JOINT COMMITTEE ON ENTERPRISE, TRADE AND EMPLOYMENT debate -
Wednesday, 4 Feb 2009

Aldi Stores (Ireland) Limited.

Vice Chairman (Deputy Cyprian Brady)

We are meeting to consider the pricing regime, competition in general and the promotion, display and sale of Irish made products in the Irish retail market. I welcome Mr. Mackay and Mr. Hurley representing Aldi and thank them for attending. This is a particularly busy day in the Houses and a number of our members are attending various meetings but they will join us in the course of the discussions. I ask the witnesses to be as brief as possible in making their submission to the committee. We have allowed five minutes for each summary, followed by a discussion with the members.

Before they begin I wish to draw the witnesses' attention to the fact that members of this committee have absolute privilege but the same privilege does not apply to witnesses appearing before the committee. Members are reminded of the long-standing parliamentary practice to the effect that members should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable. I ask Mr. Mackay to make his submission.

Mr. Donald Mackay

I thank the Vice Chairman. I will hand over to Mr. Giles Hurley, our group buying director, who will use the five minutes to make the submission.

Mr. Giles Hurley

Aldi is a large international discount food retailer operating in nine countries worldwide. The company entered the Irish retail market in 1999 and currently has a total of 64 stores with plans to open a further 12 stores during the remainder of 2009. The company's headquarters and distribution facilities are located in Naas, County Kildare. A new distribution facility that will service its southern operations is planned for Mitchelstown, County Cork, with an expected completion date in early 2011.

Aldi is committed to sourcing as much of its offering as possible from within Ireland. In the past three years it has built a dedicated Irish buying department of 20 professionals and developed relationships with around 70 Irish suppliers and manufacturers. The buying department works closely with Bord Bia in this regard and in April 2008 held a series of well-attended seminars for existing and prospective suppliers to develop relationships further.

Currently, over 40% of groceries sold in Aldi Stores (Ireland) are sourced within the State and we envisage this rising in the coming years. Aldi's commitment to Irish products is based on its interest in playing an active role in the economy in which it operates. Equally, we find that customers have a certain expectation with regard to the taste and appearance of certain products that can only come from Irish producers. This is particularly important in the fresh meat and dairy categories where they demand the reassurance of quality and traceability that comes from purchasing Irish products.

All of Aldi's fresh beef, fresh pork, fresh lamb and fresh poultry is Irish, Bord Bia approved and fully traceable to the farm. All of the eggs sold in Aldi are from Bord Bia scheme Irish farms. Among the other Irish products sold in Aldi are crisps, cakes, tea and coffee, yoghurt, flour, butter and dairy spreads, cooked meats, breakfast meats, chocolates, biscuits, spirits and beer, cheese, pet food, soft drinks, including spring water, fruit and vegetables, wherever possible, and sandwiches. A total of 95% of these products are sold under Aldi's exclusive brands.

Opportunities also exist for Irish products to be sold in Aldi's international businesses and we would expect this to increase in the coming years. Currently, products from Irish suppliers are sold in Aldi's United Kingdom, United States and Australian businesses.

Aldi's focus is on selling high-quality goods at the lowest possible price. It offers a limited, high quality product range of approximately 900 lines at prices of up to 30% below the market average. In 2008, Aldi was included for the first time in surveys by the National Consumer Agency which found, for a selected basket of shopping, price differences of up to 40% between Aldi and the established competition.

Aldi achieves its low prices primarily through offering a limited range of high-quality goods and delivering efficiencies at every level of its business operation. Rather than having a wide range of each type of product, Aldi tends to offer just one of each but puts tremendous effort into ensuring this product is of the highest quality and will appeal to the vast majority of customers.

Aldi does not seek to be the cheapest in the market at the expense of quality. In public debate and consumer surveys, price is sometimes the primary focus and Aldi would welcome more recognition and measurement of quality and nutritional value at great value prices.

As a relatively new and growing entrant to the Irish market, and with its business model, Aldi is obviously highly supportive of the concept of competition in the marketplace. Aldi is committed to providing best value to its customers through offering the best quality products at the lowest possible prices.

Aldi intends to bring its offering and further competition to consumers throughout Ireland and its overall aim is to have an Aldi store within easy reach of everyone in the country, or at least one store in most medium-sized towns.

Aldi believes that competition is vital for a healthy retail sector and a continuation of Government policy encouraging competition among industry players and choice awareness among consumers will be beneficial for retailers and customers alike.

Deputy Michael Fitzpatrick

I am aware of Aldi's distribution centre in Naas. Mr. Hurley spoke about efficiencies. I assume Aldi located in Naas because it is trying to minimise costs in that it has access to all the major road networks in that location. Will Mr. Hurley outline Aldi's costs and the way it minimises them in general terms? Does Aldi pass any of those costs on to suppliers? Do the suppliers have a choice or are they obliged to accept whatever Aldi offers them? How does Aldi's costs in this jurisdiction compare with its costs in the adjoining jurisdiction?

Mr. Donald MacKay

Perhaps I should answer that question. Right from the start of the process of sourcing through to the retailing of the product in our stores, everything has been considered in terms of efficiency. We take it into account at the outset of defining the packaging for the product. We put multiple bar codes onto the product to make it scan as efficiently as possible at the point of sale for the customer. In terms of the entire process of the logistics of obtaining the product from the supplier to our distribution centre, through our distribution centre and from it to our stores, all the costs associated with that and the labour required to achieve what is required is minimised. We review our operations on a regular basis to ensure that our costs are as low as possible. We do not achieve that through paying our people particularly low wages. We do not pay the minimum wage, but pay in excess of 30% more than it. The salaries we pay are 30% higher throughout our business, as we believe we get a greater work ethic by paying our people well. All these efficiencies and savings we achieve are passed on to the customer in the end by offering the product at a lower retail price. That is how we achieve the 30% discount against our competition. Mr. Hurley might answer in respect of the supplier end.

Mr. Giles Hurley

We are well known in the market for being one of the most efficient retailers with which to deal. We do not pass any costs on to our suppliers. The fact that we offer a central distribution facility means that our suppliers can drop their products to one location which, logistically, is an efficient way for them to do business. In addition, the fact that we operate our own logistical network, that we are 95% an exclusive label retailer and merchandise our own products on shelves means we have no requirements for suppliers to have a logistical network for merchandisers in our stores throughout the country. We do not seek any add-ons to pay the cost of the actual product that is delivered.

Deputy Michael Fitzpatrick

Do all the products come through the centralised distribution facility?

Mr. Giles Hurley

That is correct.

Mr. Donald MacKay

The only exception is milk.

Mr. Giles Hurley

It does not come in on pallets but on milk trolleys.

Deputy Damien English

The main issue we are trying to ascertain is the price difference between products here and those across the Border. Aldi has stores in both places and there is a difference in its prices North and South, as is the case with most of the large multiples. We are trying to discover what is happening in that respect. Is there a reason for that? Who is to blame for that? Is it due to a higher or lower margin, higher costs or what is the cause? I assume each multiple will have a different reason for such price differentials. The representatives might give us a breakdown of where they consider the problem lies and what factors need to be identified. We have to try to solve this issue, be it due to Government charges, too high a margin or some other factor. We have to identify the problem and deal with it, as it is a major issue. That is one issue, the difference in the price of the same products Aldi charges consumers on either side of the Border.

The representatives may not be able to answer this question, but in Aldi's setting of prices for the consumer, does it have a target margin on products and everything related is worked back from that, or does its overall margin vary from week to week, or does it have a target that it must try to achieve?

Mr. Hurley said that Aldi does not pass on any costs to the supplier, does that mean that other multiples do? He made a point of saying that Aldi does not, therefore, I wonder if other multiples do. In terms of the costs for suppliers, is there any area where the costs to suppliers of getting their products onto Aldi's shelves can be reduced?

Does the sterling-euro exchange rate affect Aldi's costs? Mr. Hurley said that most of Aldi's products are its own brand and, therefore, the exchange rate differential may not affect it as much as other multiples. However, we have been told, in some cases, it is the buying in of products that has led to higher costs.

As Mr. Hurley said, more than 40% of its groceries are sourced within the State. Does that mean they are produced or only sourced within the State? I want to make sure there is no difference in that respect, given that groceries could be bought from a supplier in Ireland but they may not be Irish.

Mr. Donald MacKay

We do not have stores in both jurisdictions. We do not have any stores in the North.

Deputy Damien English

My apologies, I thought Aldi did.

Mr. Donald MacKay

We take normal profits from our operation here in comparison to our international businesses. As a starting point in order to define how we set our pricing structure, we take normal profits from our Irish operation. We can compare that to our UK, German, Austrian, Australian and American businesses. We do not take significantly higher margins or profits out of our operation in Ireland, but there are higher operating costs and factors that impact on the retail prices that are being charged. Although we cannot compare North and South, we can give the Deputy some reasons——

Deputy Damien English

A study showed the price differential between products in German and here is large?

Mr. Donald MacKay

We are all aware of the additions of VAT, alcohol duty and the differences in that respect. We are aware the minimum wage here compared to that in the North is significantly different, namely, greater than 35%.

Deputy Damien English

That is not an issue for Aldi as it does not pay the minimum wage.

Mr. Donald MacKay

The relationship in terms of salary would be the same. Therefore, we pay higher salaries here than we would in a different jurisdiction. Commercial rents here are about 1.5 times the UK average. Everybody is aware that land prices here have been extremely during the past ten to 15 years. If one purchased land at a very high price, that will impact on one's bottom line at some point. If one is looking for a normal profit position and if one paid a significant price for land, that will have an impact. Whether it is done through leasehold or freehold, prices here have had impact on retail prices. The cost of insurance here is one and half times the cost compared to the UK and electricity costs here are double the costs in the UK.

Deputy Dara Calleary

Double?

Mr. Donald MacKay

Yes, double.

Deputy Damien English

Double the electricity costs in the UK.

Mr. Donald MacKay

We are comparing electricity costs in the Republic to a standard store with the same specification in the UK. I have done the comparison and the costs here are double those in the UK.

Regarding cash in transit questions, the cost is double.

Deputy Damien English

Cash in transit.

Mr. Donald MacKay

Yes.

In terms of bank charges, the difference is so significant it is difficult for me to even put a multiple on it. Some of the services the banks provide in the UK are not charged for, but here they are. It is of the order of ten times what we pay in total for all the services that we receive from the banks here in comparison to our operations in the UK.

Deputy Damien English

Is the cost of finance dearer as well?

Mr. Donald MacKay

We do not get involved in that.

Deputy Damien English

That is fine.

Mr. Donald MacKay

I am talking about servicing the day-to-day operation of the business, the handling of cash, the supplying of coins, anything that the bank does on our behalf in terms of handling cash as opposed to providing us with any sort of credit or debt. We are not availing of that and I am not commenting on that.

As Mr. Hurley said, a significant percentage, some 40%, of our product is Irish sourced. The Deputy wanted us to expand on that point and I will ask Mr. Hurley to do that. Irish sourced product is more expensive. One does not get the same economies of scale when one produces for a taste profile for a population of 4.5 million here as one gets when one produces for a taste profile of a population of 60 million in the UK or a population of 80 million in Germany. Therefore, if one sources a specific Irish product here, suppliers here suffer all these similar cost pressures on their operations and that is reflected in the cost price one pays the supplier. However, we believe that sourcing Irish product is the right thing to do because that is the taste profile the customers want. The Deputy asked why there are differentials in terms of the retail price to the customer in the store. These are all reasons for that.

Deputy Damien English

Are higher costs and economy of scale for suppliers the main reasons there is a massive price difference in Aldi's operations here compared to the UK and other countries?

Mr. Donald Mackay

As far as we are concerned, yes. We would be looking for normal profitability from our business here, so the difference is in the cost structure.

Vice Chairman

Have we finished?

Mr. Donald Mackay

Deputy English asked several questions but I have not answered all of them. I tried to keep a list as he asked them. I think I answered the question about cost differentials and therefore retail price differentials.

Deputy Damien English

Yes.

Mr. Donald Mackay

He also asked about target margins.

Deputy Damien English

No, it was explained.

Mr. Donald Mackay

The way he asked the question, it sounded as if he meant per product, but we do it as a total and it is a margin mix. On the product side, Deputy English asked about costs passed on in other businesses, so perhaps I can pass over to Mr. Hurley.

Mr. Giles Hurley

It is difficult for me to comment on other businesses, but I can comment on our own business. Because we are an own-label retailer with a very efficient structure, we are able to pass those efficiencies on to our supply base. Can we make it cheaper for suppliers to get products on our shelves? To be honest, we do not have hefty demands from suppliers to get their products onto shelves. We are actively seeking to increase the number of Irish suppliers in our business and are holding forums with Bord Bia to encourage that. We want suppliers to come up with products that they think can be successful. We are literally looking for what we call a net-net cost. Therefore what is the cost of delivering this product to our back door? Once it hits our warehouse facility we take care of everything else. I am not sure there is much more we can do there.

In terms of produced versus sourced, all our fresh beef, pork, lamb and poultry is sourced from Irish farms. Therefore, it is born, reared and slaughtered in Bord Bia-approved farms. Bananas are not grown in Ireland, as we all know, but we use a supplier called Iverkin in Piltown, County Kilkenny. It sources the bananas, brings them to Ireland and controls them for the maturation period. It also packs them, holds them in specifically designed warming facilities, and then delivers them to our facility.

When one talks about a product being absolutely produced in Ireland it differs from product to product. There are products where I can say it is produced here from birth to slaughter or until it is picked. There are also products which are not grown in the State but where we use Irish suppliers to pack and deliver.

Deputy Damien English

For clarity, is the 40% sourced in Ireland a combination of produced in Ireland and imported with added value?

Mr. Giles Hurley

Yes, added value is the right term.

Deputy Damien English

I just wanted to clarify that.

Vice Chairman

We need to move on. If we do not get to cover all the questions, perhaps the Aldi representatives can revert to us in writing through the clerk.

Deputy Chris Andrews

The term "normal profits" was used, but how does one define normal profits? Are normal profits in Ireland different in comparison to other jurisdictions?

Mr. Donald Mackay

No. When I say "normal", I mean of a similar level when compared to our international operations.

Deputy Chris Andrews

What is a normal profit?

Mr. Donald Mackay

We are not prepared to declare our profit percentage. That is not uncommon.

Deputy Chris Andrews

Obviously we will have to take Mr. Mackay's word for it, but is that percentage the same in different jurisdictions?

Mr. Donald Mackay

We are similar to the average. We have some countries of operation that are significantly above the average and some that are lower than the average, but on the international average of our worldwide business — we have so many jurisdictions to compare with — we are around the average.

Deputy Chris Andrews

How many jurisdictions does Aldi operate in?

Mr. Donald Mackay

I can run through them.

Mr. Giles Hurley

We are in Germany, Austria, Switzerland, Slovenia, Greece, Hungary, the USA, Australia, the UK and Ireland.

Vice Chairman

As mentioned in the submission, some Irish products are sold abroad. Can Mr. Hurley give us an idea of the amount or percentage?

Mr. Giles Hurley

I cannot give any details on percentage off the top of my head. They are generally areas of strength in the Irish economy, so dairy and meat-based products are exported.

Vice Chairman

With the Aldi label?

Mr. Giles Hurley

Under our private label, yes.

Deputy Dara Calleary

Is it clear to the customer whether goods are sourced purely in Ireland or imported? Does Aldi make it clear on the label that goods are totally produced in Ireland or have been partially imported and finished off in Ireland?

Mr. Giles Hurley

Currently we adhere to the Bord Bia scheme. Therefore, if a product is fully traceable to an Irish farm, we use a Bord Bia logo on the pack. For all other products, where there may be some added value, we use what we call a "Produced in Ireland" logo. Therefore, the consumer knows clearly that one is from a Government-authorised scheme, which is fully traceable, and the other is not — it is simply a statement of production. That can apply to goods with added value and it can also apply to a cooked ham product which may have a mixture of Irish, French and German pork in it. We cannot adhere to the fact that that is a Bord Bia product because it is not made from Irish pork alone, but it is produced in an Irish factory employing Irish people.

Vice Chairman

If members have no further questions I would like to thank Mr. Mackay and Mr. Hurley for attending the committee over two days. We have a full schedule and hope to produce a report which contains as much detail as we have gathered over these couple of days. I thank both gentlemen once again for attending our committee.

Mr. Donald Mackay

Thank you for inviting us, Vice Chairman.

Mr. Giles Hurley

Thank you.