Explanations

Business objectives of discount supermarkets

David Shreir

6th October 2017

Last week supermarket discounter Aldi announced a simultaneous rise in sales and a fall in profits. The company reported a 13.5% rise in sales and a 17% fall in profits. This begs the question how can sales rise while profits fall?

While traditional economic theory often assumes firms pursue and objective of profit maximization, in practice they often employ other aims in a concentrated market.   

Aldi first ventured into the British market in 1990, followed by Lidl four years later. Both have seen their market share grow as a result of aggressive cost cutting and penetration pricing policies. Aldi now has 700 stores and is hoping to have 1,000 by 2022. Market leader Tesco currently has 2,700 outlets in Britain and after a few years in the doldrums announced a rise in profits.

By limiting their product range they are able to exploit bulk buying economies of scale. Retail space is maximized by keeping displays simple. 2015 estimates by Retail week rank Aldi as achieving the second highest sales per sq feet. 

Furthermore labour productivity is maximized by the lightening speed at which produce is shovelled through the checkout scanner.  

Despite this both Aldi and Lidl pay the National Living wage, Aldi paying £9.75 per hour in London. Both have also increased their advertising spend over the last few years.  Both have also worked hard to improve their reputation for quality and are no longer regarded as inferior (goods with negative income elasticity of demand). 

https://www.retail-week.com/sectors/grocery/aldi-sales-densities-soar-as-it-outpaces-the-big-grocers/5073761.article     https://www.theguardian.com/business/2017/sep/25/aldi-uk-profit-drops-despite-growth

Student  Challenge

Why not try to draw a cost and revenue diagram representing Aldi`s increase in sales revenue and fall in profits!! (Think about changes in Marginal Cost and Average Cost as well as Average Revenue)

David Shreir

David has taught A` level and pre university Economics for over 20 years. He currently works at Westminster Tutors and International Foundation Group in central London

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