What Retailers Can Learn from Aldi: Could it Solve the Retail Crisis?

Sound the alarm — the retail apocalypse has arrived!

Yes, the latest retail data is out. According to the ABS, retail is now at a point not seen since 1990. Back when our last recession kicked off.

Sales for the September quarter were up marginally in terms of price (0.2%). But, total turnover in terms of volume was down (-0.1%).

That has sparked fears that our economy may be in a grimmer spot than thought.

At this rate, it’s looking like even Santa Clause may not be able to save us. And if consumption keeps going down, then everything will start to go down.

This sent the experts into a spin. Even two of the banks’ chief economists — Westpac’s Bill Evans & CBA’s Gareth Aird — are worried. Which is why they’re calling on the government to bring forward proposed tax cuts.

They want more people to have more access to cash. A solution that they believe will encourage people to start splurging again.

Remember, this is already on top of low interest rates as well. Meaning these economists think we need even more stimulus.

Now, theoretically this is all well and good. From the stand point of simple supply and demand it makes sense.

Give people more money and they’ll spend it. That’s how consumers work, right?

Well, yes and no.

See, things are a bit more complex than that. People are after all the most inexplicable variable of all. For this reason economics can never truly be an exact science.

Which is why everyone may be totally wrong when it comes to retail…

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Spending the crisis away won’t work

It seems to me that everyone has reached the wrong conclusion about retail.

One look at the data and all the experts are blaming the consumer: you and me. They see a sluggish figure and blame us for not buying enough stuff.

I don’t think that’s the problem at all. There is plenty of cash being thrown around right now.

Just look at the extreme rebound in property prices. Or the ever-growing value of shares.

More than that, people are actually borrowing less. Instead, Aussies are finally starting to pay back their mortgages and other debts.

Lack of money isn’t the problem. It’s an unwillingness to spend.

Granted poor wage growth and consumer confidence isn’t helping.

Low interest rates and global unrest has led to a jittery public. Concerns about a slowdown or collapse has people spooked.

Still, this retail apocalypse has more nuance to it than some will admit. And it’s high time the ‘experts’ looked for clues elsewhere.

It is far too simplistic to suggest more money will result in more spending. The reality is, shopping sucks in Australia…

Yes, I said it.

Plenty of our local retailers have coasted by too easily for too long. In years gone by, a sizeable inventory and competitive prices was all you needed.

Today the game has changed.

Making a purchase instore or online is far more varied. There is more choice, and more engagement.

Shopping has always been more than just a simple transaction. It’s an experience brimming with a range of emotions and feelings. And the best retailers have known and used this to their advantage.

Retail as an industry is an ever-evolving innovator. The most successful businesses keep the good ideas and add to them.

Failing to move forward with new systems or ideas will lead you down a quick road to ruin. Just take a look at Myer or David Jones and the stagnant department store model.

In contrast though, you can’t take away the good ideas from the past either.

Amazon’s lackluster (but improving) foray in Australia has shown you can’t mess with the basics. Their poor range and relatively higher prices hasn’t impressed consumers Down Under.

Striking the right balance isn’t easy, but it’s critical.

Heed the ‘Aisle of Shite’

For Australia’s many businesses, the problem is a lack of change. Most of our regular stores are still stuck in 20th century thinking.

There are of course a few exceptions, like JB Hi-Fi. While most are floundering, our national electronics store is booming.

Why? Well, Brian Walker of Retail Consultancy surmises it fairly easily:

One of the underlying strengths of JB is this sense of bargain shopping, which is not dissimilar to Aldi. Also, like Aldi, when you visit a store you have a sense of spotting things that might be new.

If there was such a thing as a ‘secret sauce’ to retailing right now, it would be copying Aldi. They are one of the kings of modern retailing.

Aldi’s success isn’t just because their products are cheap, it’s because they’re singular. They don’t stock multiple brands, they sell a single product for a reasonable price. As The Guardian reports:

The total number of products — known in retail as stock-keeping units (SKUs) — found in all Aldi stores has tripled since the early 90s to nearly 2,000, although that remains tiny compared to the 25,000 or more in a big supermarket.

Simplicity is the bedrock that has built the Aldi empire. Shoppers don’t have to um and ah over five different types of table salt. There is one option and it’s the cheapest.

Contrary to what you may think, choice isn’t always a good thing. Some of our local retailers would do better if they understood this.

Again, it’s about striking the right balance.

Having said that though, this is just a small part of a greater whole. One of the other great appeals of Aldi, for instance, is its utterly random middle aisle. The part of the store where you can find kids’ toys being sold next to ski clothes.

In the UK, this part of the store is fondly known as the ‘Aisle of Shite’. A lucky dip of odd products you won’t find in any other supermarket.

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It may be dumb or baffling, but it works. If you’ve ever shopped at Aldi, you’ll know.

The aisle doesn’t necessarily make you want to buy anything, but it gets people in the store. And sometimes, that’s all you need to get people to open up their wallets.

Don’t get me wrong, Aldi’s model isn’t a panacea for retail as a whole. Some aspects will work better for others and some won’t work at all.

But, the core ethos — the drive to create a unique experience — is what matters. They’ve worked hard to carve out their niche, and it has paid off.

Maybe if some of our other big chains did the same they’d see the same success. I know I’d be more willing to part with my cash if they made me want to.

Regards,

Ryan Clarkson-Ledward,
Editor, Money Morning


Ryan Clarkson-Ledward is one of Money Morning’s junior analysts. Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects. Ryan’s primary focus is assisting Sam Volkering with background research and insight for readers by dissecting the latest events affecting the world. Working closely with Sam, they explore the latest in small-cap and technology stocks as well as cryptocurrency opportunities. You can find Ryan’s contributing research, developments, and supporting information across several e-letters, including:


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