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Is ALDI Really That Special?

The document discusses the similarities between ALDI and Walmart's business models and philosophies. Both companies focused on operational simplicity, paying close attention to small details, and giving customers high quality products at low prices. However, ALDI differs in its extremely limited product range of just 700 items, compared to Walmart's 100,000 items. This extreme simplicity allows ALDI to generate high sales volumes per item and keep operational complexity very low. While many underestimate the importance of ALDI's limited product strategy, it has been key to their success.

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0% found this document useful (0 votes)
144 views13 pages

Is ALDI Really That Special?

The document discusses the similarities between ALDI and Walmart's business models and philosophies. Both companies focused on operational simplicity, paying close attention to small details, and giving customers high quality products at low prices. However, ALDI differs in its extremely limited product range of just 700 items, compared to Walmart's 100,000 items. This extreme simplicity allows ALDI to generate high sales volumes per item and keep operational complexity very low. While many underestimate the importance of ALDI's limited product strategy, it has been key to their success.

Uploaded by

lalasalih889
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 13

Wal-Mart’s founder Sam Walton once said: “Most of contribute to it.

ALDI shares this


is aldi really that special?

the values and the rules and the conviction: retail is detail: paying
techniques we’ve relied on have stayed attention to all the success factors over
the same the whole way. Some of them decades. That is the art, and that is no
are such simple common-sense old secret.
favourites that they hardly seem worth
mentioning.” Finally, Sam Walton had one guiding
principle: “I’m sure you’re sick to death of
ALDI founders Karl and Theo Albrecht it,” he said. “But I’m going to say it again
would have agreed with Sam Walton on and again anyway: the secret of successful
this - and many other core principles and retailing is give the customer what they
techniques. Sam was obsessed with detail. want.” ALDI concurs with this guiding
So were the Albrecht brothers. At Wal- principle, 100%. But there is one way in
Mart they say: ‘We are different’; ALDI which ALDI and Wal-Mart are poles apart.
says much the same. Sam Walton declared
‘we think small’ and referred to his Wal-Mart offers customers everything
‘simplicity concept’. Simplicity is one of they want to find under one roof at low
summer 2005

ALDI’s guiding principles too. Wal-Mart prices. ALDI offers only a very limited
makes a habit of trying things out to see if range. Consider these numbers:
they work; trial and error is the ALDI way • ALDI sells 700 items, generating a
too. Sam Walton and his managers knew turnover of US$44 billion
that there is no magic formula for success, • Wal-Mart sells 100,000 items,
vol. 5, no. 1

but that numerous small things generating a turnover of US$300 billion


journal

Is ALDI really that special?


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26

overview Dieter Brandes


Hamburg

Hard discounters represent a


major challenge to Europe’s
mainstream retailers and
manufacturers. But many still
fail to understand the secrets of
their success
This translates into: operational requirements,

is aldi really that special?


ALDI turnover per item: US$63 million • best possible qualities - measured
Wal-Mart turnover per item: US$3 million. against leading brands
• the lowest possible sales prices.
Every single one of ALDI’s items
generates high volumes of sales. Many of A limited product range
Wal-Mart’s do too. But many other Wal- ALDI’s success is the success of setting
Mart items sell at a much lower rate. The voluntary limits. For decades ALDI North
similarity of ALDI’s sales profile creates kept its product range down to 600 items. At
simplicity; Wal-Mart’s diversity creates present this figure has presumably grown to
complexity. This results in completely 700. ALDI South today still sells 650 items.
different strategies, organizations and
cost structures. As we’ll see, even the most Formerly, ALDI only sold items in what
astute business commentators still is called the dry product range.
underestimate the importance of this Refrigeration or special handling were not
difference. But first, let’s revisit ALDI’s necessary. Today, the equipment and
guiding principles. logistics necessary for refrigerated and

summer 2005
frozen goods present no problems. The
What makes ALDI tick? personnel do not require any special
ALDI was born out of a poverty regime of background knowledge about ALDI
post-war Germany when hard times and products either.
enforced frugality demanded the

vol. 5, no. 1
avoidance of waste. The end result of this When you have just 600 items, each
‘poverty regime’ was the ALDI concept. item is an individual and can be treated as
This was not a sudden invention. Albert such by everyone all the way up to the top

journal
Einstein once described his way of management. “People know” each
working as ‘I grope my way forwards’. individual item personally when there are
That’s what Karl and Theo Albrecht did only 600. Even starting from 2,000, and

© ecr
too. They literally groped their way certainly when the range goes up to
forward to their sales system, which can 20,000 items, managers at other retailers 27
be summarized by these five points: must resort to blunt instruments of
• a limited product range, quality assurance and product range
• goods which reflect basic consumer control. All business systems, the
needs, organization, communication, even the
• easily handled goods in terms of scope and type of business of meetings are

There is no magic formula of success, but numerous


small things contribute to it – paying attention to
small details over decades.
determined by the number of items in the ALDI’s success is not based on
is aldi really that special?

product range. Even Tengelmann with purchasing - as many competitors believe -


some 15,000 items must do nearly but on sales, on sales and close-to-
everything differently than ALDI. This customer policies: ALDI does not always
cardinal difference has not been properly get the best purchase prices in comparison
appreciated, even by business economists. with its competitors.

ALDI’s limited number of items enables Too many companies give too little
it to profit from those consumers who like thought to core questions. More important
their products simpler, more durable, than the question of purchase prices is
cheaper and plain, and who are tired of something else:
being confronted with new products. The “Why should customers shop in my store?
enormous variety of products on offer Why should the customer select my product?
today is quite a burden for customers.
Today, many customers are glad on This question - the core question for all
occasion to do without the enormous marketing and corporate strategy - applies
selection, if they can be sure that the in all companies and institutions, from
summer 2005

spontaneous choice from the shelf is a carmakers to hotel chains to symphony


sensible one. ALDI relieves its customers. orchestras. It is simply a question of
strategic direction, of a company’s
Focusing on basic consumer needs concept.
Ultimately in retailing, success is not
vol. 5, no. 1

decided by ‘buying power’ and purchasing However, many companies content


expertise. It is decided by marketing: the themselves with vaguely worded
ability to truly focus on customer needs. If statements such as “we want to offer good
journal

investment in purchased inventory (i.e. if products at reasonable prices”, which is


the value of purchased goods, the not an adequate answer. Many more
purchase price), is seen as a cost factor, companies indulge in all sorts of activities
© ecr

then it is by far the largest cost category and practices which have nothing really
28 in retailing. 60 to 80 percent is very to do with customer demand. Take the
common. But it would be wrong for attempt to tempt customers with special
companies to conclude they have made a discounts.
decisive contribution towards business
success if they secure respectable Purchasers and vendors meet and
purchasing prices. work out their annual programs.

The enormous variety of products on offer today is


Dieter Brandes is a
consultant and former
member of the ALDI
quite a burden for customers. Today, many customers
administrative board don’t want enormous selections.
Producers want to boost one item in range will not be eliminated;

is aldi really that special?


particular, and retailers comply in manufacturers paying if they want a new
exchange for a special payment. Or else, if item put on the shelves; and sales
a vendor wants to place a new item on interruption remuneration. If non-
retail shelves, he must come up with delivery or late delivery (missing items in
something imaginative to get retailers’ the shops) cause sales losses,
approval. Since retailers are always in compensation is claimed. But since the
need of money, they demand that causal relationship is very difficult to
manufacturers pay a certain sum to get prove and quantify, retailers go so far as to
their item listed. Since retailers support demand lump payments as compensation.
this item in a number of ways - they That’s on top of conventional discounts
present it on their shelves - money must such as cash payment discount. quantity-
be paid. These amounts are then put into related discount, campaign discounts,
the funds for outstanding achievements of promotional bonus, media-related
the purchasers. How can they prove how remuneration and so on. Thus, despite
successful they were? Whether any what is called the demand power of
specific purchasing price can be called a retailers, the retailers become the sales

summer 2005
success is anybody’s guess. Perhaps too departments of the manufacturers.
much was paid. But if the purchaser by
the end of the year has saved up a nice The consequences of such a retail policy
pile of money, then it is a success. Such are simple:
sums are even included in the annual • High advertising expense benefit +

vol. 5, no. 1
budgets. But the advertising expense weak mission = modest success
benefits reveal nothing about whether the • Low advertising expense benefit +
purchase price is generally “appropriate”. strong mission = major success

journal
And of course the vendors include such
extras in their budgets in advance. But manufacturers aren’t much better.
They feel compelled to give in to retailers,

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Retailers’ lack of real customer focus afraid that they might lose their business
shows up time and time again in the many contact. But the real reason is that often 29
ways they seek to compensate for their their products are similar to the point of
own lack of conceptual creativity. Some being interchangeable, and the use value
examples are: manufacturers being they have for the consumer is not very
required to pay contributions to make distinctive. In short, they have failed to
sure that an item already in the product answer the basic question: ‘why should

Retailers’ lack of real customer focus shows in the


ways they compensate for their lack of creativity, via
listing fees and over-riders for example.
the retailer have this product on his Of course all drive hard bargains. But
is aldi really that special?

shelves?’ All this is a product of poor what most experts mean by “purchaser
leadership and organization, and poor use power” is in fact “vendor power”: the
of employee creativity. ability to achieve high sales figures.
Vendor power is not the result of
Another example of this general lack of purchaser power, although purchaser
any overview is aggressive manufacturer power in this context can provide support.
promotional campaigns whose shop The main factors of purchaser power are
displays and eye-catchers clash with the different: sales concept, products,
store’s layout and upset business qualities, prices, locations, marketing.
organization, quite apart from the usual
over-supply of items which, after the Easily handled goods
campaign, end up in the store’s back It is often argued that “sales psychology”
rooms or are somehow squeezed onto the is the basis for ALDI’s decisions regarding
regular shelves. Such developments - merchandise placement. The interiors are
which have continued for decades - result kept so simple on purpose simply to create
from mistaken ideas about what the real the illusion of being cost conscious. This is
summer 2005

success factors in retailing are, and these wrong. ALDI does not focus on
have also led repeatedly to mistaken appearances. ALDI’s focus is on costs and,
“explanations” of ALDI’s legendary in addition, making the customer an
success. honest offer, without any “show”.
Customers are not supposed to believe
vol. 5, no. 1

ALDI does not pursue this sort of ALDI is low-price. ALDI is low-price. The
“discount policy”. The purchase price is purpose is not to suggest this. It is a fact
stated as net/net - after subtracting all the which customers experience when they
journal

discounts which have no interest themselves compare prices. Decorating the


whatsoever for the purchaser. ALDI buyers interior of an ALDI store involves no other
concentrate on essentials, specifically, criterion than the use of purposeful,
© ecr

their customer needs, on their company’s durable and low-cost materials. Shelves,
30 most immediate mission. Vendor lanes, and - if possible - even the length
conditions do not play any role at all in and width of the store itself should be
the product range strategy (while at determined solely in terms of logistics
ALDI’s vendor-oriented competitors this is (box size, pallet size, the maneuvering
often the only “strategy” they have). space needs for forklifts and similar
matters).

Vendor conditions play no role in ALDI’s product


range strategy. For many competitors vendor
conditions are the only ‘sales’ strategy they have.
In retailing it is common to place high- neatly into the cases without any wasted,

is aldi really that special?


price items or items with larger margins leftover space.
at eye-level, or the poorly calculated items
like sugar down low so that it is difficult The ordering procedure itself is the
for customers to pick them or even to find simplest one imaginable. As at Toyota and
them. At ALDI, on the other hand, other Japanese manufacturers who use
merchandise is placed on shelves and kanban systems it is based on: “If it leaves,
pallets in the stores solely in response to replace it.”
logistic considerations. Appearance is not
a factor. In the framework of finely tuned Quality comes first
ordering procedures, shelf space and ALDI always strives for lower costs, but
position are determined by weekly needs, never at the expense of quality.
item characteristics and delivery Everything ALDI sells is benchmarked
frequency. against leading branded products. As a
principle, when different qualities are
For ALDI, rational sales are more than a involved, purchase price differences are
mere slogan. When you enter an ALDI not the sole factor in the decision-making

summer 2005
market you can see what it means. Sugar, process. A higher purchase price is
flour, beverages, milk, laundry detergent accepted for higher quality.
and other items are presented for sale,
untouched, on the same machine-loaded Nearly 95 percent of all the items on
pallets as they were shipped out by the ALDI’s shelves are private-label, which

vol. 5, no. 1
manufacturer. All the other items are put however are often made by well-known
on pallet once and moved to their position brand makers such as Bahlsen, De
in the store. At that point it is usually just Beukelaer, Blendax, Trumpf, Nestlé or

journal
a matter of opening the box and the Unilever. No one else has pursued this
merchandise is ready for sale. None of policy so fanatically. Vendors know the
ALDI’s employees need to unpack ALDI quality requirements. They must

© ecr
individual packages or decorations. ALDI meet them. The best raw materials and
did not introduce refrigerated items, for excellent processing are expected. Since 31
example, until the refrigerator cases and the vendors do not have long-term
the cardboard boxes matched its contracts, ALDI can also immediately
requirements. The cases had to have terminate business relationships without
enormous capacity and boxes had to be the the need for interminable legal wrangles.
right size so that they could be placed Nevertheless, ALDI has rarely proceeded

In retailing it is common to place high margin items


at eye level. At ALDI merchandise is placed on shelves
according to logistics considerations.
so strictly that a vendor’s existence was The lowest prices anywhere
is aldi really that special?

endangered. This is why ALDI is not Of course the company’s basic principle is
interested in making vendors dependent to sell products at prices lower than
on its order quantities. Often an anywhere else, in contrast with many
additional vendor is tapped in advance. other retailers whose goal is to get the
highest possible prices without
Private labels require confident, endangering the company’s
knowledgeable consumers: quality and competitiveness. This pays in terms of the
price as rational arguments against the company’s standing in the eyes of the
irrational “brand” idea. ALDI customers customers.
do not need labels to boost their feelings
of personal adequacy. Consumers are very No one disputes the fact that ALDI sets
well capable of judging quality prices in the food retail trade. The market
themselves, independent of brand price is determined by ALDI. If the
advertising campaigns. Product value has purchase price drops, ALDI nearly
the priority. automatically lowers its sales price. ALDI
achieves its best values for prices by cost
summer 2005

There is hardly a competitor of ALDI cutting in all areas - with the exception of
who carries out such extensive quality wages and salaries which generally are
controls, at least in the course of my among the highest but, due to the high
professional life. When it comes to productivity of staff, generate the lowest
freshness, ALDI can hardly be beat. Its personnel costs. Higher wages are as much
vol. 5, no. 1

rapid transport and distribution system a part of ‘lower cost’ as anything else:
makes it practically impossible for creating a low cost structure depends on
competitors to offer fresher wares. the extent to which the company’s
journal

Reliable, uniformly perfect quality was management and its employees are
and remains decisive for ALDI’s success - prepared to and capable of working on
more important than any specific details.
© ecr

distribution system. A distribution system


32 can be watched, analyzed and copied. ALDI is also never stiff-necked or short-
Such a fanatic and no-compromise quality sighted in its quest to reduce costs. For
policy, however, requires a specific example, it never gave an “order” to
corporate culture and this requires people reduce cost category X by a certain
who think, feel and act accordingly. percentage. Cost reduction was never
forced. The basic ideas of value analysis

A distribution system can be copied. But ALDI’s


fanatic quality policy requires a specific corporate
culture and people who feel and act accordingly.
play more of a role. When value analyses matter of principle. Many believed ALDI

is aldi really that special?


are conducted certain business units or would sign such agreements to bind
cost units are examined against the vendors and somehow suck them dry.
background of their significance or Wrong. For ALDI the only thing that
necessity for business operations. What is counts is that vendors continuously
not needed can be eliminated. The supply high qualities, and of course, the
yardstick for cost management must prices must also always be competitive.
always be the strategy of the company. If anything is below par, there are very
Caution must be urged against cutting off simple sanctions. The vendor who
the “strategic branch” on which you are previously supplied, say, 20 distribution
sitting. If, for example, customer centers of an ALDI Group, loses perhaps 5
assistance is one of the company’s centers. Only in extreme cases - and these
important strategic approaches, then any all involve quality-related questions - does
personnel cuts in this area must be he lose them all. This principle of
carefully thought-out. In recent years distribution center allocation also enables
department stores have faced this ALDI to test out new vendors and expand
predicament: cut high personnel costs to their ordering.

summer 2005
the detriment of customer assistance?
ALDI also faces these dilemmas: how to Nor is there any intention of making
avoid long lines at the cash registers when any vendor completely or even
these lines are frequently only substantially dependent on ALDI. This
temporary? may seem like a good idea: it means the

vol. 5, no. 1
retailer can exercise greater influence on
Dealing with vendors: consistent and vendors or depress their prices. But this
fair would also make ALDI dependent on

journal
ALDI could not have achieved its current fluctuations in quality, internal problems
success without close working of all kinds in the vendor’s business up to
relationships with its suppliers. So how do and including capacity breakdowns. Even

© ecr
ALDI’s five guiding principles translate a collapse caused by the vendor himself
into the way it manages supplier could easily be blamed publicly on ALDI. 33
relationships? Under these circumstances it is essential
to make use of an intelligent alternative.
In contrast to a view often expressed in
the trade, ALDI does not conclude any For retailers it is basically more
long-term agreements with vendors as a interesting if the vendor market is made

Many companies indulge in all sorts of activities and


practices which have nothing to do with customer
demand. Special discounts, for example.
up of a large number and variety of partners would like to continue to engage
is aldi really that special?

companies. Each company can only exist in business in the future as well.
over the long term if their profit margins
are wide enough, so it simply does not The points I have listed below are from
make any sense to drive a partner into my experience the most important for
insolvency or - one step in that direction - successful negotiations with vendors:
to kill his appetite for business. This has • Drop what is known as the annual
been one of the most important issues on conferences. The end of the year is an
the agenda between manufacturers and accidental and random date. Issues
retailers for many years. Here too, ALDI should be handled as they arise and
has had a positive impact, in addition to negotiations should not have to start
its inflation-braking effect on the under the pressure of a deadline.
economy. Manufacturers and retailers could
The company is a fair partner: agree to periodic meetings for specific
• A price - once it has been agreed to - is product categories.
not open to ‘re-adjustments’ • In fact, every “annual conference” is a
• No discounts are demanded afterwards strategic conference. The purchaser
summer 2005

• No unjustified complaints are made holds discussions autonomously,


• Vendors are not ‘sucked dry’. bearing sole responsibility for their
outcome once management and
Improved and more successful purchasing have defined their strategic
negotiations and tactical positions. He makes the
vol. 5, no. 1

A number of ideas can be deduced from final decision alone.


ALDI’s relationships with its vendors for • Purchasers must not be given target
generally improved relations between margins before they enter negotiations,
journal

retailers and manufacturers. The current but rather conceptual ideas (e.g.
negotiating practices could be loosened up replacement of vendors, items or
and focus more on the facts. Putting on similar matters). A clear distinction
© ecr

the pressure and playing poker are not the must first be made between concepts
34 best approaches if people want to continue and conditions.
working together in the future. A good • Nearly every vendor’s sales can be
guideline for successful negotiating is increased by 20 to 50 percent. The
offered by the Harvard Concept whose question is whether this is really wanted
most important principle is that and how to go about it. At issue are the
negotiations are successful when both concepts, alternatives and options.

It simply does not make any sense to drive a supplier


into insolvency or – one step in that direction – to kill
his appetite for business.
Exhibit 1:

is aldi really that special?


Top of the list of cultural values at ALDI is asceticism. Doing without.
Here is an ALDI doing-without checklist.

✔ 1. No staff to relieve management of intellectual work

✔ 2. No controlling department to provide direction

✔ 3. No external market research

✔ 4. No work with management consultants

✔ 5. No budget forecasts

✔ 6. No scientifically cleaned statistics that reveal all

✔ 7. No scientific analysis techniques for all questions related to supplying the market

✔ 8. No customer surveys

✔ 9. No ISO 9000 or TQM

✔ 10. No sophisticated system of terms and conditions to squeeze supplier prices

summer 2005
✔ 11. No differentiated price policy by sales area or store area

✔ 12. No differentiated product mix from store to store

✔ 13. No complicated calculation methods for setting prices

vol. 5, no. 1
✔ 14. No games involving qualities to optimise profits

✔ 15. No highly complicated engineering for logistics

journal
✔ 16. No product placement in stores based on psychological analysis of shopper behaviour

✔ 17. No luxury in the offices, no top-of-the-range company cars

© ecr
✔ 18. No public appearances

✔ 19. No publicity 35

✔ 20. No acceptance of gifts from suppliers

✔ 21. No acceptance of invitations to dinner from suppliers

Asceticism – or doing without – is the most important


core characteristic of ALDI. It is top of the list of
cultural values. It goes with simplicity.
• Sales always have priority ahead of contracts in such a way that the
is aldi really that special?

margins. It is familiar knowledge that incidental effects can be turned into


costs and profit, in the end, can only be purchase advantages. The ways and means
covered by margins. But the basis of of doing this are many:
any business with a customer is sales. • A manufacturer with long-term, major
The main thought of the purchaser and orders, can be encouraged to modernize
vendor must focus on the interests of his production lines, to rationalize the
the customer, the consumer - anything manufacturing process.
else is short-sighted. • Elsewhere a vendor who sells most of
• Purchaser, vendor and conditions must his production to ALDI is convinced to
never be allowed to determine the drop advertising, on condition of a
product range. guarantee of purchase.
• Conditions must not lead to pressure on • But also less significant agreements -
volumes and quantities. The principle such as the agreement that deliveries
must be: the customer (who moreover can always take place in full trailers -
makes his own selection) makes up his make for additional purchase
own mind. Quantity scales and advantages.
summer 2005

discount rates rarely make sense.


• No agreements should be reached So it is not the purchasing conditions
which, at a later date, can only be alone which determine ALDI’s relations
adhered to by turning them inside out. with its vendors. A company which
• Find logistics cooperation and produces private labels needs the
vol. 5, no. 1

rationalization models. ECR Europe can confidence of the contractor. This is


be a source of ideas. usually developed over years of business
interaction. In the beginning, however,
journal

Long before an item is on the shelf in there is of course always a sort of


an ALDI market, the course is plotted to “coaching” by ALDI. This involves good
obtain the best prices for enormous quality levels and their precise definition,
© ecr

quantities. Negotiations are conducted package designs and sizes, as well as


36 which go beyond the usual limits of questions related to the vendor’s capacity,
procurement negotiations. The goal is to his ability to assure hygienic and reliable
realize a conception which is appropriate production processes.
for ALDI’s large-scale purchases. Because
ALDI purchasers want more than to get a Many new vendors already know what
good price. Their goal is to conclude ALDI expects. They ask colleagues and

Negotiations should focus on facts. Playing poker and


putting on pressure is no good if people want to
continue working together in the future.
they prepare themselves for a completely

is aldi really that special?


different sort of business relationship
than is otherwise customary in the trade.
One really important point remains - and
all ALDI vendors will confirm this:
renegotiations during which attempts are
made to upgrade conditions for deliveries
which have already been made do not
occur. ALDI is interested in the continued
existence of their capable vendors. The
relationships in these cases are nearly
symbiotic. But to some competitors
thoughts like these are foreign.

Summary
Companies should be capable of
developing their own business principles

summer 2005
in line with their own cultures. ALDI has
succeeded in doing this. Although ALDI
kept an eye on the competition, the
competition was never a source of
“benchmarks” for ALDI’s own practice.

vol. 5, no. 1
ALDI has always set its own course. Many
specific elements of ALDI’s business model
can be copied. But there is one thing that

journal
others find very hard to copy: a fanatical
and no-compromise corporate culture
focused on consumer value and supported

© ecr
by people who think, feel and act
accordingly. 37

Further reading
This article is an edited extract from the
author’s book Bare Essentials: the ALDI way to
retail success, Cyan/Campus, 2004

ALDI always set its own course. Many specific


elements of ALDI’s business model can be copied. But
its fanatical corporate culture cannot.
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

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