Retail’s newest innovation: deflation

The German grocery chain, Aldi, points the way to the future. Despite its lack of frills and glitz, Aldi has a great deal in common with the most cutting-edge developments in eCommerce and digital services.

The most important commonality is the value pricing strategy and its deflationary impact. Beyond being a foreign retailer entering new markets, Aldi’s retail experience strips away many of the things we previously thought were integral to in-store experience.

Aldi-isation: When bricks-and-mortar takes cues from eCommerce

Aldi offers limited product lines of mostly private brands; removes presentational packaging and in-store merchandising; uses boxes and pallets to display stock; and reduces labour costs – at least partly by shifting tasks to the consumer. In effect, Aldi is stripping its product suite back to the core commoditised offering; any effort to differentiate products through presentation or suggestion is dispensed with – leaving lower prices as the only persuasive tool.

This drives radically lower prices, increases competition and pressures margins in whatever market Aldi operates in. In Australia, an April 2016 report from Moody’s warned that Aldi’s expansion in the market is poised to be “credit negative” for the established players because of the ongoing pressure on margins. Moody’s estimated that “Aldi’s lower prices have resulted in Australian supermarket operators reducing prices, resulting in food price deflation of around 1-1.5% annually”. We have noted that “Coles’ average prices have recorded 23 consecutive quarters of deflation”.

In a sense, eCommerce has trained us for such a shift—in buying online, we’ve already accepted the lack of an in-store experience, and we handle everything from selection to checkout ourselves. Aldi is, in effect, blending the bricks & mortar and internet themes.

That is not the only way in which eCommerce has paved the way for this new retail reality: when firms sell online, they make all prices public, dramatically reducing the research costs for competing retailers weighing market entry. This global pricing transparency has also re-shaped consumers’ shopping strategy: PwC’s 2017 Total Retail survey showed that 47% of respondents used Amazon as a research site for prices; while PwC’s 2016 survey found that 31% of respondents used their mobile phone to compare prices while
in-store.

Aldi is not the only retail example of the influence of eCommerce. 

In China, Xiaomi is notorious for compressing the margins of major firms like Samsung, Huawei, and Apple, by offering cheap, quality substitutes to competitors’ mobile phones, and doing so without any investment in a traditional retail or advertising presence. (Xiaomi-isation hardly rolls off the tongue though.) This phenomenon of innovative products being commoditised to the point that it eats at the margins of established competitors is becoming increasingly widespread.  

Globally, Amazon continues to challenge traditional retailers with offerings such as Amazon Fresh and Amazon Go. Amazon’s founder Jeff Bezos has been quoted as saying “your margin is my opportunity” when undercutting prices in new markets. Amazon’s potential arrival in Australia is likely to increase competitive pressure for local retailers.

In fact Amazon Go takes the Aldi retail experience to a Star Trek-like next step. In Star Trek no one ever pays - you eat, you drink, you leave. Amazon Go seeks to achieve this by using technology to recognise what you put in your basket and charge your Amazon account automatically when you leave. Later this year, Australia will roll out the New Payments Platform (NPP) which will allow for payments to be made in a matter of seconds, 24/7—taking seamless and almost automatic payments a step further. By making the payment part of any transaction virtually instantaneous, NPP could bring new opportunities and have further deflationary impact. The future of payments does actually look to be Star Trek.

THE VIEW FROM ASIA-PACIFIC: EXCEPTIONS TO DEFLATIONARY DOLDRUMS? 

One crucial aspect of Aldi-isation is that chains, such as Aldi and Lidl, tend to succeed where costs of living are high. That’s an important point to keep in mind when we try and look at the prospects for Aldi-isation within the Asia-Pacific region, because not only are national economies quite different, but the differences within countries are large as well. Indeed, the radical variation between Chinese cities and regions has been cited as one reason for WalMart’s underperformance in this key market, as the retail giant has struggled to determine a core product mix that can be delivered efficiently on a national scale.  

This differential offers a bright spot in a picture that could otherwise easily invoke concern. In some places in Asia, low living costs may mean that Aldi or Xiaomi style models open up new markets among populations which previously weren’t served. Indeed, in China the absence of legacy chains like Walmart has been cited as one reason for the rapid growth of new online retailers. Aldi seems to have recognised this by entering this market not through a brick-and mortar chain but with an online presence on Alibaba’s Tmall online B2C platform. In other words, the benefits of greater consumer choice come at much less disruptive cost to established players. 

FIGURE 1
Outside the top cities, consumers access digital sales platforms primarily through mobile devices

Source: Bain & Co, Can Southeast Asia Live Up to Its E-commerce Potential? March 2016