Competing Supply Chain Strategies: Tesco, Aldi and Lidl

Competing Supply Chain
Strategies
Tesco, Aldi and Lidl
Case study
Reference no 610-022-1
This case was written by Christos Tsinopoulos, Durham Business School and
Carlos Mena, Cranfield School of Management. It is intended to be used as the
basis for class discussion rather than to illustrate either effective or ineffective
handling of a management situation. The case was compiled from published
sources.
© 2010, Durham Business School and Cranfield School of Management.

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610-022-1
Competing Supply Chain Strategies: Tesco, Aldi and Lidl
The case was written by Christos Tsinopoulos and Carlos Mena. It was compiled from published sources
and is intended to be used as a basis for class discussion rather than illustrate effective or ineffective
handling of a management situation.
© 2010 Durham Business School and Cranfield School of Management
Christos Tsinopoulos – Durham Business School
Carlos Mena – Cranfield School of Management

610-022-1
Competing Supply Chain Strategies: Tesco, Aldi and Lidl
1. Introduction
The success of the international retail sector has always been dependent on the management of
the supply chain. Customers increasingly demand higher quality and lower prices, whilst they
are spoilt for choice. To deal with this apparent trade‐off international retailers have adopted
different approaches to the management of their operations. In this case three such examples
are examined. UK’s Tesco, one of the largest in the world, with significant buying power is often
seen as a market leader as it offers a large variety of products – including an expanding range of
non food ‐ at relatively low prices. German retailers Aldi and Lidl are significantly smaller in size
and market share in the UK. Yet, their aggressive growth strategies, and their ability to offer
products at very low prices has made an important impact on the retail world in the countries
where they have chosen to compete.
The following sections present the approaches taken by the three retailers in the areas of
strategy, product range, store format, sourcing, logistics and distribution.
2. Tesco Plc.
Tesco Plc. is UK’s 1st and the world’s 3rd largest grocery retailer. In 2009 Tesco reported
revenues in excess of £59 billion, up 15% from 2008, and profits before tax of £ 2,954 million, an
increase of 10% from the previous year. As of October 2009, the company employs more than
470,000 people worldwide and operates 4,331 stores in fourteen countries in Central Europe,
Asia and more recently in the USA and India.
Despite its international presence, Tesco’s operations are dominated by its UK business which in
2009 accounted for almost 70% of the group’s sales. Their market share in the UK grocery
market is 31.7 %, almost double the share of its nearest rivals ASDA (17.3 %) and Sainsbury’s
(15.9 %)[1].
2.1 Tesco’s Strategy
Tesco’s core purpose is “to create value for customers to earn their lifetime loyalty”. To achieve
this Tesco aims at being a successful international retailer, while growing its UK business. In
addition to this Tesco is diversifying its non‐food business by offering, for example, financial and
telecommunication services.
To manage performance Tesco uses a balanced scorecard known as the “Steering Wheel”,
which aims at measuring performance against the top priorities and provides a visual reminder
of their plans. At the centre of the steering wheel is Tesco’s motto and key strategic directive
“Every little helps”, which refers to both customers and employees.

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Central to Tesco’s strategy is its Clubcard scheme, which has been in operation since 1993. The
scheme offers a 1% discount to customers and is used as an effective marketing tool, allowing
marketing to understand customers better to target promotions and make more effective
pricing decisions.
2.2 Tesco’s store formats
Tesco operates four main grocery store formats in the UK [2], which are outlined in Table 1.
Each format is targeted at a different group of customers with different needs. The differences
in location and product range offered by each of the formats present major supply chain
management challenges. For instance delivering to a Tesco Express in the middle of London will
require very frequent small deliveries using small vans facing restrictions in delivery times. On
the other hand a Tesco Extra will require lorry load deliveries of a much wider product range,
adding complexity to the operation.
Table 1: Tesco's store formats
Format Size Location Product range
Extra more than 5,500 out‐of‐town Widest range of food and non‐food lines

2
m including clothing, homewares, electrical
equipment, health and beauty and seasonal
items
Superstore 2,000 – 4,500m2 Suburbs and edges of large Grocery plus a small range of non‐food items

and medium‐sized towns such as books and DVDs.
Metro 650 – 1,400m2 in city centres of small towns Emphasis on food lines including ready meals

and villages and sandwiches
Express Up to 280 m2 city centres, small shopping Up to 7,000 SKUs; including fresh produce

areas and petrol stations wines and spirits and bakery.

Another channel is the on‐line business “Tesco.com” which is one of the largest online grocery
operations in the world, representing the fourth largest online retail operation in the UK behind
Amazon, Dell and Argos [3]. Tesco.com requires additional stages in the supply chain to pick
products and deliver them directly at the customers’ homes. This final stage in the chain has
been a particularly strong point for Tesco as they were one of the pioneers in picking products
directly from stores rather than from dedicated distribution centres. This meant that Tesco did
not require major investment in its distribution network to launch its online business. However
there are still questions about how appropriate this approach is as the online business
continues to grow.
In addition to the grocery formats Tesco operates a number of non‐food stores known as Tesco
Homeplus, a garden centre trading under the name Dobbies and ‘One Stop’, a group of very
small stores. Each format has its own supply chain requirements.


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2.3 Product range at Tesco
Tesco offers a very broad range of products and the total number of SKUs has been estimated at
over 75,000, of which about 50% are own brand products [2]. In fact, Tesco was one of the first
retailers to pioneer the “good, better and best” offering with their Tesco Value (2,200 products),
Tesco and Tesco Finest (2,300 products) ranges [2]. In addition to these ranges, Tesco offers a
range of sub‐brands targeting specific niches such as Tesco Healthy Eating, Tesco Organic and
Tesco Kids.
As already mentioned, Tesco offers a variety of non‐food products and services such as clothing,
furniture, electricals, pharmacy, home & garden, jewellery, banking, insurance, gas, electricity
and telephone services. Each of these will have its own supply chain with very different
requirements and challenges.
2.4 Tesco’s sourcing strategy
Tesco’s main priorities in terms of sourcing are delivered cost, quality and reliability ‐ although
responsiveness is an increasingly important factor [2]. Tesco has traditionally been known as a
tough negotiator, and its scale and bargaining power certainly helps this cause [2]. ‘Fines’ of
£40k and more are often meted out for failure to deliver on time, with de‐listing the ultimate
penalty. Furthermore, their international presence allows them to use direct sourcing from a
variety of markets[2]. Nevertheless they accept that suppliers are an essential part of a
successful and sustainable business and they follow a partnership approach with many of their
suppliers, providing them advice and technical expertise [4].
An important role of Tesco’s buyers is to make sure the products they buy comply with ethical
standards. With this purpose in mind they use ethical audits and aim to cover 100% of their
high risk own brand suppliers [4]. Furthermore they have provided training on supply chain
labour standards to all their commercial teams [4].
2.5 Logistics and Distribution at Tesco
Tesco approach to logistics and distribution has been recognised as a critical success factor for
the company. Effective logistics operations have allowed them to reduce cost and at the same
time improve availability of products [2, 5]. Innovations, such as factory gate pricing, leading to
more efficient and cheaper transport [2], the use of point of sale (POS) data to trigger
replenishment [2] and the development, jointly with suppliers, of retail ready packaging (RRP)
and merchandisable units (MUs) to improve speed of flow‐through and simplify replenishment
[2, 5], have all been pioneered by Tesco.
In the UK Tesco operates 29 depots with a total area of approximately 780,000 m2. In terms of
transport, Tesco has a fleet of over 2,000 vehicles and 4,000 trailers. Tesco uses a combined
strategy of in‐house and outsourced logistics. It’s been estimated that around 19% of volume

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goes through third party warehouses and 41% is transported by third parties. Two of the 3PLs
used by Tesco are DHL‐Exel and Wincanton [5].
Technology is also central to the way Tesco manages its logistics. For instance they use an
Advanced Shipment Notification (ASN) system to inform sites of forthcoming deliveries and they
are currently piloting pallet‐level RFID between distribution centres and stores [5].
Tesco has also increased efforts to reduce the environmental impact of its logistics operations
with actions such as use of biodiesel mix, investment in technologies to reduce pollution from
vehicles and increasing use of sea and rail freight. One example of these is the use of the
Manchester ship canal to bring bulk wine from the docks in Liverpool to the bottling plant in
Manchester [5].
3. Aldi
Aldi GmbH & Co. oHG (Aldi Group) was established in 1913, is headquartered at Essen in
Germany, and has established itself as a reputable retailer in the international market. Aldi is a
discount food retailer operating supermarkets and discount stores. The company operates from
two independent business groups, namely, Aldi SUD and Aldi Nord in Europe. Aldi’s stated goal
is ‘to provide our customers with the products they buy regularly and ensure that those
products are of the highest possible quality at guaranteed low prices’. At the end of 2008, Aldi
had 4,745 stores abroad and 4,267 in Germany. It has stores in 14 countries including the UK,
Switzerland, Austria, France, the Benelux countries, Spain and Portugal.
In 2008 in the UK, where it employs almost 6,000, Aldi enjoyed annual sales growth of more
than 20%, according to retail analysts TNS Worldpanel [6]. But this has slipped to 8%, though
the discounter has managed to hold a 3% share of the £130bn grocery market [1]. Aldi returned
profits of £73.6m for the 12 months to 31 December 2008 ‐ up from £59.8m a year earlier.
Group turnover for 2008 stood at £2.01bn ‐ up from £1.53bn in 2007. Operating profit almost
doubled, reaching £88.9m against £48.2m in 2007. The growth in earnings came as Aldi's sales
benefited from the downturn in the UK and Ireland in the back half of 2008, which favoured the
low price retailer. In 2009, Aldi's sales growth in the UK has slowed as its larger, mass‐market
rivals like Tesco, Asda and Morrisons fought back. Nevertheless, Aldi keeps reducing prices in
several of its products by passing savings to its customers [7].
3.1 Aldi’s Strategy
Aldi has been very secretive about its strategy; however some recent moves indicate how it sees
itself developing in the next decade. Declining revenues in its home market (about 5% in
Germany in the first five months of 2009) encourages Aldi to expand in different geographic
areas. From 2010 Aldi is planning to open 35 new stores in Ireland, while it is seeking to expand
in New Zealand [8]. In 2001, Aldi entered Australia and since then expanded rapidly and has

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been continuously ranked highly for customer satisfaction. Recently, it started expanding in the
USA, where it has just 1,000 stores spread over 29 states. Experts estimate that Aldi's prices are
generally 10 to 15% lower than those of other national US retailers, which leaves a lot of room
for further expansion. The German supermarket chain has focused on the east coast of the USA
with a presence felt in three states only.
An additional move that provides indications of how Aldi would like to develop in the future is
the location of some of its new stores. While older Aldi stores were often located in less
affluent neighborhoods, many new stores are located in areas that attract suburban and middle
class shoppers as well.
3.2 Aldi’s Store format
Aldi stores are designed to cut out many of the costs associated with traditional big
supermarkets. The company passes on savings to its customers by eliminating several of the
services customers have been accustomed to in larger supermarkets, because they do not
necessarily add value. These include in‐store banking, pharmacies, bagging clerks, check
cashing, and photo processing. In addition, stores are typically open only during peak hours‐‐9
a.m. to 7 or 8 p.m. Monday through Saturday and 12 p.m. to 5p.m. on Sunday‐‐allowing the
company to cut back on electrical and other operating costs. Aldi supermarkets have a very
different approach to grocery shopping, offering household goods alongside the daily
necessities. Aisles consisted of bulk products on pallets. Customers choosing everything from
chocolate to canned peas had an easy choice of one or two brands.
3.3 Product range at Aldi
Aldi’s product range portfolio includes food, beverages, toilet rolls, sanitary articles and other
inexpensive household items. In addition to its standard assortment, the company also comes
up with special offers on expensive products including electronics, appliances, computers, and
even suits. More recently Aldi has added more fresh products, especially produce, to its range
and has spruced up its stores to make them appear more attractive to new customers.
Typically, Aldi holds a limited range of products (around 700) while about 95% of its stock
comprises house brands [9]. Each product is sold in only one or two sizes. Nevertheless, Aldi
often offers many of the same products that larger supermarkets are selling. They do so by
changing the brand name to one which is less well known, but the actual product inside may be
the same. In Ireland, for instance, Aldi's meats come from Larry Goodman, the same plants that
supply Superquinn a large Irish supermarket. Aldi's own brand crisps are made in Co Meath by
the same company that makes Tayto and King crisps. Their tea and coffee are Bewley's and
Robert Roberts. Their water bottled by the same people who make Tipperary Water. Their
yoghurts come from a company in Clonakilty who also supply other large retailers such as Tesco.

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Despite these significant cost savings several of Aldi’s products have achieved recognition in
blind test competitions [10]. Aldi’s Solesta Evoo extra virgin olive oil had an "enticing" fruity
smell and ranked top, beating other products from larger competitors. More significantly
however, Aldi and Lidl (see below) managed to beat larger UK retailers such as ASDA and Tesco
in a Which satisfaction survey conducted early in 2010 [11].
3.4 Aldi’s approach to sourcing
Aldi has traditionally developed long‐term relationships with suppliers to source product at best
prices and high quality. Its relatively simple business terms include payment in 30 days net, no
rebates, discounts or listing allowances. In recent surveys Aldi was considered the overall
preferred retailer by international manufacturers [12], and has a very good record for paying
suppliers on time.
Due to its low number of stock keeping units, Aldi uses a relatively small number of suppliers.
This often means Aldi cannot play the suppliers off against one another in the way the bigger
supermarkets can. However, as it stocks 95% of own‐label brands, which could be produced by
a number of different companies, it is not hostage to some of the bigger brands and can
therefore look for ‘hungrier’ suppliers.
Aldi’s negotiating position enjoys one additional key advantage over larger retailers – its
geographical reach is much wider. This, coupled with its growth intentions makes Aldi a very
attractive customer to supply, which gives them power at the negotiating table. In fact,
recently, and in a surprising move to many of its suppliers and observers, it made use of this
negotiating position when it demanded a 5% price reduction in return for the greater volumes it
would need for its plans to grow [9].
Finally, pricing in each country is decided locally, taking into account the local cost base, the
scale of operation and product sourcing. Aldi sources up to 40% of its stock from local suppliers
despite being able to source cheaper internationally [13]. They do so to support the local
economy and to provide its customers with the quality and product taste they demand. An
additional element of its strategy is everyday low pricing (EDLP) with consistent prices across
regions and unit pricing, which is easily contrasted to most grocery retailers.
3.5 Logistics and Distribution at Aldi
Aldi’s logistics is driven by the simplicity of its operations. Due to the small number of different
products it sells, IT and logistics systems are far simpler and cheaper than they are at other large
retailers. Because Aldi only runs a smaller number of lines, store managers are able to operate
the replenishment system manually.
Dry goods are delivered in small pallets, created by Aldi, once a day and wheeled into the stores
onto large plastic trays – so reducing handling costs. At the beginning of 2010 Aldi South

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introduced foldable plastic crates for fruit and vegetables to its stores [14]. The crates are part
of a closed recirculation system and are used as storage for fruit and vegetables throughout the
entire supply chain, including merchandise presentation in retail stores. The company supplying
the crates is responsible for delivery, collection and cleaning of the crates after the goods have
been sold. Transportation monitoring and contractor assignments will be supervised through an
elaborate IT system.
Soft drinks and vegetable oils are transported and displayed in recyclable crates. To reduce
energy use, stores and warehouses minimise air loss through double‐brick or insulated panels,
entry/exit airlocks, suspended ceilings, freezer lids and chiller curtains. Stores run on one‐third
of the normal lighting levels outside store hours. For increased transport eco‐efficiencies, trucks
in Aldi’s fleet have a unique movable bulkhead system, allowing each truck to deliver a
combination of goods [15]. The trucks also often backhaul products from suppliers on the
return leg of a store delivery.
4. Lidl
Lidl is another privately owned, German‐based chain of grocery stores operating in 23 European
countries. Its market share varies from country to country and in the UK it has been estimated
at around 2.3% [1]. The first Lidl store opened its doors in Germany in 1973 and now they have
a portfolio of over 7,000 stores, with over 3,000 of them in Germany. The company is part of
the Schwarts Group which includes other retailers such as KIaufland and Handelshof [16].
Lidl entered the UK market in 1994 and has shown consistent growth since. Currently the
company employs over 9,000 people and operates around 500 stores [17]. Financial results
from February 2009, indicate sales in excess of £164.5 million and profits of £81,000 [17]. This
appears minuscule compared to Tesco’s operation, but considering that turnover has almost
doubled in the five years to 2009 [17], shows why they are considered a threat for mainstream
retailers.
4.1 Lidl’s Strategy
Since Lidl is a privately owned company few details about its strategy are made available,
however at least some of their strategies can be inferred from their actions and public
statements. Discounting is one element of Lidl’s strategy; their motto is “to provide top quality
products at the lowest possible price”. However their strategy has sometimes been described
as 'soft‐discounting' as they also stock a range of the common branded products. In the UK, for
instance, they offer products from companies like Premier Foods and Dairy Crest. Discounts
also vary between categories, for instance in categories like toilet paper and nappies discounts
range between 10% ‐ 20%, while in categories like deodorants and shampoos they can be as
high as 70% [18]. To achieve the “lowest possible price” they followed a no‐frills approach

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having simplicity as the cornerstone of their success and the benchmark for all operations and
work processes [19].
Another evident strategy is international expansion, particularly in Europe, although there are
rumors that they are seeking opportunities in other markets including Australia, Canada and
Mexico. According to a study by Nielsen, they have opened stores at a rate of one per day over
the last 15 years [18]. In the UK they are actively looking for new sites for future development,
and they have a dedicated section of their website advertising their requirements for future
expansion [19].
Although neither Aldi nor Lidl release detailed sales figures it is estimated that Lidl has been
outperforming Aldi in the German market over recent years. The fact that Lidl has been
expanding more quickly suggests that its stores are generating a greater abundance of free
capital for expansion. Aldi, which already has over 4000 stores in Germany, is increasingly
finding it difficult to open new stores that do not cannibalise existing stores; however, the area
that really differentiates the rival chains is the attitude to branded products.
4.2 Lidl’s Store format
Lidl usually looks for out of town locations or where areas real estate prices tend to be lower.
Stores range between 1000 – 1300 m2 of selling space [16], which is comparable in size to a
Tesco Metro store. Store decoration tends to be sparse, and they try to keep store overheads
to a minimum [16]. Despite their “no frills” approach to store design there have been reports
that they have started to look into bespoke store designs in the UK to facilitate obtaining
planning permissions that are suited to the local character.
4.3 Product range at Lidl
Lidl has a limited range of 800‐1400 [18, 20] products per store, most of which are own label,
although in some countries, most notably in Germany, they also a offer branded goods. They
follow a centralized approach to managing product assortment and all stores offer a similar
assortment. On average they offer about 13 items per category, although this is higher in
Germany. Having one “European” assortment has many benefits in terms of process simplicity
and increased bargaining power with suppliers. However, it also exposes the company to
competition from strong local brands.
Lidl follows the Every Day Low Price (EDLP) strategy relying less on promotions. Nevertheless
they do have promotional lines, run weekly special offers on household items, clothing,
electrical goods, games and leisure products [20]. On Monday and Thursday they have specials
in stores stocking anything from a range of specialty Asian foods to DIY goods.
Although LIdl aims for a “best price” image, they also aim for quality in their product range. For
instance a bottle of Real Italian extra‐virgin olive oil is just £2.75; a Tarragona Gran Reserva 1998

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red wine from Spain is £3.99. Gourmet products like prosciutto abound and mineral water is
their biggest seller.
4.4 Lidl’s approach to sourcing
The discounter is displaying an international product range based on a two‐tier pan‐European
buying structure which combines the benefits of large scale purchasing with those of
independent buying. The structure involves a central purchasing function and a separate buying
unit in each country where they trade. This means they can benefit for both making best deals
for the whole group, and buying locally for local stores. For instance in Ireland, the company
now sources around 30 per cent of produce from Irish suppliers.
4.5 Logistics and Distribution at Lidl
Information about Lidl’s distribution network is limited. However, given their European focus
and their centralized approach to assortment, their operation is much simpler than those of
Tesco and other mainstream retailers. Similarly, operating medium‐sized out of town stores
allows them to have a much simpler logistics network.

5. References
1. Great Britain consumer spend in TNS Global. 2009.
2. Sequeira, S., M. Koschat, and A. Ryans, TESCO: Keepting the hard discounters at bay?
2008, International Institute for Management Development (IMD): Lausanne,
Switzerland.
3. Tesco PLC. 2009, Datamonitor Europe: London.
4. Annual Review and Summary Financial Statement 2009. 2009, Tesco Plc: Cheshunt, UK.
5. Retail Logistics 2008. 2008, IGD: Watford, UK.
6. Aldi reports bumper sales, earnings for 2008., in Just‐Food. 2009.
7. German grocery chains cut prices, in German News Digest. 2010.
8. Russell, M., Aldi "eyes New Zealand expansion". in Just‐Food. 2010.
9. How should we read Aldi’s hardball letter to suppliers?, in The Grocer. 2009.
10. A Which? taste test of olive oil puts Aldi and Lidl in the top three, in Western Mail. 2009.
11. Tree, O., Waitrose No1 but shoppers check out cheaper options, in The Scotsman. 2010.
12. in Retail World. 2008.
13. Aldi to create 1,000 jobs in €350m expansion, in The Irish Examiner. 2009.
14. German Interseroh wins order from Aldi, in German News Digest. 2009.
15. Aldi awarded for greening up, in Inside Retailing. 2008.

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16. Chatterjee, P. and S. Govind, LIDL: The Hard Discounter. 2008, ICMR Centre for
Management Research: Hyderabad, India.
17. Lidl Ltd ‐ Standard Report. [Profit and Loss Account] 2009.
18. The Hard Discounter Report: And overview of Aldi and Lidl in Europe. June 2007, The
Nielsen Company.
19. About us, in Aldi Ltd. UK. 2009.
20. Discount Retailing 2007. 2007, Key Note.


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Competing Supply Chain

© 2010, Durham Business School and Cranfield School of Management.

Distributed by ecch, UK and USA North America Rest of the world

Competing Supply Chain Strategies: Tesco, Aldi and Lidl

© 2010 Durham Business School and Cranfield School of Management

Competing Supply Chain Strategies: Tesco, Aldi and Lidl

Extra more than 5,500 out‐of‐town Widest range of food and non‐food lines

Superstore 2,000 – 4,500m2 Suburbs and edges of large Grocery plus a small range of non‐food items

Metro 650 – 1,400m2 in city centres of small towns Emphasis on food lines including ready meals

Express Up to 280 m2 city centres, small shopping Up to 7,000 SKUs; including fresh produce

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