How to be German: The industry dominance of the discount supermarket

Wikimedia / Onderwijsgek

Wikimedia / Onderwijsgek

Our resident psychologist Sven Rudloff joins us to explain the background of Germany’s industry-dominating discount supermarkets, Aldi and Lidl. Listen in the player above or continue reading!

Today I want to talk about a particular German success story: How two brothers created a completely new kind of retail business that conquered the world and the purses of all cost-conscious consumers - the discount store. If you ask Germans about the ALDI stores, they will tell you that you can buy there cheap but with reasonably good quality, and maybe that ALDI’s reclusive owners are the richest people in Germany. They may however not necessarily know that ALDI is also the largest retailer in the world, and that they in fact invented the discount category as we know it.

It was 1913 when Karl Albrecht senior and his wife Anna opened a small store in a suburb of Essen. At the time, and for many decades to come, such family-run shops provided their neighbourhoods with food, household goods, simple textiles and everything else essential for everyday life. The shops also stocked goods that were easy to store but actually came from far abroad; this led to this category often also be called “colonial goods stores”. Dry goods were usually not pre-packaged but sold by weight and packaged in-store. The relationship between the shop owners and their customers was very personal; regulars could buy on credit, and the owners took special orders and often did home deliveries, too. Especially after the Second World War, such stores became colloquially known as “Aunt Emma shops”.

In 1945 the two sons of the Albrecht family, named Karl junior and Theo, took over their parents’ business and started expanding. Within 15 years, the brothers owned more than 300 stores across Western Germany. But the time of the small “Aunt Emma shops” came to an end with the rise of supermarkets: Large self-service stores with a wide selection of products and brands. The Albrecht brothers also experimented with the supermarket concept, but even their larger stores were too small to compete. Today, a German store has to be at least 400 square meters in size to be called a supermarket. The experimental Albrecht supermarkets were only half that size.

Eventually, the Albrecht brothers had a new idea: Could our smaller stores compete with the large supermarkets on price if we get rid of all unnecessary costs?

So what are ways to reduce costs? Significantly cut the number of products you offer, and offer only one product per category. Ideally, agree with the supplier of a good-quality product that their product will be the only one in this particular category sold in your shop; in return for this exclusivity and the large quantities they can sell this way, you get a very good purchase price. At the same time, require that the product is not sold under its original brand but under a no-name store brand. This way, you can still switch suppliers in the background if you want to, and the supplier doesn’t dilute its own brand by offering their product in a discount store.

More ways to cut costs is to only offer products that sell quickly - so called fast-moving consumer goods (FMCG) -, and to avoid fresh products that can spoil easily or require specialists to sell like fresh meat or fish. Cut down on personnel and train the cashiers to do all necessary tasks like re-stocking shelves by themselves. Do not offer special services, discounts or buying on credit to customers. And finally, avoid costly store interiors, decorations and marketing campaigns.

As a result, even with an attractive margin for the store owners, consumers can enjoy low prices as if they got a permanent discount. This is why this retail concept is known as the “discount store”.

1961 the Albrecht brothers started to run with this concept and called their newly organised stores “ALDI”, short for “Albrecht discount”. They expanded quicker than any other retailer ever. The turnover per employee in the new ALDI stores was ten times that of their previous ventures. Because customers could only pay cash but the brothers had agreed a 30 day time for payment with their suppliers, they always had enough cash in hand to invest in new stores without the need to take out bank credits.

Today, ALDI has more than 4,000 stores in Germany, another 4,000 in the rest of Europe and about 1,500 stores in the US and Australia.

However, ALDI is in fact not one company but two. No one knows why, but at the same time they started their success story, Karl and Theo split the existing stores between them and continued more or less separately, but on good terms. Today, ALDI Nord, with a blue logo on white background, operates in Northern and Eastern Germany, in Denmark, Poland, and the Western countries of continental Europe. ALDI Süd, with a light blue logo on dark blue background with an orangey border, operates in Southern Germany, Austria, Switzerland, Hungary and Slovenia, as well as in the UK and in Ireland. The more than 1,300 ALDI stores in the US also belong to ALDI Süd, while ALDI Nord owns the US retail chain Trader Joe’s.

Even today, ALDI is still owned by the Albrecht family. The two brothers were very reclusive, never gave interviews, and there are hardly any photographs of them. Karl, the elder and owner of ALDI Süd, was the richest man in Germany since the 1970s, with an estimated wealth of more than 18 billion Euros at the time of his death last summer. His younger brother Theo, owner of ALDI Nord and the second richest man in Germany, already died in 2010.

Theo gained some publicity when he was abducted in 1971 until a ransom of 7 million Deutschmarks was paid. The two kidnappers were caught but half of the ransom money was never found.

ALDI like all discounters has always been seen as stores for low-income customers. However, the quality of the ALDI products is solid, consumer tests regularly praise them, and some of ALDI no-name products can easily compete with well-known brands. So it’s no surprise that about three quarters of the generally cost-conscious German households regularly shop at ALDI. Why buy expensive champagne if you don’t want to show off and you can get a decent cheap one from ALDI - or from Lidl?

Let’s not forget that the world’s second-largest discount store chain is also German: The Lidl company had already existed since 1858, when its owner Dieter Schwarz turned it into a discount chain in the 1970s. Today, Lidl has almost 10,000 stores in 26 European countries, and they are about to enter the US market, too. Compared to ALDI, Lidl focuses very much on food, and with 1,600 food products it offers more than twice that what ALDI carries.

Looking back at my four “How to be German” topics so far, it seems process improvement is a common theme. Be it for producing TV crime movies, setting industrial and educational standards, making beer, or running shops. Let’s see if I can find more aspects to being German next time.