Aldi is notoriously close-lipped about its strategy. From its earliest days, the corporate structure has been designed to avoid requirements that it publish its earnings information or details about how it functions. But as the German discount retailer continues to grow, spreading across the globe, some outsiders have figured out at least a few of the tactics that have made it such a success.
It begins with cutting costs. The Albrecht brothers, the company’s founders, have been described as obsessive when it came to reducing costs, across the board. Employees were expected to reuse scrap paper and turn off office lights on sunny days—decades before such ideas became popular pursuits of the environmental movement.
Although those elements were important, they were not the key to cutting costs though. That key comes from limiting the assortment in stores, severely and aggressively. Aldi’s stores stock, on average, 1300–1600 items. By way of contrast, conventional supermarkets tend to carry 20,000–50,000 products, while a Walmart Supercenter might have as many as 120,000 items on hand. With the belief that “Nobody needs 50 different types of toilet paper,” Aldi strictly limits its assortment.
In so doing, it can devote more attention to ensuring that the products it stocks are of high quality. It performs constant quality checks and frequent taste tests, so that even when the prices are absurdly low, the quality of the products is enough to attract shoppers. People with less disposable income like Aldi because they can get what they need at a low price; people with more income still shop there too, because they can get great products that likely are not available elsewhere. One poll of German consumers thus indicated that 95 percent of blue-collar and 88 percent of white-collar workers shopped at Aldi.
With the limited assortment, Aldi also keeps its stores smaller, rather than having to invest in massive, warehouse-style locations. Such operations come at lower costs, but they also enable the retailer to close locations that might be less profitable and find alternatives more easily than big box competitors can.
Such single-minded pursuit of cost cuts means that its prices are substantially lower than virtually any other grocer can achieve. A market basket analysis showed that Aldi came in 17 percent below Walmart on a collection of frequently purchased items. It also has meant persistent growth, such that the company plans massive expansions throughout the United States, enough to make it the third-largest U.S. chain (behind Walmart and Kroger). Will American shoppers embrace the aestheticism of Aldi in the same way that its German home market has? Most evidence is promising—including the retailer’s proven ability to sell a 12-pack of diet cola for just $2.25.
Discussion Questions:
- Perform a comparison of Aldi, Whole Foods, Costco, and Kroger, and answer the following questions:
- How do they compare on variety versus assortment?
- How do you expect their strategic profit model to work?
- Do you expect Aldi to be successful across the United States? Why or why not?
Source: Zeke Turner, The Wall Street Journal, September 21, 2017