(Yicai Global) April 26 -- Before introducing Aldi to China, the German discount supermarket chain's local Chief Executive Christoph Schwaiger visited thousands of retail stores across more than 40 Chinese cities in three years.
China is the first stop in Aldi Einkauf GmbH's Asian market entry, Schwaiger told Yicai Global in an interview yesterday.
Instead of opening physical stores, the privately held company will penetrate the China market by operating a flagship store on Tmall, an e-commerce marketplace owned by Chinese internet giant Alibaba Group Holding Ltd., and will focus on store-brand products. The agreement was signed yesterday.
Breaking into China via online sales will reduce Aldi's initial outlays. But it is an open question whether it can succeed this way given the poor awareness of European and American store-brand products among Chinese consumers, an insider pointed out.
"Our company is more than 100 years old and mainly specializes in grocery retail," Schwaiger said. "We have about 10,000 stores of varying sizes in Europe, America and Australia."
Aldi has more than 1,000 stores in the US alone, and even Wal-Mart Stores Inc. [NYSE:WMT] once considered it to be a main rival, the insider said. Still, Germany's biggest discount retailer has come to the Chinese market much later than its competitors.
"We're a major global retailer, but little known in Asia," Schwaiger said. "We chose China as our first stop in Asia, because the country offers a unique market environment, and consumers here have special food safety requirements. The market is going through a consumption upgrade."
Aldi did not rush the decision, knowing that its competitors are already in China.
"We spent many years researching the Chinese market, and we found that e-commerce is fully developed in the country," Schwaiger said. "E-commerce is our best choice to enter the Chinese market, not bricks-and-mortar stores."
Having made up its mind, Aldi selected Alibaba as its partner. "We contacted them last July, and struck a deal two months later," Schwaiger said. "An agreement was signed in early December, and we entered into the strategic partnership today [April 25]. We'll open a flagship store on Tmall.com."
Schwaiger had just employee last year, but now has more than 40, he added.
"Aldi's first batch of products sold in China will be directly supplied from Australia," he said. "They include approximately 100 high-demand products ranging from wines, snacks and breakfast to organic food."
Schwaiger said store-brand goods are what makes Aldi a competitive player in Europe and the US, so many of the products in its Chinese outlet are also store-brand goods marketed as "handpicked for you."
Many offline stores have suffered shrinking sales, with some even closeing due to rising costs and the proliferation of e-commerce businesses. The UK's Marks & Spencer closed all of its mainland China stores last month. Wanda, Rosen, Carrefour and Wal-Mart have all shut some stores.
"The high costs involved in operating offline stores are one of the main reasons for Aldi's decision to enter the Chinese market via e-commerce, to reduce cost and risks," retail veteran Shen Jun told Yicai Global. "But running an e-commerce business isn't easy either. For example, the 'last mile' issue and logistics operations must be carefully planned."
In terms of logistics, Aldi will leave the 'last mile' to Alibaba, which has an extensive delivery network across China, Schwaiger said.
"The other issue is branding," Shen said. "The competitiveness of leading international retailers actually lies in their store-brand goods, but these products are mostly little known in China, and Chinese consumers generally prefer well-known brands. Store-brands make up a considerable proportion of Aldi's products, so the poor brand awareness will pose a challenge to the company."
Schwaiger said that he was also aware of this problem, and Aldi would sell more products under well-known brands such as popular food and imported milk powder that cater to the needs of local consumers.
"The Chinese market is in the middle of a consumption upgrade, and 'new retail' collaborations have been on the increase," he said. "We have set long-term goals for our operations in China."