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?

Is a lack of competition causing inequality in Australia?

When I started studying economics I was 17. Young enough to be arrogantly skeptical of everything I heard. One of the many questions and concerns I had as I chomped through the stale bread of first-year economics was why we would believe that firms in competitive markets would put all their efforts into producing at lowest cost, when they could instead put their efforts into deterring competitors.

What was assumed away in the basic competitive market theory we were learning was that firms will fight hard to protect their space. Few firms operate in the unrestrained markets where they live and die red in tooth and claw. Far more operate in spaces where competitors are kept at bay, by owning a key resource (Telstra, Rio Tinto) or by making sure regulations operate in their favour (Woolworths, Commonwealth Bank). Their operations are run with an eye on costs, sure, but also with an eye on the competition.

Competition matters. Western countries run relatively unfettered capitalism because the prediction of competitive market theory is that capitalism will deliver more happiness, more efficiently. But competition is a key input to that theory. If competition falls short, we must question whether relatively unfettered markets are serving us best.

Some new research from the United States shines an important light on competition.

How America Became Uncompetitive and Unequal is a Washington Post op-ed that summarises a great body of work from non-partisan think tank the New America Foundation. It outlines how mergers and market power see prices pushed up and looks at how firms use their power to suppress workers’ wages.

“While dwindling competition hurts the vast majority of Americans, for the well-off it often proves a path to huge payoffs. Indeed, it has even become a basic formula for successful investing. Goldman Sachs in February published a research memo advising investors to seek out “oligopolistic market structure[s]” in which “a smaller set of relevant peers faces lower competitive intensity, greater stickiness and pricing power with customers due to reduced choice, scale cost benefits including stronger leverage over suppliers, and higher barriers to new entrants all at once.” Goldman went on to highlight a few markets, including beer, where dramatic consolidation over the past decade has enabled dominant companies to use their market power to extract more from suppliers and consumers — and thereby enrich investors.”

In Australia, competition policy has flickered through the news like a shooting star in the last few weeks, with a warning from ACCC head Rod Sims that privatisations are creating uncompetitive scenarios; and a Wikileak that suggests Australia’s financial sector would be exposed to competition if Australia signs a new Trade in Service Agreement. But we should wish on that shooting star, because competition is more important than ever.

“The lack of competition in America inhibits dynamism and risk taking. A New America Foundation study shows that the number of job-creating businesses that Americans start every year fell by 53 percent between 1977 and 2010, when measured as a proportion of the U.S. working-age population.”

I’ve dived into the ABS figures to see what Australia looks like on the same issue. We don’t have as much historical data as America, but the numbers are just as striking. While Australia is home to ever more businesses, the number of businesses per person has fallen from nearly ten to closer to nine.

Business numbers

The explanation for this is in the willingness of Australians to open businesses. A decade ago, 900 new businesses were registered every day. Now it is under 700.

Bu
Bu

This is not necessarily a bad thing. If people can have employment without risking their house on a business idea, then perhaps that’s a good thing. Perhaps something has changed in the economies of scale that mean our economy runs on fewer bigger businesses now.

But the coincidence of rising inequality(1, 2) and higher market concentration makes the application of vigorous competition a huge priority for Australia. If rising inequality is explained by markets becoming more cosy than competitive, that is something we should act on as a matter of urgency.

Competition is something both left and right should be able to get behind. The only people who support market power are plutocrats who grow fat on the cream churned up by insufficiently competitive systems.

Monstered Trucks: Are food vans history?

I love Melbourne’s food trucks.

Image

In theory.

In reality I went to the Taco Truck one time when it was parked in Fitzroy North, not so far from me. I felt like I was getting ripped off paying $12 for three little tacos and left hungry.

But today, shock! A report suggests the whole food truck movement is coming apart at the seams. Melbourne now boasts 52 food trucks, Good Food claims. Seven are for sale according to the story. (I could only see two, including this coffee van for $179,000.)

ImageThe report follows a series of articles in The Age in which they claimed Brunswick Street was a “struggle street”. The same journalist, one Alana Schetzer, wrote that story, scraping together 13 Brunswick street venues that had closed in a four year period. In a street that must have a hundred eating places, that’s actually pretty good going.

This latest story does not suggest the death of the truck. Far from it. 

If you look at the statistics for Victoria, they show a healthy scene is driven by fierce natural selection. There were 9100 cafes and restaurants operating at the start of the most recent financial year for which there is data. 1560 closed their doors. 1930 opened up. 

Image
Like a phoenix. From the ashes of one hospitality dream rises another.

Victoria also had 6700 take away food shops. 1220 closed and 1210 opened.

What’s happened with food trucks is simply the maturation of the scene. Next, the weakest competitors will be replaced by savvy operators with actual hospitality experience. Jacques Reymond isn’t doing anything, for example.  The next food truck could be a Rolls Royce.