Why is Aldi so cheap?

I like Aldi.

It can be very very cheap. Aldi is selling this yoghurt at $6.99 for 18 tubs.

vaalia

At Woolworths it is $9.25 for 12 tubs. That’s 98 percent more expensive per tub.

Similarly Woolworths is selling lamb rack right now for $44.99/kg.

lamb rack

Aldi is selling it for $19.99/kg.

How can they do it?

Woolies and Coles are famously focused on the cost of goods, pushing their suppliers to sell more and more cheaply. While Aldi has less buying power, it obviously negotiates hard too.

But Aldi is famous because it is extremely tightly focused on costs inside its own business.

aldi method
These numbers made-up to serve as an illustration.

The savings at Aldi come from a lot of things – visible and invisible – they do to keep costs down.

THE CHEAP WAY

One of the most visible examples is making you pay for a trolley. To get one you must insert a gold coin, which is refunded when you return the trolley. That way Aldi doesn’t have to pay young people to hang out in the carparks retrieving scattered trolleys.

That’s just one example of how Aldi makes life a bit more difficult for customers, in order to keep prices down.

You may have also noticed that they make you pay for plastic bags. Aldi has been doing that since before the Greens political movement took off (coincidentally, also in Germany), simply because it saves money.

They have only 900 core products on offer. Every item a supermarket stocks costs them money in managing supplier relationships, in accounting, etc. The small selection means small stores, which means less rent.

Similarly, you may have noticed that Aldi doesn’t have an “8 items or less lane” at the checkout, saving on staff. They also make sure products have multiple barcodes or enormous barcodes, so the check-out person needn’t fumble and fuss to scan the item.

aldi rice crackers
baaaaaaaaaar coooooooooooooode

Aldi often employs only two or three staff at the entire store. The guy with the mop could easily be the assistant manager. (They pay those few staff very well however, with assistants getting $23.40 an hour, and assistant managers $76,000 to $84,000.) The stores are open less than 12 hours a day (8.30am to 8pm), however, so Aldi spends less on labour and lights, etc.

Those are just the things you probably already noticed. There are also less visible things Aldi does differently.

They forced pallet-maker CHEP to invent a “multi purpose beverage tray” that can go from the factory to the truck to the supermarket floor without being unpacked. It can store 1.25L bottles or 2L bottles.

MPBT

You spend less on shelf stackers if you don’t need to stack shelves.

Aldi also operates on a Just-in-Time system. Storing inventory is a big cost for businesses. Having goods arrive right when the previous batch runs out means Aldi spends less on behind-the-scenes space, and has less money tied up in owning stock.

Aldi also makes sure cereal packets, etc, are full. The trend to sell half-empty packets to convince consumers they are getting a lot when they’re not is incompatible with Aldi’s hyper-efficient supply chain. [source]

One other invisible innovation is especially welcome…

Unlike the major companies’ incredibly annoying jingles, you probably don’t remember seeing an Aldi TV ad.

Only a handful have gone to air in Australia – even having TV ads is pretty radical for this company. In fact, the only public statement company owner Karl Albrecht ever made was this one, in 1953:

“Our advertisement is the cheap price.” [source]

BROTHERS GRIM?

Aldi has been around since Albrecht brothers Karl and Theo took over their father’s store in Essen, Germany, in 1946. The name stands for Albrecht Discount and the thirst for efficiency goes to the very heart of the business. The brothers were famously ruthless, according to this article in German newspaper Der Spiegel.

“High-ranking executives would dig old pencils out of their desk drawers whenever one of the brothers paid them a visit, just to avoid causing any suspicion that they were wasting office supplies.”

Aldi’s maniacal focus on prices has had spill-over effects in Australia. An investigation by the ACCC found that prices at Coles and Woolworths were lower when an Aldi store was nearby.

Sounds good! But Aldi’s effect has been more complex than that. The lower prices at Coles and Woolies have caused problems with suppliers. And the deluge of home-brands those big supermarkets now own can be traced back to Aldi’s entrance into the market.

This clip from the excellent Mad as Hell shows just how the home brand revolution is working out:

Aldi must bear some responsibility for that. But it never had real brands, so it can’t be found guilty directly.

Reports suggest Aldi treats suppliers better than the big two. Could it be that having stable, simple supplier relationships is more cost-effective? Unlike the big two supermarkets, Aldi refuses to charge suppliers for shelf space and boasts it has very simple terms with suppliers, unlike Coles and Woolies.

PROFIT MOTIVE

Aldi claims it wants “to suck the profitability out of the [supermarket] industry in favour of the consumer.”

That’s pretty radical for a business in the current era. Most businesses are ultimately about shareholder value, not consumer value. It is likely Aldi’s claim is marketing spin. Likely. But not certain. Aldi is not a publicly-owned business, and if it wants to pursue goals other than pure profit maximisation, it absolutely can. Giving up on profits would certainly help explain the low prices!

The brothers who founded Aldi were famous for being billionaires – the richest in Germany. Perhaps their views on the merits of such wealth changed after one was kidnapped and forced to pay a ransom in 1971? It seems unlikely given the drive with which Aldi has expanded across Europe, the USA and Australia. And with the passing of the last brother in 2014, Aldi is free from their direct influence.

If Aldi changes, or makes a mis-step, it need not be the end of German discount retailing in Australia.

Lidl is ready to open stores in this country. Lidl is even older than Aldi and has reportedly opened an office in Australia and registered its business name. In the UK it has proved even more popular than Aldi, with a business model very similar to the Aldi model.

Under the pressure of a bit of direct competition, Aldi might become even cheaper.

Shoppers like me will rejoice. But whether that is a good thing will continue to be debated. Can supermarkets be run with even fewer staff? Will rumours of widespread unpaid overtime intensify? Might Aldi be forced to tighten the screws on suppliers just as Coles and Woolies have? Is there a point where your yoghurt and lamb is too cheap? Or is that idea a middle-class affectation?

Published by

thomasthethinkengine

Thomas the Think Engine is the blog of a trained economist. It comes to you from Melbourne Australia.

7 thoughts on “Why is Aldi so cheap?”

  1. Great post. I have this discussion regularly with people. One big thing you missed is the brands. ALDI has a few, but most products are internally branded. The big food brands like Kraft, Mars etc don’t get a cut in the supply chain – and removing their cut removes all the advertising and marketing that goes with it.

    The weekly specials are another thing. I’ve heard on the grapevine from pretty well informed supply chain people that one factor in getting those products cheap is the credit conditions and turn around. Basically, they get the products on Wed, and they are all sold by the following Wed – not only not wasted storage time, but they may not have to pay the suppliers till the end of the month – they can sell then buy.

    All I can say is that it is about time the competition arrive in the Australian supermarket industry.

    Liked by 2 people

    1. The economics of those weekly specials is something I wanted to discover but there’s very little about it out there. Are they all purpose made? Or are some end-of-run stuff that didn’t sell elsewhere?

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  2. Marketing cost is low also thanks to some sneaky moves. Copy packaging of well recognised brands is plentyful. That’s a smart approach: be an up-close-follower or changing a well-known brand name by 1 or 2 letters is an innovative efficiency measure.

    Their website is pretty slick and quite useful to ever attract the consumers with their never ending special specials.

    I know it is a bit further away from economics but overall quality of products is good and that’s why people – like me – go back… often (try their vaccuum sealed scotch fillet). Less products means less time spent in the aisles, with a basic 2 choices approach: very cheap and descent quality or cheap and good quality. It’s even color coded for the fairtrade organic crew oriented throughout the shop.

    The only sad news reading through the lines of your post is that they will never do home delivery, and that’s a bummer.

    Lidl – that is widely spread in France – has a more drastic approach. It is a bit like Ikea but without the display areas. Straight to the cold and storage room.

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  3. I love Aldi. Their food products are almost always very high in quality. The low price and high quality has been enough to make it our main grocery store for many years now. Their constantly changing fake brand names, aping those of the huge global conglomerates, also provide us with pleasant satirical humour while we shop.

    And on top of that, in recent years I’ve read a number of articles which suggest very strongly that Aldi also treat suppliers much more fairly than the Big Two do, e.g. this one:

    http://www.smh.com.au/business/suppliers-rate-aldi-above-woolworths-and-coles-20130305-2fidz.html

    Just last week on Sean Micallef’s “Mad As Hell” there was a really great, and quite funny but very sad skit on the subject of how the major supermarkets treat the farmers:

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