Aldi is a global supermarket chain that is based in Germany. Aldi is a short form of “Albrecht Discount”. It is one of the world’s largest retail chains operating in more than 8000 stores globally (Aldi par.1). Aldi was founded by Karl and Theo Albrecht’s brother in 1946. They had inherited a convenience store from their mother and created a chain of discount food shops. The two brothers came up with a new idea or subtracting up to three percent rebate at the point of sale. At that time, leading retail stores mostly owned by co-operatives required their clients to gather discount stamps and send them regularly so as to claim their cash (Aldi Group History par. 2).
Aldi first went global by opening a branch in Birmingham, United Kingdom. Currently, the supermarket chain owns more than 400 stores in the UK alone, which makes the UK its largest market (Aldi Group History par. 2). The majority of the products sold by this supermarket chain are own-branded labeled plus a few non-branded products. This system enables Aldi to stock a variety of products similar to other general supermarkets but in a limited space. The Albrecht brothers are the one who came up with the idea of keeping the size of their retail stores as small at the same time providing similar services as the general supermarkets (Aldi par.3).
The supermarket chain normally gives out special offers. These special offers are mainly on household goods, for instance, clothes, and electronics (Aldi par. 4). They also present genuinely discounted prices for over 1300 range of foodstuff owing to its cost-cutting strategies. Some of the cost-cutting strategies that enable it to offer deeply discounted prices include locating its stores in the city outskirts where the land is cheaper, setting up cheaper warehouses, employing a limited number of employees, furnishing the store to a bare minimum, and stocking privately-labeled goods (Aldi Group History par. 6).
Comparing Aldi with its main rivals
Aldi’s main rivals are Tesco, Sainsbury, and Morrison supermarkets. They are operating in the retail segment, have the same business and sell similar products. However, unlike Aldi, the other retail supermarket chains only focus on the quality of products and not prices. Last but not least, they have all come up with different channels of distribution to reach their target markets easily (Graiser and Scott 12).
Aldi confronts various risks as an aftereffect of its marketing techniques. These risks are attributed to both internal and external factors. The risks may negatively affect the company’s future advancement, for instance, global market share, overall status, and consumer allegiance. The UK market alone is dominated by five major retail chains that control nearly three-quarters of the retail market, hence a very stiff competition (Worthington and Brotton 12). So as to maintain its status in the global business, Aldi needs to be aware of the business sector patterns and customer tastes and inclinations. However, the company is at risk of not keeping up with the fashion trend when the changes are taking place at a faster rate. On the off chance that the organization can’t take after the emerging design patterns, it risks losing its market share (Worthington and Brotton 14). Similarly, the introduction of new products in order to maintain the existing clients and attract new customers can have a negative ramifications if the process is so hasty. Rapid introduction of a new product that does not fall under this category may bring confusion (Worthington and Brotton 16).
Analysis of Financial Statements
Financial analysis is a very significant aspect of case study analysis. In any case, the financial analysis reflects on the performance of the company in relation to its strategies and structure (Gorsky 66). Even though financial analysis is somehow complex, a great deal of the company’s financial position can be determined using ratio analysis (Poznanski, Sadownik and Gannitsos 1).
These ratios show whether the company is making progress or going down. Profitability ratios include Net Profit Margin, Return on Total Assets (ROA) and Return on Stakeholders Equity (ROE). Profit margin= Net Income/Net Sales Revenue. On the other hand, Return on Total Assets (ROA) = Net Profit/ Total Assets, whereas Return of Stakeholders Equity (ROE) = Net Profit/Stakeholders Equity (Poznanski, Sadownik and Gannitsos 2).
Net Profit Margin (NPM)
Net profit margin shows the company’s level of profitability (Poznanski, Sadownik and Gannitsos 2). As you can see from the table below, Aldi Supermarket has a higher net income earned by every dollar of net sales compared to Tesco Group in the five-year period. The high-profit margin is attributed to its cost-cutting strategies and prompts a response to consumer demand, taste, and preference.
|Profit Margin Percentage for Aldi Supermarket||21.9||19.3||16.1||14.8||21.6|
|Profit Margin Percentage for Tesco Group||9.2||4.1||3.7||6.5||6.4|
Earning per Share
Earnings per Share= Net Income/Average Number of Common Stock Outstanding Earnings per the Share
|Earnings per Share for Aldi Supermarket||5.81||4.93||3.95||3.53||4.86|
|Earnings per Share for Tesco Group||0.21||0.33||0.42||0.31||0.25|
EPS shows the efficiency of earnings from each share. Earnings per share for Aldi Supermarket have been relatively low since 2010. It may be because of changes in the global market environment and some economic factors, rather than the poor performance of the company. However, its values are comparatively higher than Tesco Group’s, but this cannot be compared directly. This is because the prices of shares always vary from one company to another. In addition, the company has managed to improve its earnings per share by reducing the number of shares by buying them back from the stockholders.
Return on Equity (ROE)
The ratio computes the earning from every unit of equity. It is more reliable than earnings per share when comparing the performance of different companies. ROE for Aldi is better than Tesco PLC as a result of higher profit margins and increased revenue. Besides profit margin, the company puts more focus on the distribution of idle cash, enhancement of asset turnover and decreasing tax burden.
|ROE% for Aldi Supermarket||30.23||29.78||26.28||25.29||25.67|
|ROE% for Tesco Group||-52.7||6.2||0.72||10.6||16.9|
Return on Assets (ROA)
Return on Assets ratio of any establishment shows how proficient assets are used to generate returns. ROA for Aldi is also higher than Tesco PLC as a result of increased account receivables and a decrease in bad debts.
|ROA% for Aldi Supermarket||12.4||10.8||9.2||8.9||13.5|
|ROA% for Tesco PLC||-12.7||1.94||0.25||5.7||5.0|
Return on capital employed
This is a ratio that gauges the company’s level of efficiency in term of capital utilization. It is a good indicator since it considers debts and liabilities, unlike ROE which is only concerned with profits.
|ROCE for Aldi supermarket||16%||12.2%||8.4%||7.7%||17.3%|
|ROCE for Tesco PLC||12.0%||11.80%||14.98%||14.42%||13.06%|
ROCE for Aldi supermarket has been fluctuating over the five-year period. Its level of profitability was lower compared to its rival. However, Aldi is considered more efficient in the utilization of capital to generate revenue.
These ratios measure the ability of the company to meet its short-term obligations.
Current ratio=Current assets/Current liabilities and it should be more than one. However, a high current ratio, particularly the current ratio larger than 2 may mean the company is using its resources unproductively.
|Current Ratio for Aldi Supermarket||2.361||2.197||1.901||2.381||2.050|
|Current Ratio for Tesco PLC||1.01||1.18||0.67||0.68||0.74|
The current ratios for Aldi Supermarket are above 0.1 in the last 5 years, which means the company is able to pay off the current debt. This is good financially. However, the current ratio larger than 2 may mean the company is using its resources unproductively. On the other hand, Tesco PLC has a relatively low current ratio. The ratios are below 0.1 at one point, which is financially unsound. But, the ratios have been improving in the last two years. The two companies can further improve their current ratio by taking the following into consideration: first, re-amortizing long-term loans; second, minimizing personal draws; lastly, selling off non-profitable or worthless assets.
Quick Ratio (Acid Test)
Quick Ratio= Quick Asset/ Current Asset
Actual Calculations= (Cash Equivalent Investment Securities+ Account Receivable)/ Total Current Liabilities
|Acid Test for Aldi||2.01||2.01||1.76||2.12||1.99|
|Acid Test for Tesco PLC||0.8||0.84||0.48||0.5||0.56|
The acid test ratio shows two companies real liquidity position. It is a more reliable ratio than the current ratio as it considers a quick asset and excludes inventory, which may not be converted to cash. There is an increase in the ratio (except in 2012), which means the company is in a good position and is increasingly growing compared to its main competitor.
|Gearing ratio for Aldi||0.188||0.101||0.125||11.02||0.498|
|Gearing ratio for Tesco PLC||148.7||152.70||53.13||52.30||71.62|
This ratio shows the company’s total level of indebtedness. The gearing ratio for Aldi has been fluctuating from one year to another. Nonetheless, the company has a low debt obligation than its competitor.
Debt-to-Equity Ratio= Total Liabilities/ Stakeholders’ Equity
Actual Calculations= Total Liabilities/ Total Shareholders’ Equity
|Debt-to-Equity ratio for Aldi Supermarket||0.0931||0.864||0.872||0.991||0.818|
A low ratio suggests that Aldi supermarket does not depend heavily on funds provided by creditors, which puts the business at less high risk.
Interest Coverage Ratio
This ratio is used to establish a company’s capability to pay interest on the unsettled balance. In other words, it gauges the company’s safety margin as regards interest payment within a given time. When a company has a low-interest coverage ratio, then it has a high debt burden. Therefore, a company with an interest coverage ratio of less than 1.5 has high leverage.
Interest coverage ratio= EBIT/Interest expense
|Interest Coverage ratio for Aldi Supermarket||15.93||16.62||18.27||15.9|
|Interest Coverage ratio for Tesco PLC||4.25||4.76||7.88||6.35||5.29|
The company is less leveraged compared to its rival, which implies less risk for lenders. This gives them an assurance that their interest will be paid back.
The ratio analysis is a very significant tool for assessing the performance of companies as they mirror progress and viability. However, these ratios do not provide an ideal representation of a company’s financial position for a given time. In other words, financial ratios are not the best tool for analyzing a company’s financial position for any fiscal year. This is because these ratios rely on financial statements that are availed by companies through their annual reports, which are always summaries for a given time period. Therefore, ratio analysis should be carried out at intervals throughout the financial year to reflect the true picture of the company. In addition, ratio analysis always ignores the most significant aspects that play a key role in the interpretation of a company’s financial position, that is, the non-financial factors. This makes it very hard to conduct a perfect analysis.
From the above analysis, it is evident that Aldi supermarket is performing well compared to its main rival and, therefore, it is rational to invest in the company. The analysis shows that the company is stable and healthy financially. The profit margin shows that the profitability of Aldi supermarket keeps on increasing. The Earnings per Share and Return on Equity are also growing. The current ratio further suggests the company is able to pay off current liabilities. The quality of cash is good, which means that there is enough cash for running the business, especially when money is needed for emergency purposes. The debt-to-equity ratio also shows that the company does not rely too much on creditors, which is a healthy condition for any business. In a nutshell, investing in Aldi supermarket is not a risky venture.
Aldi. Welcome to Aldi. 2016. Web.
Aldi Group History. Company History.2016. Web.
Gorsky, Alex. Company Analysis, Cincinnati, Ohio Print: J & J Inc., 2014. Print.
Graiser, Andy and Taylor Scott. ”Understanding the Dynamics of the Supermarket Sector.” The Secured Lender 60.6. (2004): 10-14. Print.
Poznanski, Julie, Bryn Sadownik and Irene Gannitsos. Financial Ratio Analysis. 2013. PDF file. Web.
Worthington, Ian and Chris Brotton. The Business Environment, London: FT/Prentice Hall, 2009. Print.
Appendix 1: Aldi Supermarket’s Balance Sheet
Aldi Supermarket’s Balance Sheet.
|Cash & Short Term Investments||27.66M||32.26M||21.09M||29.21M||33.09M|
|Total Accounts Receivable||9.77M||10.58M||11.31M||11.71M||10.99M|
|Accounts Receivables, Net||9.77M||10.58M||11.31M||11.71M||10.99M|
|Accounts Receivables, Gross||10.11M||10.94M||11.78M||12.05M||11.26M|
|Bad DeBt/Doubtful Accounts||(340M)||(361M)||(466M)||(333M)||(275M)|
|Work in Progress||1.46M||1.64M||2.26M||2.61M||2.46M|
|Progress Payments & Other||–||–||–||–||–|
|Other Current Assets||4.5M||5.19M||6.22M||7.61M||7.05M|
|Miscellaneous Current Assets||4.5M||5.19M||6.22M||7.61M||7.05M|
|Total Current Assets||47.31M||54.32M||46.12M||56.41M||59.31M|
|Net Property, Plant & Equipment||14.55M||14.74M||16.1M||16.71M||16.13M|
|Property, Plant & Equipment – Gross||30.43M||31.83M||34.65M||37.13M||36.69M|
|Land & Improvements||738M||754M||793M||885M||833M|
|Computer Software and Equipment||–||–||–||–||–|
|Other Property, Plant & Equipment||–||–||–||–||–|
|Total Investments and Advances||0||0||0||0||0|
|Other Long-Term Investments||0||0||0||0||0|
|Long-Term Note Receivables||0||0||0||0||0|
|Net Other Intangible’s||16.72M||18.14M||28.75M||27.95M||27.22M|
|Tangible Other Assets||3.33M||3.52M||3.22M||2.59M||3.23M|
|Liabilities’ & Shareholders’ Equity|
|ST Debt & Current Portion LT Debt||7.62M||6.66M||4.68M||4.85M||3.64M|
|Short Term Debt||7.6M||6.04M||3.16M||3.08M||3.63M|
|Current Portion of Long Term Debt||13M||616M||1.51M||1.77M||7M|
|Income Tax Payable||578M||854M||1.06M||770M||500M|
|Other Current Liabilities’||9.25M||9.57M||12.69M||13.79M||13.31M|
|Miscellaneous Current Liabilities’||6.61M||7.25M||10.27M||10.99M||10.56M|
|Total Current Liabilities’||23.07M||22.81M||24.26M||25.68M||25.09M|
|Long-Term Debt excl. Capitalized Leases||9.16M||12.97M||11.49M||13.33M||15.12M|
|Capitalized Lease Obligations||0||0||0||0||0|
|Provision for Risks & Charges||6.09M||8.35M||9.08M||7.78M||9.97M|
|Deferred Taxes – Credit||1.45M||1.8M||3.14M||3.99M||3.15M|
|Deferred Taxes – Demit||5.1M||6.54M||4.54M||3.87M||3.4M|
|Other Liabilities’ (excl. Deferred Income)||6.57M||10.63M||8.55M||7.85M||8.03M|
|Preferred Stock (Carrying Value)||0||0||0||0||0|
|Redeemable Preferred Stock||0||0||0||0||0|
|Non-Redeemable Preferred Stock||0||0||0||0||0|
|Common Equity (Total)||56.58M||57.08M||64.83M||74.05M||69.75M|
|Common Stock Par/Carry Value||3.12M||3.12M||3.12M||3.12M||3.12M|
|ESOP Debt Guarantee||0||0||0||0||0|
|Cumulative Translation Adjustment/Unrealized For. Exch. Gain||(869M)||(1.69M)||(288M)||43M||(4.66M)|
|Unrealized Gain/Loss Marketable Securities||24M||448M||195M||106M||257M|
|Total Shareholders’ Equity||56.58M||57.08M||64.83M||74.05M||69.75M|
|Accumulated Minority Interest||0||0||0||0||0|
|Liabilities’ & Shareholders’ Equity||102.91M||113.64M||121.35M||132.68M||131.12M|