Business Irish

Thursday 2 October 2014

Aldi has turned the sod on its second distribution centre

::: Donald Mackay managing director Aldi IrelandPoised to make more gains in a retail market on the brink

Published 21/05/2009 | 00:00

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With military bearing, one suspects that Aldi's boss in Ireland is not easily fazed. Time is a resource to be carefully allotted, and Donald Mackay has probably been putting it to pretty good use.

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With the retail environment in Ireland on the brink, if not already engaged in all-out war, the German discounter is taking advantage of a confluence of events that undoubtedly has rivals watching their flanks.

Since it arrived in Ireland in 1999, Aldi, as well as its German peer Lidl, which opened its first Irish store a year earlier, has been steadily stealing a march on the market.

Responded

Last week, Aldi responded to a salvo fired by giant Tesco, which slashed prices at its border stores to bring them in line with sterling equivalents, by cutting the prices of many of its own goods.

Ostensibly, Tesco's move was initiated to stem the tide of shoppers from the Republic flowing across the border to Northern Ireland to pick up bargains. But Tesco has plans to roll out the price cuts to other stores too, ratcheting up the clash between retailers.

Yet Tesco has suffered from PR indigestion. Its relatively high profit margins have drawn fire, while scenes this week of angry farmers, lacking only pitchforks and burning torches, raiding a meeting of the retailer's managers and its chief executive Terry Leahy are hardly ones that will make the company photo album.

Those farmers are annoyed at British potatoes being stocked by Tesco, while other suppliers to the multiple are also feeling the squeeze.

For Mr Mackay, there's no schadenfreude, or at least none that's publicly expressed.

"It's difficult for me to pass comment on our competitors," says Mr Mackay, a Scotsman who has been working with Aldi since 1997.

"We've have been able to offer a discount to our competitors in terms of retail price since we entered the market, and we're going to continue to do that."

Diplomacy aside though, Aldi has been busy taking market share. Its store carparks are as likely to feature a year-old Merc as a decade-old Mitsubishi.

Lastest estimates rank Aldi with a 4.8pc share of the Irish market, which is reckoned to be worth €14bn in total. If true, that would equate to annual sales of about €670m from its current tally of 67 stores.

Operations

Aldi's UK and Ireland operations reported sales of more than £1.5bn in 2007 (€2.06bn based on the then exchange rate) and an operating profit of £48.2m (then €65.5m). Mr Mackay says that Aldi has no significantly different profit margin in Ireland compared to any other country where it operates.

As such, it could be reasonable to speculate that Aldi generates an operating profit of about €20m per annum at the moment in Ireland based on an assumed profit margin of slightly more than 3pc.

With nearly 400 Aldi stores in the UK, it could seem odd that the Irish arm could account for such a big chunk of overall profits. But Irish stores of foreign-owned retailers can often generate higher sales than their UK counterparts too, and the Irish stores could simply be busier.

"You have to remember that our efficiencies are passed back to our customers in terms of lower prices," says Mr Mackay. "But we pay our staff 30pc more that the market average, we pay a very fair rate to our suppliers and we offer our groceries at cheap prices," he adds, stressing that he will not divulge Aldi's profit margin here.

"None of that adds up to excessive profit. We're not taking an unusual profit out of Ireland."

One of the problems for observers of the Irish retail trade is that the value placed on the country's grocery market varies widely depending on the figures from various sources.

It's hard to believe, but Mr Mackay maintains market share is not something he and his immediate boss, Paul Foley, who has overall responsibility for Aldi's Irish and UK business, discuss when they meet.

"We don't spend any of our resources trying to estimate the size of the market," he says.

"Because when you don't know the true size of it, you don't know what your share of it is. We don't use the figure that's speculated in the market for any internal purpose. That's fact."

Mr Mackay adds that Aldi will continue to grow until it has the coverage it wants across the Republic.

"At the end of that we'll have a certain market share, but there isn't a target market share." Last week, Aldi turned the sod on its second distribution centre in Ireland, in Mitchelstown, Co Cork.

The €100m facility will allow the retailer to meet its store growth targets, with a further 35 outlets slated to open over the next three years to tip it over the 100 mark.

"Each distribution centre has an optimum capacity to service between 70 and 85 stores, so I would expect us to fill that capacity with the two facilities," according to Mr Mackay. "Whether we would consider a third one, that's not a decision we'd make yet."

Within the past 12 months, Mr Mackay believes Aldi Ireland has bought €121m worth of goods and produce from Irish suppliers.

Household names such as Bewleys, Tayto owner Largo, and Odlums all feature on the Aldi supplier list.

Products

Aldi says 30pc of the products it stocks are manufactured or produced in Ireland, while those products account for 40pc of Aldi sales in Ireland. Irish suppliers also sell about £10m (€11.3m) worth of groceries to Aldi for sale in the UK.

But despite the apparent munificence, a cursory glance at any Aldi fruit and veg stall for instance, reveals staples such as tomatoes, lettuce, parsnips, broccoli and onions that are all imported. Milk, meanwhile, is sourced from Omagh-based Strathroy Dairies in Northern Ireland.

Mr Mackay is unapologetic, however. Strathroy, he says, sources milk from both sides of the border (an argument that is unlikely to cut much ice with many dairy farmers), while Irish potatoes feature prominently in its stores. Fresh meat and poultry is also sourced in the Republic.

"We have about 70 Irish suppliers. All our eggs come from Monaghan, for instance. We can't source from every supplier.''

"If you have centralised distribution, almost by definition you need one or a small number of suppliers to achieve the efficiencies you're aiming for through that model," he says.

"We have to take each product in turn and ask what the best approach is. We're endeavouring to source as much as we possibly can from the Republic," claims Mr Mackay.

He adds that the store won't stock Irish products at any price just for the sake of it, as Aldi customers have value as a priority.

However, Mr Mackay points out that once a product is clearly labelled as being Irish, it benefits from an immediate uplift in sales. He also maintains that the retailer is not in the business of putting undue pressure on suppliers.

Price cuts on about a quarter of its range in recent months, he says, have been implemented for the longterm, on a "considered, structured and sustainable approach".

"Our suppliers are not put under significant pressure from us in order to achieve that. We are aware of the dynamic that's been happening in the past few weeks in the market. We've monitored it and looked at what everybody has been doing. We've come up with a sustainable reaction to it."

Recession

The recession has proved a fillip for Aldi, but Mr Mackay dismisses any notion that it is the sole driver for current growth. Sales at Aldi in Ireland were 25pc higher last month compared to April 2008, while they were 23pc higher in the first quarter of 2009 compared to the same period a year ago.

"We're getting the full demographic into our stores. There's no typical Aldi shopper, and it's never been the case that we've had a limited demographic. It has always been broad," he says.

Any suggestion that shoppers will revert to Dunnes, Tesco or SuperValu once the economy eventually revives is similarly discounted by Mr MacKay.

"I don't believe people will revert back en masse to some historic pattern. We've seen strong consumer demand year after year. There's been a steady shift towards us that's not linked to the current economic situation."

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