Little is known about the notoriously secretive hard discounter, so Liz Hamson tracked down a former insider to quiz him on the secrets of its success and ask whether he thinks the formula will thrive in the UK

Most of the time, Jessica, Sarah and Hermione are too busy being ladies who lunch to demean themselves with the grocery shopping - and after all what are au pair girls for? But the first Monday of every month, one of them ditches the designer togs in favour of something decidedly more low-key and heads off to the supermarket to pick up groceries for the group. They agree that it’s quite fun trying to mingle with the other shoppers in the hunt for some real bargains, but it’s not something they want to advertise to their friends. Why not? Because it “wouldn’t be the done thing dahling” to confess they frequent the aisles of hard discounter Aldi.
In the UK, the German store is still very much the domain of the low-income shopper. Attitudes are slowly changing as they have in Germany, where you will see a Mercedes parked alongside a Lada in an Aldi car park and more affluent shoppers openly boasting about the quality of the champagne. But there is still a degree of stigma attached, and that - along with the fact that Tesco pre-empted the hard discounting drive into the UK in the early 1990s - has been widely interpreted as limiting the potential market for the “pile ’em high sell ’em cheap” retailer.
As for how Aldi hopes to crack the problem, the women’s secrecy tends to mirror that of the company itself. However, last week at the Breaking the Rules CIES marketing forum conference in Amsterdam, former managing director Dieter Brandes gave a rare insight into the way the organisation works and urged delegates never to underestimate the seductive combination of the chain’s minimalist strategy and a buying power that experts say exceeds Wal-Mart’s by up to a hundred times.
Theo and Karl Albrecht, who founded the company in 1948, recently stepped down from their lead roles as chief executives of Aldi Nord and Sud respectively, with Theo’s sons taking over Aldi Nord, and Ulrich Wolters and Norbert Podschlapp running Aldi Sud.
Aldi has become the biggest hard discounter in Europe with over 6,000 stores, but the new management follows the same philosophy of keeping things simple, says Brandes, who was with the company from 1971 to 1986 and currently works as a consultant.
“Aldi doesn’t have a lot of rules. The reason it’s such a success is the culture of simplicity. It’s not because of low prices but the clearly defined company culture. Customers understand it.”
Just as important, he says, with a laugh: “Even the managers understand it.”
Epitomising this simplicity, the Aldi model is based on providing high quality products - mainly exclusive labels - at the lowest possible price which it achieves by offering a limited range of between 600 to 800 SKUs in the most basic of shopping environments.
Brandes, who describes Karl and Theo as “down to earth” but “fanatical about detail”, concedes that people struggle to understand the company because of its unusual structure.
But, he says, the fact that it is more collaborative makes it simpler.
“In Germany, the brothers worked with 65 regional entities that each have accountability. Some people say this is stupid because you lose synergies. But it allows employees to use their creativity.”
Aldi, he says, is like Toyota, in that it makes a point of doing things differently. He also likens it to Google in that people hear about it through word of mouth and “it’s something people trust”.
That certainly seems to be the case in most countries where it has a presence. M+M Planet Retail says the company produced a £24.8bn turnover in 2002. While most German retailers had negative turnovers in the first year of the Euro, Aldi’s increased by 15%. And it is the hard discounters who continue to enjoy rapid growth in Germany.
Yet, claims Brandes incredibly, Aldi does not set annual financial targets. “They have no budgets, no annual plans. Why on earth do they need them? Budgets are just toys for top managers. Budgets are one of the big money wasters.”
He adds: “If a product belongs in the range, let’s see the turnover. They are not interested in profit, only whether the product fits into the range and you can really only see that in the turnover. The first target is whether it fits in.”
Aldi’s asceticism extends beyond its finances, he adds. For instance: it has no central marketing department.
Instead it simply asks itself what basic products consumers want and then stocks them initially on a trial basis. It can take a long time to secure a listing - in Aldi Nord it can take up to a year but when the listing is achieved, the foundations for a strong and enduring relationship with the supplier are there.
So much so, says Brandes, there are no annual negotiations with suppliers. “Some have not been into Aldi for two years or more - they’ve nothing to talk about.”
Several German suppliers at the conference attested to the strength of their relationships with Aldi. However, while this appears to be true of its exclusive label suppliers, which generate around 98% of the chain’s sales, it has been a different story with branded suppliers. In March 1999, the retailer removed branded grocery and ceased trading with leading suppliers such as Nestlé and Kellogg. Since then it has had an on-off relationship with Kellogg which in March 2000 started to provide own label cereal to Aldi, but stopped in 2001.
The number of major manufacturers discreetly supplying Aldi is much higher than people realise. For instance, its highly recommended champagne is rumoured to be surplus stocks from prestigious French vineyards. But it remains the case that many suppliers are reluctant to be openly associated with Aldi for fear of jeopardising their relationships with other retailers.
That said, the limited range of SKUs sold at Aldi means that the few suppliers it does work with are fiercely loyal. It also means that Aldi can leverage impressive buying power. Brandes drew gasps from the conference delegates when he revealed it had 30 to 100 times the buying power of Wal-Mart, thanks to its limited range which meant it generated much higher sales per item stocked.
As for the competition posed by the global number one, he says dismissively: “It’s a big store like many others.”
Some might question such blind faith. The German retailer may be doing well in its heartland, but analysts suggest that if it sticks to the hard discount format, it has limited growth prospects elsewhere. In the UK, which it entered in 1990, the outlook is not improved by the fact that it faces
competition not only from the hard discounting tactics of chains such as Asda/Wal-Mart and Tesco but also from hard discounters such as Netto and Lidl. Over the last two years, Lidl has stolen a march on its German rival with an aggressive expansion programme in the UK. It has also doubled its advertising spend and broadened its range, moves that many analysts see as critical if the discounters want to compete successfully with the entry price ranges - or hard discounting as it has been described - of Asda and Tesco.
But Brandes is unperturbed by the competition. It is logical for Lidl to take a different approach, he says, adding: “In the UK, Aldi is taking a step-by-step approach. The system is working: why wouldn’t it? Lowest prices depend on limited range. Lidl has always been in more stores than Aldi but it only gets 50% of the average store sales that Aldi does.”
Brandes believes UK consumers will realise Aldi is not cheap and nasty, but cheap and high quality, as they have in Germany. Consumers are certainly beginning to take notice of its recent clutch of awards for a range of products including wines. Its attempts to appeal to a more upmarket consumer with 39 new look stores boasting wider aisles, new fresh lines, 700 SKUs and a healthy range called Balanced Lifestyle are also expected to pay off.
The one anomaly in this portrait of a simple company is Trader Joe’s, the US chain Brandes was responsible for acquiring in 1979. Some believe the only non-discount format in the Aldi portfolio should be ditched while others argue that for Aldi to really crack the UK market, it needs another non-discount chain.
Brandes says that the likelihood of either happening is remote and that Aldi is happy with its UK strategy. He adds that although the company is highly focused, its finances are bolstered by a lot of shares in other companies, like its 10% stake in US retailer Albertson’s.
In fact, the only note of caution Brandes sounds is over non-food offers like last month’s one-off sale of computers in Germany. “There’s a limit to what they can do with non-food. They are on the edge of the concept,” he says. “It introduces risks over quality that aren’t there with food and it is more complex.”
So Brandes returns to the core message: keep it simple. Sceptics point out that the philosophy will come under huge strain if it moves, as expected, into the hugely challenging Chinese market.
But, insists Brandes, as long as the company “does what is necessary rather than what is possible”, it will slowly but surely win over shoppers like Jessica, Sarah and Hermione. As the former insider says: “What Aldi is doing in principle has nothing to do with discounting. It has to do with trust and the consumers trust it.”