, Aldi “took about 112 tonnes of strawberries we hadn’t planned to” due to “a massive glut in the early season”.

“It’s important to stress we did pay the same price pro-rata but we sold big packs and gave better value to our customers and they loved it. So we believe there are many levers we can pull to develop.”

Aldi is also hoping to use its lean operating cost model to help tackle the overuse of plastic in its supply chain. “If you want to lead it is challenging,” he admits. “And there’s always a risk it will affect your cost base because until something is normalised in the industry it could be that you have to pay more for it. But we have a couple of advantages. First, 90% of what we sell is exclusive label, so we control it. We’re not dependent on brands or multinationals. It’s about us. And second is our limited sku range. It is inevitably going to be a little bit easier to convert 1,800 products than 30,000.

“There are also some quick wins. We’ve removed the cardboard from our pizza bases. That’s zero cost, that’s an easy one. We’ve removed some plastic from our produce. And we can see more options. We’re currently working on our steak packaging. Moving it from a black film to a grey film because the black isn’t identifiable in [recycling plants] whereas the grey is. We can do that at zero cost.

“And you know what? When we shine a light on an area, our ability to get traction and deliver is very strong. So it’s going to be challenging. It will take focus. And of course we’ll need the support of suppliers to see the long-term perspective. But I’m confident we’ll deliver.

“We’re serious about plastic. We were the first retailer to sign up to Wrap. We’re going to get rid of our 5p plastic carrier bags. We’ve got plenty of initiatives there and, like food waste, plastic is a win win win.”

Win, win, win? You know what? It’s not a bad motto for Aldi either.