How Aldi’s global wine buying hub is only part of a bigger consolidated wine market
By Richard Siddle
On the face it the announcement this week that Aldi is to create a dedicated global wine-buying hub in Salzburg, Austria, to co-ordinate buying and blending for all its markets around the world is pretty big news.
But then it’s equally a wonder why it has not done this before. For one of the strengths of the German discounters over the years has been how it has used centralised buying for so many of its core, commodity grocery lines to be able to buy at such competitive rates and keep its prices lower than the rest of the grocers on the high street.
It’s why its tinned tomatoes taste just as good as the most expensive branded version, or its tomato ketchup is on a par with Heinz, its cereals a match for anything Kellogg’s can make. Products are centrally trialled, tested and developed and benchmarked against the number one brands in that category.
So when consumers pick them up for a half the price, take them home and discover they taste just as good as the originals they come back for more.
It’s the strategy that has made the German discounters a success in every international market they have gone in to around the world as they have introduced products that match up to the best selling brands in that particular country.
The fact that wine is only one part of what will be a major new global centralised buying hub for Aldi should be no surprise. Details from Aldi are typically scratchy, but this is likely to be an extension of an existing central buying function, rather than a completely new division. At least for Aldi’s sake hopefully it is.
For its arch rival, Lidl, has been proudly boasting about its centralised wine buying hub for some years.This is how Karsten Kremer, who ran Lidl’s central wine buying operation back in 2012, described how it worked to the Daily Telegraph: “I gather the needs for the different countries that will want to sell it, and then it depends if we’re talking about 500,000 or six million bottles.”
As wine does not have the Heinz or Kellogg’s equivalent to benchmark products against it’s a more difficult task for the discounters to come up with a winning recipe they know will work in store.
Instead the challenge for Aldi and Lidl’s centralised wine teams is to find what Kremer called “the reference” point way back in 2012.
Here’s how he described the process: “I receive samples of everything we are tasting. We do huge tastings and when we find the right wine we say, 'OK this is the reference.’ We send it to an accredited institute and they do what you might call a technical fingerprint – they measure everything from colour to density to residual sugar to acidity, dozens of parameters.”
Fast forward to 2019 and Aldi’s new centralised approach is pretty much the same, as Mike James, Aldi’s former UK wine buyer, who is moving to join the new team in Saltzburg, explained to Harpers this week: "Aldi is big player in lots of different countries. We would be missing a trick by not streamlining, and that goes for categories across the shop floor - not just wine.”
He added: “My role will be to look at those wines where we could possibly do some joining up on volumes and build economies of scale from that."
Building economies of scale
A desire and need to cut costs and build economies of scale is not just an issue for the discounters. But one shared by major grocery chains the world over. It’s why we are seeing an increasing number of collaborations and consolidations between major multiple groups who are prepared to get in to bed together if it helps their collective bottom line.
Like Tesco and Carrefour. It signed a “strategic alliance” last year to look at ways it could pool its more than considerable forces to buy better, bigger, and yes, cheaper. A link up that has to be seen in context with Carrefour's commitment to cut costs by €2bn by 2020, and Tesco's on-going transformation strategy under new chief executive, Dave Lewis.
Here’s how Lewis sees the deal with Carrefour: "By working together and making the most of our collective product expertise and sourcing capability, we will be able to serve our customers even better, further improving choice, quality and value."
Tesco has also joined forces with the major UK cash and carry business, Booker, to align its buying power and reach more areas of the market.
It’s why Asda and Sainsbury’s, also in the UK, were so keen to come together before being thwarted by the competition authority.
Asda is already part of the US grocery giant Wall-Mart, which, in turn uses a standalone business, IPL (International Procurement & Logistics), to control, consolidate and manage how Asda can buy better across a whole range of categories, including wine. Whilst keeping the Asda management team and buyers one step removed from the process.
The world over the major grocers know they can only get bigger by joining forces, cutting costs and maximising their economies of scale. In Europe there is the AMS Sourcing Group, the Amsterdam-based, non-profit, strategic-buying alliance that currently works on behalf of 10 European food retailers on joint own label projects together. Including such big names as Ahold Delhaize, Musgrave, Morrisons, and ICA.
None of this is anything new. In the mid nineties the much acclaimed ECR (Efficiency Consumer Response) group saw the world’s biggest retailers and FMCG brands come together to pool their expertise on enhanced supply chain solutions. From which came such technologies as RFID labelling and just in time distribution. The AMS Sourcing business has been working since 1988.
Such alliances are usually formed to work on and around own label projects where there is usually no direct conflict between the retail players. They have also become good friends to the bulk wine market over the years.
The draw back for suppliers and growers down the supply chain is that these kinds of groups and consolidating hubs are very much tilted in the retailers’ favour. It allows them to buy huge volumes at any one time, and play the market to get the best price.
As Mella Frewen, director general of FoodDrink Europe, told the BBC recently: “Buying alliances have a detrimental effect on the whole food supply chain. They increase the buying power of the retailers in the alliance thus putting the manufacturing industry, and other suppliers, under increasing price pressure.”
But they are not going away. In fact, as Aldi has shown this week, they are only going to get bigger and a more important part of the overall grocery supply chain that wine is such a key part of.
Business hubs and alliances that are equally going to need to work with suppliers and producers with the capabilities of giving them what they want and the ability to help them cut costs. Which is why we are equally seeing such consolidation on the supply side, like Henkell & Co’s purchase of Freixenet, and the fact Constellation and E&J Gallo are so keen to do business with each other.
As the world continues to be destabilised by trade deals and tariff disputes the major grocers, suppliers and producers all need to find ways they can work around those issues and if that means increasingly working together and building strength in numbers then so be it.