Aldi stores are becoming a familiar presence in Shanghai
One of the undoubted changes in the UK over the last few decades has been the rise of the German supermarket chain Aldi. As we will see in this blog, the same phenomenon is now happening in China. In this blog I also want to contrast the approaches to retail in China being adopted by the Aldi company with those used by Tesco, which exited the China market in 2020.
First a little bit of background. The very first ‘Aldi’ store opened in the German town of Essen in 1913. It was owned by the mother of Karl and Theo Albrecht, brothers who began the rise of the company into a retail giant after the Second World War. Aldi ( short for ‘Albrecht discount) arrived in the UK in 1990, when the first store opened in Birmingham. Initially growth was slow and didn’t really take off until the decades of economic difficulty in Britain which followed the 2008 financial crash. By 2017 Aldi’s share of the British retail economy had risen to 7.5% and currently Aldi has the third largest market share in the UK, at around 10%. However, this is still a long way behind Tesco, which dominates UK retailing with almost a 30% share of the market. Moreover, Aldi has become a global business with 10,000 retail outlets in 18 countries around the world. China is becoming one of the most significant of these.
Aldi started business operations in China in 2017. Interestingly it didn’t start with physical stores. Instead it opened an on-line presence on T-Mall which is an e-commerce platform operated by the Chinese retail giant Alibaba. Alibaba has a market share of about 46% of the online retail trade in China with the second large competitor, JD.com, a long way behind at about 27%. For Aldi this choice of an on-line launch pad for its business was a significant strategic success. The first pilot stores were opened in 2019. This number has now risen to 53.
All of these stores are located in the Shanghai basin. This again must be seen as a smart strategic business move. Shanghai is a wealth hub. It is the 11th wealthiest city in the world. With apologies to Beijing and Shenzen, I find it to be the most cosmopolitan city in China, its streets lined with a myriad of international shopping outlets. It’s not for nothing that the business acumen of Disney led them to open the first Disneyland in China in the suburbs of Shanghai. The Shanghai economic eco-system is very welcoming to a business like Aldi.
However the success of Aldi in China is more about strategy than location. The decision to establish an on-line presence initially was critical. China is the leading country in the world for e-commerce. In 2023 more than one quarter of China’s consumer goods were sold online. The e-commerce market in China in 2023 was worth 1.3 trillion US dollars, exceeding that of America. By contrast the same market in the UK is worth 152,557.8 million US dollars. Aldi is not available in Beijing. I do a lot of my shopping on-line using ‘Sam’s Club’, which is operated by the American company Walmart. 沃尔玛 , Wò’ěrmǎ as they are called in China, are an even greater success story than Aldi. The first Walmart supermarket in China opened in 1996, in the city of Shenzen. Sam’s Club now has 47 stores in 25 Chinese cities. I live on the furthest outside edge of Beijing but the service is efficient and reliable. Walmart are making innovative use of cloud technology to constantly increase the market range of its delivery business. In 2023 it achieved a staggering 25.3% growth across all sectors and a 38% growth in e-commerce.
Both Aldi and Sam’s Club have benefited from shrewd insights into the shopping psychology of Chinese consumers. On-line shopping is an almost universal habit, carried out around the clock, by hands from which a mobile phone is almost never absent. I recently travelled from one side of Shanghai to the other by subway at commuter rush hour and was shocked to see that at no point in the two hour journey was any hand in my carriage, without a mobile phone. Of course it wasn’t all on-line shopping, but if only a fraction of the crowds, the ‘ren shan, ren hai’ (‘people mountain, people sea’, a popular idiom) were shopping, significant amounts of business were being conducted in just that one carriage, in just one one journey.
Another factor in the Aldi success story, is its intelligent approach to matching the interests and needs of Chinese shoppers. The Aldi formula has been to focus on localised products which gain the loyalty of consumers, rather than fill the stores with international produce. In fact something like 80% of the products are directly sourced from local suppliers. This has a number of benefits. For consumers it means that there are high levels of confidence in buying familiar goods. It also means that the quality and freshness of goods can be better controlled as opposed to imported items. The logistics of moving goods within China is much cheaper than the costs of importing them. There is another, more subtle effect. Buying locally means that Aldi is becoming embedded in the local economy as a provider of investment and jobs. In other words, Chinese consumers see it as a local business adding value to the economy, rather than as a foreign enterprise extracting value from China. The Managing Director of Aldi China, Roman Rasinger, is on record as saying, “Over 80 percent of the products are directly sourced from local suppliers in China, further empowering the development of local suppliers. This proportion is enough to make us seen as a highly localized company.”
This is not the only way that Aldi have customised their business strategy to the Chinese market. Membership schemes are incredibly popular and seen as something of a status symbol. Aldi’s smart move was to launch a membership scheme on China’s most popular social media channel, 微信 Wēixìn or ‘We-chat’ as it’s called in the west. The statistics show that a staggering 1.5 billion people use Wēixìn every month. That’s potentially an enormous amount of publicity for Aldi and its products. Unsurprisingly, Aldi has made moves to take advantage of this enormous presence. Consumers can have free membership through a Wēixìn mini-programme ( like an APP), contrasting with the paid membership of Sam’s Club. Once they are members, Aldi uses a number of strategies to tempt shoppers to buy such as Super Savers, double points on Tuesdays, coupon redemption and more. This convenient and rewarding membership system has gained Aldi a loyal following. Aldi also organises WeChat follower groups in which ‘Xiao Ao’ (an online shopping assistant) can provide instant replies to customer queries as well as provide timely updates about discounts and offers.
In order to further understand Aldi’s success in adapting to the Chinese retail market, it is salutary to make a quick comparison with the doomed Tesco venture in China from 2004. The Chief Executive of the company, Sir Terry Leahy said, “ China is one of the largest economies in the world with tremendous forecast growth and a market we have researched extensively, these are a billion customers we cannot afford to ignore.” Famous last words. By 2013, Tesco in China had suffered nine consecutive years of losses. What are some of the key reasons for this? We have seen Aldi’s successful gradual entry into the Chinese market, starting by building on-line loyalty, then through incremental growth with strong local networking. By contrast Tesco went for a ‘big bang’ entrance by taking control of an already existing company and rebranding it as Tesco 乐购 , or Tesco Legou – ‘Happy Shopper’.
Tesco Legou
We have seen that creating partnerships with local suppliers has boosted the success of Aldi. Tesco chose instead to emphasise its own Tesco branded products which may have been slower to find acceptance with Chinese consumers. In some locations, Tesco tried to copy the ‘superstore’ strategy which has been so effective for it in the UK, by trying to entice Chinese shoppers to drive to a large supermarket and do a ‘weekly’ or even ‘monthly’ shop. This model, which was imported into Britain from the US, has very little resonance in Chinese retail culture. From my experience, it seems to me Chinese shoppers still follow the ‘little and often’ approach to shopping, preferring to walk to local outlets and only buy as much as they can carry home. There is still an overwhelming preference for fresh food and nothing like the use of frozen or convenience food, the ‘ready-meal’ which makes a significant contribution to the market share of Tesco in the UK. Amongst my students who study at UK universities, Tesco is famous for one thing only, the ‘meal deal’ which allows them a thrifty alternative to the generally high price of food in Britain. Tesco also failed to invest in local management expertise for its stores, preferring to fly in managers whose expertise had been developed in differing cultural conditions. In 2020 made a final exit from China altogether.
As I write, I read that Aldi is planning an expansion programme, opening 100 more stores in Shanghai alone. This level of success is evidence that there are successful ways for western companies to do business in China, but that an investment in cultural understanding, in geographic and demographic analysis and in negotiating the thriving e-commerce business environment are critical first steps.