Aldi UK bosses on stellar results: 'Our formula is working'

As Aldi’s profits soared by a stunning 124%, The Grocer caught up with Aldi UK’s joint GMDs Roman Heini and Matthew Barnes to talk about saucy fish, the sustainability of its business model, the central London ‘convenience’ store trial, and why Asda can’t compete.

JH: A pre-tax profits boost of 124% is impressive. And sales were up 40% in 2012, to £3.9bn from £2.1bn in 2009. That’s an 86% sales boost in three years. How do you keep growing like this? And can you keep it up?

MB: We have been the leading retailer for growth recently, our Aldi model is the most successful model out there, retail-wise. The formula is working. So we need to keep ensuring we keep working hard on the key elements. Keeping close to the customer is paying dividends. This year Kantar Worldpanel has recorded consistent 30% growth. We confirm that is accurate, which means for the third year running we have fantastic levels of sales, and we are determined to keep that going for as long as we can.

RH: The journey we started, to convert top-up shoppers to full shoppers, has continued. We have followed up on it. We now have 17 items per average basket, whereas Sainsbury’s and Morrisons have 18. For us, the additional sales and more customers are good, but this average basket statistic is evidence that, with a limited range of 1,500 products compared to 30,000-40,000 products in the major multiples, our range is relevant for today’s shopper. So, in answer to the old question of whether the limited-range retailer is a sustainable business model in the UK, from our end we have no reason not to believe that it is the case.

To increase that basket size Aldi has done a lot of work on quality. Can you give me an example of how you have taken that work forward?

MB: We have a much extended quality control department, hiring people from the industry to work for us purely on quality. David Roos came from Pepsi Co for example. He has joined us to head up a new in-house quality control department and improve it extensively. There is still a lot we can do there. And it fits very much with the direction and the evolution we are taking.

Which is what exactly?

RH: We are selling more fresh food than ever. For the first time ever, over 50% of our sales are fresh. So looking ahead to next year we will spend £50m to provide more space, more chillers, all for fresh. We see it as a big area of growth and it also attracts new shoppers. Having a wider fresh range will convince more shoppers that we are a great shopping destination.

How will you create that space? By shrinking other departments like non-food?

MB: Actually, non-food is a very important part of our business. It’s a great reason for customers to come into our stores. We do massive volumes of non-food. That said, of all the categories we have adapted in response to the recession, non-food has possibly adapted the most. We did a very strong business in high value in the past, like TVs, but people aren’t buying that anymore. We are seeing a massive trade in gardening, selling a huge amount of bedding plants, compost, fertilisers. We offer a massive discount. Customers see that and respond accordingly. We also do a lot of specialised stuff, like cycling, running and motorbike gear. It grows every year.

“For the first time ever, over 50% of our sales are fresh”

Roman Heini

RH: It doesn’t outperform the core range, but we see that as an opportunity. The core range should outperform the specials, anyway. The core range draws customers in, and if they purchase non-food as well, that’s the perfect scenario.

MB: We will put a lot of energy and resource into our non-food offer. We see the opportunity. We have invested overwhelmingly into core grocery recently, but as we add resource into our specials buying department we think there is a real opportunity for non-food. We are really excited about the non-food opportunity over the next few years.

So we will create the necessary space to grow fresh volume space by cubic utilisation. We will become more efficient. The opportunities we see are primarily in fresh, and by hitting 50% we have doubled where we were just three years ago. So £50m is a lot of money, but it’s needed to meet customer demand for fresh.

How will you evolve your supply chain to cope?

MB: We have some long-standing relationships with suppliers, but we have had to develop more. Doubling our buying resource means we have been out there, vocally, looking for more suppliers. And we have found more, and we have developed strong relationships with them. We look to go right to the source, go to the farms, which also gives us great visibility of the supply chain.

RH: The sales growth also helps build relationships. More and more suppliers are keen to work with us, because they see the current volumes, and they can imagine the volume we will do in the future.

MB: Dealing with British suppliers is really important. Our customers tell us that. So where we can, we go British. Even on bacon and ham. So long as it isn’t cost prohibitive, we will definitely go British.

“Dealing with British suppliers is really important. So where we can, we go British”

Matthew Barnes

RH: We have doubled sales of fresh every other year for four years now. We used the same phrase last year, mathematically, we can’t maintain that. But we still see scope by making more range changes, adding more products and we still have shoppers in reach. Plus there is still more work to do to convince shoppers we are a viable destination and growing the store network overall. That combination will give us more momentum, although looking at the percentages we can’t maintain 30% forever.

MB: Ultimately, no one does what we do. We are unique and that is key to our success. We are the true value equation of quality and price. People are obviously shopping for price, but the recession has also proven how important quality is. It is very much appreciated.

RH: For three years in a row, fresh meat has grown by 60%. Fresh fruit and vegetables by 40%. We have also added fresh salmon and fresh cod. We have a few categories where we can grow, salad bags, more ready meals.

MB: We saw the success Saucy Fish has had, so we will be launching our own range of that. We know we can do better. We are experimenting, trialling more, products like big takeaways, for example. We see a real opportunity to move into those areas, more than we have already. It’s a sizeable investment, but one that is worthwhile. There is more scope there, we are 100% on that one.

You talk about winning over more customers, where are you taking them from?

MB: We have gained a million new shoppers last year from across the board. If we open next to a Sainsbury’s we take as many shoppers as if we open next to an Asda, or a Tesco. The expanse of our offer, the fact we have tiered quality, the fact we supplement it with seasonal offers, we have more for everybody. And the key transition has been converting top-up shoppers to main shoppers, and the shoppers who may have once felt they shopped with us because they had to, now shop with us because they want to.

You mention the tiering, which is a recent trend for the discounters. How is it going?

MB: Everyday Essentials is doing really, really well. We continue to grow and invest in it, but we absolutely grow the quality, too. It’s everyday essentials – that means it’s an essential, it doesn’t mean anything other than that. It’s still a very good quality line at a great price.

RH: We launched with around 10 items In January 2012, we have 60 now. It’s grown a lot. It’s part of the structure, people want a hierarchy, it adds clarity and gives customers a choice.

MB: We have also invested a lot into Specially Selected. Last year that range was up 40%. This year, the same again. It’s grown in line with business growth, if not better. It reflects our customer demographic, but also that people want to treat themselves.

Especially at Christmas. Lidl already has its range in stores.  What does Aldi have planned?

MB: We are very excited about Christmas. Fresh Lobster tails for £9.99. Fresh Scallops. Fresh turkey. Sides of salmon. A beef forerib joint. And the prices will be the best in the market. Five millions homes will get our brochure in a few weeks’ time. We have a fresh three bird roast this year - our four bird frozen roast has been well known for a while.

Our store managers will have to prepare for this, some members of staff will just have to be replenishing all day. We have lots of lovely desserts. And we have a magnum of champagne, another variety of champagne, some really great wines. And a whole leg of Serrano ham.

RH: You can invite your family round a few times with the amount of ham you can slice from one of those. We will have around 20 going into each store.

MB: It’s a bold move. We continue to offer interesting products at unbeatable value. Harrods sells one. Maybe Selfridges. I’d be surprised if other supermarkets are selling a whole leg of Serrano ham for £49.99. We have doubled the Christmas range because we have been bowled over by the success of previous years, so this year we have decided to really go for it.

We are doing a fresh party range as well, benchmarked against M&S, it is absolutely superb. It’s going to hit stores in a couple of weeks, it’s our biggest ever, and we are really excited about it. For those that haven’t ventured into our stores year, there is a lot to persuade them.

On the subject of attracting new customers, you recently moved into central London, opening a smaller-than-usual store in Kilburn. How is that working out?

RH: We can’t, and we don’t want to, ignore central London. So we introduced a concept store to see how we could adapt. To see how can we deal with a smaller footprint, no car parking, just basket tills, the deliveries, the staff, all the issues retailers face in London. It’s been a success from day one in terms of customer numbers and average spend. We have made quite a few tweaks since we opened to the offer, though. We started with our standard range. We added a few more products for convenience, like food to go, drinks to go, smaller pack sizes, an in store bakery. We have been really surprised.

MB: Once we have found a model we are happy with, and one we can replicate, we might open a few more stores. However, our priority is still outside the M25. We don’t have plans to open, say 10 stores in central London. We are not in a rush. We have to find a way to operate in central London. The market is enormous and we don’t have access to those customers. We have had overwhelming feedback from the customers in Kilburn, especially on price. They love the quality, but they can’t believe the prices compared to what they are being charged elsewhere. There is a great sense of relief for us that they have responded so positively. It’s given us great confidence that we can deliver to London and be very successful.

“There are some unique challenges to running a store in central London. We are on a very steep learning curve”

Roman Heini

RH: There are some unique challenges to running a store in central London. We are on a very steep learning curve and we have a long way to go. But when we have completed these learnings, and we understand how to run a business consistently and to the standards we require, in London, we may roll it out.

MB: We will probably add another one or two stores to the trial, because it is still in a trial phase, but there is no pressure. We are not under pressure. Some of our rivals are in a position where they have to open c-stores. This is not a c-store, it’s a city store. We have no plans for convenience, this is just an Aldi store that is as close to the Aldi blueprint as we can get in central London. It’s a challenge, but we are delighted. So far, really delighted.

RH: The staff will tell you it’s a challenge. The sheer number of customers they get, for a start. It’s all baskets, rather than standard tills, so we have had to put more tills in to cope with the volume of customers. Plus the in-store bakery, we have never done that before, we are doing thousands of units a day. It’s a lot of labour every day just baking, and replenishing. And longer opening hours. It’s all new to us. It’s a challenge.

Is meeting demand a familiar challenge? Aldi often gets positive feedback on quality products, offered at a bargain price. Is it hard work trying to maintain availability on hero products, like the Toro Loco wine?

RH: Out of nowhere we get great accolades, especially on alcohol, and we work hard to find a solution. Overall we have measured availability with a mystery shopping programme and we have a quite good KPI so far. There is scope to be better, but with our rate of growth we have to be fairly pleased.

MB: It’s also challenging for our suppliers. We are working closer than ever before, it’s a partnership and it’s a good story for both parties. And the better we can forecast, the better it is for all of us. It is getting better, but the growth we are experiencing means it can be a struggle. Accolades are fantastic. Our gin beating Harrods, our Toro Loco wine doing so well, our Magnum washing up liquid beating Fairy and being a Which? best buy and our Mayonnaise beating Hellmann’s. We welcome it when that happens, although obviously we get no warning. And as soon as it happens we see a flood of demand for those products - and they already sell very well! So trying to pre-cast that is extremely difficult.

RH: It’s been a hugely challenging few years. Our staff have worked extremely hard.

And, by all accounts, they are worked very hard?

RH: We have close knit store teams and with the growth in our business, it has been challenging. We look to continue to invest in our staff. We have a new Aldi UK academy we have set up to invest in training. We have so many people coming in. We had 5,000 new starts last year, 6,000 this year. For a fairly small operation, that’s a big number.

“As a company we work hard but we are rewarded very well. We have high expectations”

Roman Heini

As a company we work hard but we are rewarded very well. We are well known for our salaries. We have a good premium compared with the marketplace. So we have high expectations and a high reward. And every other year we have an employer survey to see where we are, to give us a transparent picture of how our employees are treated – and the last one we had the results had never been better. Maybe because it’s quite nice to work for a very successful business which has a good atmosphere. So stretched, yes, but positive.

That’s the staff covered, but how do you measure, or build on, customer satisfaction? Do you have a loyalty scheme on the horizon?

RH: We believe we have maintained a bigger discount to the average basket within the competition. So why add complexity, which someone has to pay for eventually, which would then narrow that gap, simply to give a discount again afterwards? That concept is alien to us.

MB: We don’t feel we need to give our customer a card and points to gain their loyalty. We need to do the same, just get better. And loyalty is driven by the fact that when customers come to our stores they know what they are going to get. They know what the price will be.

“We don’t feel we need to give our customer a card and points to gain their loyalty”

Matthew Barnes

We are the only EDLP retailer, the only true exponent of EDLP, that’s what drives loyalty. We are adamant about that. Our ultimate goal is to deliver quality, fresh product and availability. That’s a loyalty driver, not a piece of plastic they build points up on. 

No plans for a loyalty scheme, how about online?

RH: The same goes for online. We have no plans. We are very close to what happens out there. We watch e-commerce closely. We watch if anyone is making money or being successful and whether customers want it. It would be foolish not to monitor it. It’s a fast growing part of the market, but the fastest growing part of the market is us, the discounter. So we are focused on what we do, but we are focused on doing it on a wider scale. Why divert our efforts to a sector which, in terms of profitability, hasn’t really proved itself yet?

MB: We see our price gap widening as time goes on, unquestionably. So we don’t want to bolt something on which might put that in jeopardy. We watch it carefully. But we have no plans.

Does that also go for click & collect?

MB: I would put that in the same box. It’s all part of the same thing. We saw British retailers going headlong into delivery and they are now pulling back into areas which are less costly, like click & collect. It’s all in the mix. We watch it closely. But bricks and mortar is where the potential lies for Aldi. What we are doing right now is working well. We have top-notch competitors and we are more on the radar now than ever before.

Do you feel the heat from those competitors?

MB: We feel it in terms of the rhetoric. We feel Aldi is more of a focus that before. But as soon as we take our eye off what we are doing, there is a danger we will lose our grip on what we need to do. We are focused on quality, price and customer. And we know our price gap is widening. We have shielded our customers from well-documented commodity increases on things like fresh meat. We have taken a hit on our margins and we hope we ride out the storm.

RH: We decreased the margin yet again. The key driver to being able to do that is our sales momentum. That enables us to absorb costs to the extent that no one else can, and pass that on. We have more initiatives, a more efficient supply chain for example, more British suppliers to cut our transportation, there is a long list. But the sales momentum is the biggest.

“We see prices moving up, but we shield our customers wherever we can”

Matthew Barnes

MB: We saw Asda respond to us by fixing the price on a number of essentials. But it’s not all about a handful of essentials. Customers aren’t concerned with our costs, they are concerned about theirs. What they can afford, what their shopping is going to cost them. And they are telling us, more and more, that they are seeing rises elsewhere. But they see us trying not to hit them. We are very careful. We talk about prices all the time, particularly the prices in fresh. We see them moving up, but we shield our customers wherever we can. And if that means a drop in trading margin, we need to accept that for a period of time.

Comment: Aldi - why is it doing so well?