Wednesday 15 July 2009

Aldi to apply a 5% Cut In Suppliers' Prices from 1st August 2009 - the knock-on effect

The cost to you: the incremental sales required to restore your cash profit

A supplier making a 10% net profit, needs an incremental sales increase of 100% to restore cash profit.

Two questions:
  1. Is it likely that you could double your Aldi sales?
  2. What impact would increased scale have on your costs? (say for 10%, 20%, 30% sales increments)
(If you are currently achieving a net profit of less than 10%, the position gets progressively worse {to work out the figures, see NamCalc}. If your Net Profit is currently less than 5%, bye, bye…

The value to Aldi: the incremental sales required by Aldi to generate the same benefit via the bottom line:
With gross margins of say 15% on 2008 UK sales of £2.15bn, Aldi could generate £90m, if all suppliers complied.
Assuming a UK net profit margin of 2%, Aldi would need incremental sales of £4.5bn to generate £90m.

Every little helps…

The fall-out for branded goods suppliers
This is not about Aldi. Aldi are simply attempting to raise funds to optimise share growth potential in the current climate. However, a 'one-sided' change in the supply 'contract' is really a fundamental issue that goes to the core of the supplier-retailer ' fair-share' relationship, particularly for their non-branded suppliers (Aldi's relatively few branded products are by definition category leaders, usually limited to 1/2 SKUs and their suppliers have the strength to refuse).

The real problem is that other multiples, already under pressure from Aldi's growing share, could use this move as a precedent, and try to take equivalent steps with their branded suppliers…With more branded choice, the other multiples could afford to lose key brands, replacing them with competitor equivalents…

UK: Aldi Calls On Suppliers For 5% Cut In Prices
The Grocer reports that Aldi is facing a revolt by its suppliers after telling them it will pay 5% less for their products from the end of this month. Suppliers are said to have received a letter from Aldi’s MD of Buying, Tony Baines, telling them it required “a 5% cost reduction on the range of products you supply.” In the report by the trade magazine, one supplier described the tactics as “bullying” with several companies said to be threatening to stop supplying the discounter as a result. Aldi said it deserved better prices because it was offering suppliers increased volumes and a chance to share in its growth. “We are looking to improve our cost base to support our activity and that will benefit all our suppliers,” Baines told The Grocer.
Namnews - Tuesday 14th July 2009

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