Answer required for case study:

1. Do you think ALDI could pursue its business model without developing strategic alliances with channel members? Discuss.

2. Discuss the concept of win-win in the context of strategic alliances in marketing channels.

CASE: Superior Consumer Value through Strategic

Channel Alliances

ALDI is an international grocery discount retailer specializing in private-label, high-quality products. ALDI, which opened its first stores in Germany more than 40 years ago, now operates in 8 countries with over 8,500 stores (see Exhibit 1 for a view of a typical ALDI store). It is ranked number 10 out of the top 30 food retailers worldwide and was selected as "Germany's top brand" in the year 2000. What separates ALDI from the wide range of other discount retailers is its core competency embedded in its unique approach to buying: ALDI buys only a relatively small number of different products but in huge quantities at the lowest possible prices. Moreover, virtually all of these products are sold under private label.

The Limited Assortment Concept

What makes this strategy work is ALDI's limited assortment concept. ALDI's product line includes no more than 700 to 1,500 items (retailers like Wal-Mart offer more than 25,000 different items). The range is strictly focused on the products most needed and frequently used in the average home. These basic product categories are enriched by weekly "special buys" where customers can find anything from DVD players to clothing to kitchenware. This strict "no-frills" strategy eliminates virtually all of the "extras" found at other grocery stores. For example, ALDI uses no baggers, fancy displays, check cashing, or preferred-customer savings programs. Further, at ALDI the consumer shops from open carton displays that are easy to replenish (see Exhibit 2) and pays only cash to avoid delays associated with credit card verification. The customer even has to use a coin to obtain a shopping cart from ALDI's "cart rental system." When the consumer returns the cart, the coin deposit is returned. This minimized the need for staff to collect shopping carts. Wherever one looks at ALDI, ruthless cost control is the leading philosophy.

Indeed, it is not unusual to mistake the store manager for a "blue-collar" guy wheeling a pallet of canned vegetables to the sales floor. One of the founders of ALDI, Theodor Albrecht, is said to be so thrifty that the first thing he does when entering a room is to turn off the lights and heat!

Operational Efficiencies at ALDI

The combination of low overhead, high volume, and heavy use of private goods is what enables ALDI to underprice other chains. This differential advantage is further reinforced by ALDI's superior relationship with suppliers as well as its outstanding logistics capabilities. What makes it so difficult for competitors to catch up with ALDI is that the company is able to offer high-quality products that match or exceed the quality of leading national brands for a significantly lower price. By focusing on a streamlined product assortment that remains relatively stable over time, ALDI and its vendors are able to allocate resources efficiently.

An added benefit of ALDI's "bare-bones" approach to inventory acquisition, control, merchandising, and logistics is that it is much easier for ALDI to plan and order far in advance. Vendors can rely on ALDI's dependable and substantial cash reserves and the mostly long-term agreements that ALDI negotiates with them. Customers hardly ever find empty trays at ALDI, and products are always fresh because the product turnover is so high. In fact, merchandise turnover is so rapid that, on average, the entire inventory of a store is completely renewed after only two weeks. Yet ALDI's stores receive deliveries of new goods daily from decentralized regional logistics centers.

These depots are in constant contact with vendors, creating a super-efficient replenishment system that competitors find hard to imitate. For instance, ALDI has used cross-docking in its warehouses for more than 30 years now, well before Wal-Mart became famous for using this system. In addition to all of these operational efficiencies, from its earliest days in business ALDI has also encouraged and worked with its suppliers to develop packages that are easy to handle for logistics providers as well as store staff on the sales floor and stockroom. So, instead of store staff having to open boxes and place items on shelves, consumers can grab products from a pallet that has already been stacked by the supplier.

The Private-Label Advantage

Although private branding is often associated with lesser quality than famous national brands, this is not the case at ALDI. Indeed, the opposite is true. ALDI's private-label. Product quality meets or exceeds national name-brand standards. "Meeting brand standards" is more than a slogan, as many of the products manufactured for ALDI are especially modified for ALDI to significantly upgrade quality. A vendor is accepted to deal with ALDI only if it can provide products with consistent quality, guaranteed to meet or surpass those of its competitors but at a lower price. Designing quality specifications that equal or

surpass government standards is also a frequent criterion for ALDI's private retail brands, as quality defects within only a few products can endanger the quality positioning of the whole company. Consequently, only suppliers that use the best ingredients and excellent processing are admitted into the highly select circle of ALDI vendors.

Relationship Marketing at ALDI

ALDI's approach to relationship marketing focuses much more on its vendors than its customers. ALDI does not use data mining methods to profile its customers and does not provide them with rebates or bonus cards. ALDI believes that customers will stick with ALDI as long as it is able to provide high-quality goods at the lowest possible prices. Thus, ALDI constantly works at perfecting its supplier-retailer relationships to assure that the quality of products, low prices, and flawless delivery that keep bringing consumers back to ALDI's stores will continue in the future.

ALDI's strategic alliance with a bread supplier in the company's homeland, Germany, illustrates how strong cooperation between ALDI and its vendors creates better value for consumers. As mentioned earlier, ALDI tries to stock a core assortment of food products. One of these products is fresh bread. All over the world bread is one of the items to be found in nearly every shopping cart. But offering fresh bread (instead of preserved packaged bread, which has a relatively long shelf life) of high quality at a low price is a challenging proposition. To meet this challenge, ALDI has established a special relationship with its bread supplier. ALDI is able to get bread delivered fresh and crispy every day from a German bakery at a price that is 40 percent lower than what consumers would pay for a product of the same quality at a local bakery. How can ALDI and its vendor do? ALDI contracted to buy fresh bread over a five-year period exclusively from this particular bakery (as long as the quality is stable) and at a certain minimum

price guaranteed by ALDI. This created a win-win situation for both companies. ALDI gets a quality product for a significantly lower price than its competitors, and the bakery can focus and allocate its resources because it has the certainty of a long-term (five-year) strategic alliance with ALDI. Although such single or exclusive sourcing is often viewed as risky because it can lead to a one-sided dependency, this approach has worked very successfully for ALDI, not only for fresh bread, but for numerous other product categories as well.

From Bread to Consumer Electronics

Although ALDI's "bread and butter" is its core assortment of staple products that its customers buy day in and day out, its weekly specials provide another dimension of excitement and value for ALDI shoppers. But how does ALDI, with its highly concentrated focus on the everyday grocery needs of consumers, manage to also be a value leader in such products as PCs and consumer electronics? ALDI does this by again relying on its ability to create strategic alliances with its vendors and other "upstream" channel partners. For the merchandise used in the weekly specials, ALDI relies on Medion, a fullservice marketing support vendor publicly listed on the German stock exchange. Medion's service package covers the complete management process needed to support ALDI's aggressive weekly special promotions, including market research, product design, production oversight, quality control, logistics, and after-sale service. By partnering with Medion, ALDI, which is essentially a grocery retailer, can offer high-quality electronic products from well-known manufacturers at prices that are often lower than those charged by consumer electronics discount retailers. Here again, ALDI has created a win-win situation through a strategic alliance with a channel partner. ALDI's huge market power and close contact with its loyal customers provide Medion with a tremendous opportunity to profitably utilize its expertise in marketing management. At the same time, Medion's efforts free ALDI from having to manage complex product development, marketing, and promotional activities that are not part of its core competency.