Case

Two efficiency-driven networks on

a collision course: ALDI’s innovative
grocery business model vs Walmart
Sayan Chatterjee

Sayan Chatterjee is usinesses can use a systematic process to develop and iteratively refine the core
Professor of Strategy at
Weatherhead School of
Management, Case
B strategy powering their business model. A company first stakes out its competitive
territory by identifying an initial target segment of customers. Several decades ago,
when the initial target chosen by an unheralded foreign entrant into the U.S. grocery market
Western Reserve
was the bargain price niche and the competition was just a few faltering chains, it’s likely
University in Cleveland
not much notice was taken by the industry. However, in more recent times, once the upstart
(sayan.chatterjee@case.
entrant established a foothold, a strategy stumble by the market leader provided the
edu) and author of
Failsafe Strategies newcomer with an attractive opportunity to expand its competitive reach into more upscale
(Pearson, 2004). neighborhoods. The upstart discounter swiftly moves to offer its customers more value at
even lower prices. Then other foreign entrants sense their moment has arrived to leap into
the fray now that the once unassailable market leader finally seems open to attack. Recent
chain store news headlines tell the breaking story: “Supermarket Wars!”
This case study tracks how the retailing behemoth Walmart became vulnerable to Aldi, a
privately owned foreign grocery chain that over time designed and refined an innovative
business model to out-compete its rival on price. Aldi, now an increasingly important
competitor in the U.S. grocery store market, has repeatedly followed the process outlined
in Exhibit 1 – adding to its consumer target, charting needed capabilities and learning to
deliver value–as it adapts to competitive opportunities and its rivals’ strategies.

To illustrate this iterative process in action we examine how Aldi, originally founded in
Germany, is fortifying a formidable presence in the U.S. economic
landscape by continuously adapting its efficiency-based network
business model. Aldi established its position by making just about
all the right decisions in its go-to-market strategy following the
steps delineated in Exhibit 1. Its step one – the initial target
segment it identified–were price conscious, underserved
customers. Its strategic choice, open its cut-rate supermarket
grocery stores in neighborhoods with large numbers of financially
struggling customers, and offer a limited selection of
merchandise, mostly house brands. Aldi, like Walmart, achieved
its low prices using an efficiency-based network business model.
Pallet displays signal low prices at ALDI stores.
But its tactics and Walmart’s stumbles produced a competitive
© RRandallPublish@cs.com opportunity that enabled it to open new stores, some under

PAGE 18 STRATEGY & LEADERSHIP VOL. 45 NO. 5 2017, pp. 18-25, © Emerald Publishing Limited, ISSN 1087-8572 DOI 10.1108/SL-06-2017-0057
 Exhibit 1 Systematic steps to build a business model[1]

To build a business model: step one is to select an initial target segment, a process of
identifying a set of potential customers and how the product or service should be
positioned in that market relative to the competition. Step two: decide what type of
business model is appropriate for the target segment. Step three: define a value capture
(profit) logic for the chosen type of business model. Step four: customize the profit logic
for the business and identify a set of deliverables (core objectives) that follow from the
profit logic. One should only go forward if the core objectives are executable given
the capabilities of the business.[2] As a company innovates new offerings it can repeat
the process with a new target segment.

Walmart’s nose. Aldi’s subsequent rapid expansion presents a challenge to Walmart’s

grocery business. Aldi has been so successful that it has forced Walmart to match its
prices.[3] Thirty years ago when Aldi entered the U.S. market it seemed unlikely to threaten
big chains located in upscale suburbs. But in today’s supermarket skirmishes Aldi’s
expansion is backed by its €50-billion parent company, ALDI Einkauf GmbH & Co. oHG,
which now operates 10,000 stores in 18 countries.

Innovative business models for retailers and grocers

The broad profit logic of an efficiency-based business is to maximize the utilization of its fixed
capital and labor resources and gain more control over prices. In order to do this, it must be
able to match customer demand to its productive capabilities in a predictable way. If it can
accomplish this, and as a result produce more goods or services at lower cost than its
competitors, it can offer its customers lower prices and gain more control of the demand for its
products. Riding the digital revolution, Walmart first became a powerhouse by developing a
business model based on predicting when and what its customers would buy from its stores
based on point-of-sale (POS) data. Upending industry practices, Wal-Mart went on to share the
POS data with its larger vendors and logistic providers to create unprecedented efficiency
across the entire network that allowed it to run its business with practically no inventory in its
stores. Next it expanded the same network efficiency business model into the grocery business
and became the dominant force in the industry. Then it tripped (see box “Aldi’s competition:
how Walmart changed the retail business model to a network efficiency model and then
stumbled.”) So how could Aldi compete on price with a Goliath like Walmart?

How Aldi is successfully challenging Walmart and others in the grocery business
Aldi’s name – trademarked as ALDI– is a shortening of “Albrecht Discount,” which was
founded by brothers Karl and Theo Albrecht as a self-service store in 1954 in Essen,

VOL. 45 NO. 5 2017 STRATEGY & LEADERSHIP PAGE 19

 Aldi is unleashing a billion-dollar price war – and it should terrify Walmart
Aldi currently represents only 1.5 percent of the U.S. grocery market versus Walmart’s 22 percent,
according to Reuters, but its sales represent a growing threat. Reuters reports that sales at Aldi are
growing at a rate of 15 percent, while sales at Walmart are only expected to grow 2 percent in 2017.
– Business Insider, May 11, 2017[4]

Germany. The brother’s frugality and approach to retailing stems from the price and
product focus of meeting the everyday survival needs of their country’s desperately frugal
post-war consumers.
Aldi has experienced steady growth in the U.S. since opening its first store in Iowa in 1976. As
of 2004, Aldi was the world’s 11th largest grocer with $37 billion in sales and 7,000 stores
world-wide[5]: in 2017 it is the fifth largest in UK.[6] As of 2017, Aldi attracts about 40 million
shoppers a month in the U.S. and hopes to get it up to 60 million by 2020. Starting from a humble
beginning Aldi is investing $1.6 billion in its U.S. chain in 2017 to take on the mainstream grocers
including Walmart.[7] By examining the simple rules for business model innovations that have
driven its success so far, observers can better analyze where Aldi might go next.

Critical decisions in Aldi go-to-market strategy

Because the U.S. grocery market was not growing rapidly in the 1970s the primary goal that
Aldi focused on was to expand market by lowering prices dramatically.[8] Initially this was
somewhat of a zero sum game–taking share from low-end grocers such as Pic N Pac. To
escape the limits of this strategy, Aldi decided to build a business model that allowed it to price
its products at an order of magnitude below other grocers and also develop a reputation for
private label quality that has ultimately enabled it to challenge leading discount grocers.
A typical Aldi store in the U.S. only carries around 1,400 products, 90 percent of them
private label; rents its carts to customers; charges for bags used to package the customer’s
groceries and doesn’t offer any customer loyalty programs. The U.S. unit only began
accepting credit cards in 2016. In spite of all the seemingly unfriendly customer treatment,
in Germany, Aldi is regarded as the third most admired corporate brand. Aldi’s grocery
business is now focused on investing in its U.S. stores and applying its business model to
its expanding chains in Australia and Ireland.
Aldi is known as a “hard discounter” in Europe, which is a retailer that offers prices even lower
than traditional discounters. Price competition has increased over the past decade; the market
share for hard discounters in Europe has more than doubled and now represents about 9.5
percent of the total market. When it first entered the U.S., market, Aldi was perceived to appeal
only to customers who desired low price, but effective merchandising of the private label
products has produced increasing acceptance of Aldi’s product quality.[9] Its corporate
communications campaigns publicize store items like “Aldi’s $8 wine ranked among some of
the best in the world.”[10] It is fair to say that one of Aldi’s core capabilities is to identify and
nurture relationships with unknown vendors that can deliver the quality that Aldi insists on. Aldi’s
relationship with their suppliers is usually a long standing partnership. However, the supplier
does not have much power because the product is private labeled and Aldi can and will find
new sources if suppliers fail to deliver on time and quality.

Store location strategy

One of its first stores in Cleveland, Ohio was located in a neighborhood with mostly lower income
customers. However, as years passed and Aldi developed a reputation for the quality of its
merchandise it had success with stores it opened in more upscale Cleveland suburbs.

PAGE 20 STRATEGY & LEADERSHIP VOL. 45 NO. 5 2017

 ‘‘Businesses can use a systematic process to develop and
iteratively refine the core strategy powering their business
model.’’

Aldi’s latest store in Cleveland is in a development that boasts a Walmart supercenter. Aldi
is seemingly inviting customers to compare its prices to its rival by opening its new stores
close to existing Walmart stores.[11] In New York City, Aldi’s has opened a store in a
complex adjacent to Costco. In effect, Aldi is letting its rivals do its marketing and bring
comparative shoppers into its stores. It plans to operate 2000 U.S. stores by 2018.
To understand Aldi’s slow, but consistent success and growth, it is important to deconstruct its
tactical responses to customer preferences and behaviors. Price conscious customers buy a
limited range of grocery products. A full-service supermarket chain stocks some 30,000 products;
Walmart cuts this to 15,000 items, but Aldi pares the list to between 1,400 and 1,700 SKUs.
With wage-earning consumers, price is increasingly winning over brand loyalty. And when
it comes to price, perception is reality. A McKinsey study found that customers perceived
the prices at Aldi as being 25 percent lower than traditional retailers.[12] Analysts note that
difference is actually much closer if a more sophisticated set of benchmarks is used.

Tricks of the discount trade

Aldi, like the Costco mega-store chain, has mastered a number of tricks of the discount
trade. Both retailers display items directly on pallets. Both retailers have convinced vendors
to repackage their products in containers that maximize the pallet space, in some cases
switching to square cans instead of round ones. Vendors also have to put large UPC codes
on literally every surface of the packaging so checkers can work faster.[13]
Store layout: Small store foot print saves shopping times. Proximity to apartment complexes
provides a steady source of customers. A standardized layout reduces stocking time and
training costs and makes tracking stock outs easier. By not providing bags or accepting credit
cards Aldi further trims its costs. Customers have to use a quarter to unlock a shopping cart and
must then return the cart to its garage in order to retrieve the quarter. Further, Aldi has installed
electronic locks on all its carts so they cannot be removed from the parking lot.
Human resources: Despite its focus on costs, Aldi pays its non-union staff a higher salary
than most other discounters.[14] A typical Aldi store has 10 employees who are trained in
all aspects of the business. Aldi employees are highly productive multi-taskers who can
perform as cashiers and stockers and also take returns, clean up spills and answer
customer questions.[15] Aldi keeps store staffing levels to a minimum, which can results in
long lines at the registers, but customers seem willing to wait.
All its interlinked tactics have helped boost Aldi’s profits. Its sales have grown at an
estimated 8 percent per year since 1998 and they have opened 40 stores per year from
2004 to 2010 in the U.S alone, a cautiously financed slow expansion into new markets.
Being privately held, Aldi doesn’t have to justify its growth options and financing to
shareholders. The bottom line: Aldi’s focus on costs yields extremely high operating
margins–9.3 percent in Germany–and its steady expansion is a testament to the success
of its business model. One survey found Aldi to be the 20th best grocer in the United States
out of 52. Important do’s and don’ts for the Aldi value chain are outlined in Exhibit 2.
Product selection, supplier management and staffing are key resources for Aldi’s business
model. Its product strategy and store layout and site strategy can be easily copied. Some

VOL. 45 NO. 5 2017 STRATEGY & LEADERSHIP PAGE 21

PAGE 22 STRATEGY & LEADERSHIP
VOL. 45 NO. 5 2017
Exhibit 2 The key elements of Aldi’s business model that led to its initial success
Customers Stores Products Pricing Package Suppliers Employees

Helps Low end customer Small foot print 80/20 basic products – Everyday low price Imitates branded Have the ability to deliver Able to do all the jobs
interested in basic Lower income avoided 1 percent milk 20 percent below products a single type of products in a store from stocking
products areas close to only regular and skim others Shaped to packaged and arranged to check out
Can walk to store large Products always maximize pallet for display on pallets Non union
Reduced shopping apartmentsNo available space Supply to DC or stores Higher salaries for
time other grocers Bar codes on all improved productivity -
sides multitask
Hurts Upscale customer Opposite of Prepared Foods Frequent discounting Fancy material Poor quality and inability Opposite of above
seeking product above Counter service of different types of Bar codes that to deliver on time Not versed in what
variety Hard to find Organic, Branded products are hard to scan products are available
Browsers products in Products and where to find these
Credit pays store
of its innovations have been adopted in Europe by competitors such as Lidl, which recently
announced its entry in US market.[16] However, it would be difficult for an U.S. grocer to be
able to imitate the totality of Aldi’s business model. Walmart is making some efforts with its
new neighborhood market, small footprint concept.

Recent changes to Aldi’s business model

Aldi is increasingly moving more into the mainstream grocery business. As it opens stores
in more affluent neighborhoods most of its business practices have remained the same but
it is incrementally adding more stock keeping units that are demanded by middle class
shoppers. Aldi is also beginning to offer organic produce, and a wider assortment of
specialty goods likes cheeses. It’s looking a bit less like Costco and a bit more like Whole
Foods. However, 90 percent of its business has remained based on the factors listed in
Exhibit 2. Aldi has simply managed to convince traditional middle class customers of the
value of its private label offerings.

How will “Supermarket Wars” end?

Analysts note that 18 companies in the U.S. retail grocery segment have gone bankrupt
since 2014. Aldi’s expansion has provoked Wal-Mart to respond with price cuts, The
German discounter Lidl is opening 400 stores in the U.S. and Amazon has ambitions in the
grocery market. Some analysts expect a significant number of supermarket war casualties–
more grocery store bankruptcies and liquidations over the next few years.

Aldi’s competition: how Walmart changed the retail business model to a network
efficiency model and then stumbled
For a retail grocer, unlocking capacity simply means selling more than its competitors with
comparable shelf space. In order to do this, Walmart learned to focus on a very different business
objective than big box stores such as Kmart. The mantra of the Kmart’s of the world was to put
pressure on their suppliers and cut costs through economies of purchasing. The idea was that the
resulting lower prices would attract customers away from small mom-and-pop stores. Kmart was
very successful through the early 1980s with this approach. However, if Kmart had ordered too
much or the wrong products then low price alone would not move them. This led to periodic heavy
discounting that came to be known as “blue light specials.” This business model did work until
Walmart turned it on its head by being able to carry exactly what its customers wanted, when they
wanted it. To achieve this core objective, Walmart brought its suppliers into its extended value
chain as partners.[17] The core objective of this business model was to achieve “predictability” in
what and when the customers would buy from Walmart stores. The goal would be accomplished if
prediction was on the mark and the extended value chain delivered the products to the shelves at
the right time and in the right quantity. The critical capability was managing supply chain activity
so that stores carried practically no inventory that was not on the shelves. The lack of inventory, or
carrying costs and a very lean working capital requirement was the foundation of Walmart’s
innovative retail business model.

In order to execute this strategy, Walmart shared its point-of-sale data with its large vendors and
together they devised analytics that predicted the demand for specific items. With this information,
the largest suppliers such as P&G and Newell could plan their manufacturing and logistics with
superior precision and longer lead times, enabling vendors to reduce their cost. Instead of having
to rush large volumes of products to stores on short notice, Walmart’s model produced efficiency
not merely at its stores, but also for the vendors, truckers and other logistic providers. This is the
hallmark of network efficiency. During the 1990s, the entire inventory that passed through Walmart
Stores was in full trucks. Predictability was ensured when Walmart’s everyday low prices produced
a steady flow of customers through its stores, ending the need for periodic sales.

(continued)

VOL. 45 NO. 5 2017 STRATEGY & LEADERSHIP PAGE 23

 Exhibit 3 The key elements of Walmart’s business model that led to its success
through the 1990s
Market Customer Products Pricing Suppliers Employees

Helps Large market Low end customer Products with Everyday low Have the ability Are part of the
size that can interested in basic established price leading to deliver a value chain
support a products usage to increased wide variety of helping
distribution patterns – predictability products on suppliers with
center branded of customers time and a full vendor
feeding products to stores truckload using managed
multiple predictive replenishment
stores analytics
Hurts Small Upscale customers Products whose Frequent Smaller high- Are not
markets that interested in a demand is likely discounting of end suppliers knowledgeable
require variety of products to be variable different types focusing on about how
smaller of products niche products products are
stores moving in their
category

How Walmart lost its way and opened opportunities for Aldi
Innovative business models work because they are fanatic about their core objectives that follow
from the profit logic. Time and time again, erstwhile successful business models have lost their way
because a new generation of leaders lost sight of the core objectives. In the case of Walmart,
managing predictability meant following certain do and don’t rules as described in Exhibit 3. As it
indicates, the key prescriptions are all focused around helping the supplier and Walmart to be
precise about replenishing the shelf with the right quantity at the right time. Some of the “do’s,” such
as why to stock branded products can be counter intuitive. Clearly branded products are more
expensive than private labels. However, Procter & Gamble can help Walmart predict the demand
for its Tide detergent much better than the private label product. So even if private label products
are cheaper they may end up costing Walmart more if the product does not move as predictably
as is branded items. It is well known by now Walmart has not been very successful outside the
United States and has been forced to retreat from markets such as Germany. While it has a
presence in other markets such as the UK (through its Asda stores) it has simply been unable to
replicate all the elements of its value chain as effectively as in the U.S.[18] However, since the early
2000’s Walmart made a number of changes to its U.S. businesses that are contraindicated based
on the elements in Exhibit 3. This has led to the loss of the powerful position Walmart enjoyed as
well as enabled businesses like Aldi to mount a successful challenge, especially in the grocery
segment. It is possible to infer that Aldi would have stayed on as a niche grocer had it not been for
the opening presented by Walmart.

Around 1999, Walmart became worried about Target and its slightly more affluent customer base.
Walmart tried to upgrade its offerings, “rationalize” – translation: reduce the number of its offerings–
and increase the percentage of private label products that they carried in the stores. These moves
undercut the efficiency of their large suppliers and partnership with them started to crumble.[19]
This had a domino effect; some basic products were not consistently available on store shelves and
products that Walmart’s core customers did not really want took up shelf space. Walmart lost the
trust of its core customer base, opening the door for more focused retailers like Aldi and Dollar
Stores. For the first time Walmart introduced sales (“rollbacks”). Walmart is now trying to migrate
back to its core model.[20]

Notes
1. www.slideshare.net/AxelRodriguez8/simple-rules-for-business-models (accessed 22 May 2017).

2. This can be ascertained by drawing a COAR map (Customer, Objective, Activities and Resources).
See Chatterjee S, Narayan V. and Malek W. 2016. “How strategy execution maps guided Cisco
System’s Sales Incentive Compensation plan.” Strategy & Leadership, Vol. 44 No. 6, 2016.

3. www.cnbc.com/2017/02/27/wal-mart-launches-new-front-in-us-price-war-targets-aldi-in-grocery-
aisle.html (accessed 22 May 2017).

PAGE 24 STRATEGY & LEADERSHIP VOL. 45 NO. 5 2017

 4. www.businessinsider.com/aldi-is-lowering-prices-and-opening-more-stores-walmart-2017-5/#the-
new-aldi-store-looks-similar-to-its-older-stores-on-the-outside-1

5. Jack Ewing, Andrea Zammert, Wendy Zellner, Rachel Tiplady, Ellen Groves, Michael Eidam.
(2004, April 25). “The Next Wal-Mart?” Businessweek. Retrieved from www.businessweek.com/
stories/2004-04-25/the-next-wal-mart, (May 28th 2014). Bonnie S. Benwick (2014, March 28). “How
Stores ‘Private Labels’ Went from Cheap Goods to Premium Products.” The Washington Post.
Retrieved from http://articles.courant.com/2014-03-28/business/hc-ls-store-brands-20140315_1_
store-brands-private-labels-premium-products (accessed 16 June 2014).

6. www.marketingweek.com/2017/02/07/aldi-fifth-largest-supermarket/, accessed on May 22, 2017.

7. www.chicagobusiness.com/article/20170208/NEWS07/170209859/aldis-1-6-billion-battle-
plan (accessed 22 May 2017).

8. Sayan Chatterjee, “Simple rules for Designing Business Models,” California Management Review,
55(2), (2013), pp. 97-124.

9. Aldi’s parent, ALDI Einkauf GmbH & Co. oHG, owns Trader Joes, a U.S. chain, which is well known
for its private label quality.

10. Jouston Schronicle, May 27, 2017, www.chron.com/life/article/Aldi-s-8-wine-beats-ranked-among-

some-of-the-11178246.php
11. www.bloomberg.com/news/articles/2016-03-22/wal-mart-loses-everyday-low-price-edge-as-aldi-
opens-across-u-s (accessed 22 May 2017).

12. www.mckinseyonmarketingandsales.com/sites/default/files/pdf/discount_stores_retailer_strategy.
pdf (accessed 27 May 2016).
13. www.motherjones.com/kevin-drum/2016/06/aldi-has-very-impressive-barcode-strategy (accessed 14
November 2016).

14. www.csmonitor.com/Business/2014/0626/IKEA-Gap-and-eight-more-companies-that-pay-higher-
than-minimum-wage/Aldi (accessed 15 May 2015).
15. www.csmonitor.com/Business/2014/0626/IKEA-Gap-and-eight-more-companies-that-pay-higher-
than-minimum-wage/Aldi (accessed 22 May 2017).

16. www.washingtonpost.com/news/business/wp/2017/02/15/a-first-look-at-how-german-grocer-lidl-
plans-to-conquer-the-u-s-market/?utm_term⫽.06fdbd247fac (accessed 22 May 2017).

17. We are by no means suggesting that Walmart was not demanding of its suppliers. However, it is
a much less often adversarial relationship and more of an information sharing partnership leading
to a “win-win” than was possible with the prior big-box business model.

18. Exhibit 2 helps explain how markets in Europe do not conform to the elements of the business
model.

19. Miguel Bustillo. 2011. “Wal-Mart Tries to Recapture Mr. Sam’s Winning Formula.” Wall Street
Journal, February 22.

20. Ibid.

Corresponding author
Sayan Chatterjee can be contacted at: Sayan.Chatterjee@case.edu

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