Theo Albrecht, who died last week, and brother Karl, created a pioneering grocery model. So what are the secrets of its success?

Hard discounter Aldi broke the mould when it emerged in post-war Germany in the 1940s. Brothers Theo, who died just over a week ago, and Karl, had returned from conscription and took over the running of their mother’s small grocery store in Essen.

Tuning into the post-war rationing mindset, the brothers set up Aldi - standing for Albrecht Discount - with the aim of offering good quality, staple products at low prices. The cost-efficient model they created took off, and Aldi soon dominated Germany.

In the 1960s the brothers divided the company into two branches, Aldi Nord and Aldi Sud, covering the north and south of Germany - reportedly because of a disagreement over whether to sell cigarettes - and Theo took the north and Karl the south.

The brothers then expanded globally and their combined companies’ sales now top E50bn (£41.6bn). Notoriously secretive, partly because Theo was kidnapped in 1971 and released 17 days later after a ransom was paid, the brothers never lost sight of the original cost-efficient format.

The no-frills approach - Theo reportedly used pencil stubs instead of expensive pens - has been key to Aldi’s success and aspects of its model have been copied around the world.

Retail Week examines 10 ways in which Aldi created a pioneering model and changed the face of retail.

1. Limited range

Aldi carries just 1,000 SKUs compared with more than 10,000 in a traditional supermarket. The limited range ensures that Aldi can maintain quality and keep prices low because it is buying the same product for the bulk of its 9,800 stores globally.

Retail Expertise managing director Michael Poynor maintains the “wonderfully simple” limited assortment discount model “is the key to Aldi’s success internationally”.

He says: “What has driven the international expansion is the operating model and that has meant it can offer good quality at low prices, which is the essence of most supermarkets today.”

One of the only statements Karl made publicly was in 1953, when he expressed his strong belief that low prices were intimately linked to the limited assortment. Planet Retail research analyst Matthias Queck says: “Aldi invented the limited range concept and the key motivation was to be able to increase volume negotiating powers with suppliers.”

The model has been replicated globally by retailers such as Germany’s Lidl, Carrefour’s Ed format in France, Danish retailer Netto and Turkey’s BIM. Warehouse clubs including Costco and Sam’s Club operate on similar principles.

2. Private label

About 95% of Aldi’s products are private label. According to Planet Retail global research director Bryan Roberts, the discounter was “pioneering in the way it developed its private label ranges in such a big way”.

He adds: “Aldi single-handedly created the private label model in Germany and continental Europe, and it has since been copied by other retailers such as Lidl.”

IGD senior business analyst Cecile Riverain says: “Aldi’s success with private label led to many other grocers developing their own ranges. When Aldi came to the UK, it sparked Tesco to review its private label range to create the different tiers it has now.”

More recently, when Aldi and the other discounters were winning shoppers in the UK in the depths of the recession, Tesco launched its Discount Brands range in direct competition, with the claim that shoppers do not need to go to stores such as Aldi for its private label products. Riverain points out that French giant Carrefour also created a discount range “as a direct reaction to the discount grocers gaining market share”.

3. Quality

Part of Aldi’s ethos is to deliver products of the same or higher quality than the leading brand in whichever market it is operating. The grocer is able to achieve this, as well as delivering low prices, because of its global buying power.

Aldi is so confident in its quality that it often does not stock leading brands in some territories, such as the US, where it does not carry Coca-Cola.

Poynor says: “There is often derision among Aldi’s competitors, rubbishing its quality because it is a discounter and has a very basic store format, but when they carry out blind consumer tastings they realise that the quality is excellent.” He points out that Aldi would not have been able to account for 13% to 14% of the German coffee market by selling bad coffee.

Riverain says: “Aldi’s philosophy is not based around the cheapest price but on the value equation”. That means “Aldi shoppers have a huge degree of trust in the grocer”. She cites Germany as an example - 70% of shoppers there perceive Aldi to sell products similar or better to their well-known brand competitors.

4. Supply chain excellence

Aldi’s limited number of lines means that its supply chain is “best in class” according to Roberts. He says that while the supply chain may not be high tech, “it is incredibly lean, with every product being a best seller, and therefore it has great on-shelf availability”.

The high volumes of each product line also mean that Aldi has good relationships with its suppliers. Queck says: “Aldi’s suppliers know where they stand and the relationships

are often long-term and built up on trust so it is generally a better partnership than traditional grocers. The high volume also means it often gets the freshest produce.”

He notes that the relationship means Aldi can be innovative in its supply chain. In Austria, for example, it was the first grocer to introduce a fully traceable product line for its dairy produce, whereby the product code could be inputted online enabling shoppers to see which farm it came from.

5. Recruiting the best

Aldi’s thrifty approach is the stuff of legend - one anecdote tells how Theo even managed to haggle with his kidnapper over his ransom and later applied for tax relief using the logic that it was a business expense - but when it comes to the recruitment of top managers, the grocer does not scrimp.

Aldi’s graduate training scheme is ranked third in the UK in the The Times Top 100 Graduate Employers, only behind PricewaterhouseCoopers and Deloitte. It offers graduates a £40,000 starting salary, rising to £60,000 after three years, as well as benefits such as an Audi A4, life and health insurance.

As a result, Aldi attracts the cream of the graduate crop. This year it received 12,000 applications for 50 jobs.

Poynor says: “Aldi knows where to spend money and its exceptionally high salaries means it gets great people, who often stay for their entire careers.”

6. Retail-ready packaging

As part of its cost-efficient model, Aldi was one of the early drivers of retail-ready packaging, whereby the pallets or boxes that products are delivered on by the supplier are also those on which they are displayed in store.

Roberts says: “Being able to put the pallets straight onto the shopfloor is part of Aldi’s brutal efficiency and the result is a basic store layout but one that fits its model and ethos perfectly.”

7. Promotional innovation

Alongside groceries, Aldi came up with the idea of weekly non-food promotions. Usually in the centre of its store, Aldi runs different promotions each week on such items as TVs, bicycles, sports equipment and satnavs.

The non-food products are again bought in bulk for all stores to keep prices low and sold on a when-it’s-gone-it’s-gone basis.

Queck says the tactic created a “bargain hunt atmosphere”. Shoppers often queue outside before a store opens and make a “mad dash” to secure the product on offer.

8. Keeping things simple

Aldi has never felt pressure to copy its competitors or try expensive ideas - it has typically stuck to what it knows best.

Queck says: “Aldi is innovative in that it doesn’t just dive into something because everyone else is doing it. One of its key principles is to refrain from adding any complexity, which often leads to higher costs.”

Aldi’s no-frills stores are basic, with a market-like feel, and it employs just two or three staff per store “which means customer service is not high on its priority list but that’s not why shoppers go to Aldi” says Queck.

Poynor points out though that Aldi’s status as a private company “is key to its success as it does not feel any pressure from shareholders to go into new areas and therefore keeps costs to a minimum with a winning formula”.

9. Operational innovation Aldi

has introduced various operational innovations as part of its drive to create the most cost-efficient model possible.

Such innovations include the trolley deposit system to avoid trolleys getting lost or stolen, which also means store staff do not have to collect them from car parks; it claimed to be the first German retailer to fit its stores with conveyor belts at tills; and it introduced packaging with several bar codes so that no matter which way the till operator held the product, the bar code could be easily scanned and no time was lost finding the code.

Another innovation - again cost-led - was to charge customers for carrier bags. “Nowadays charging for carrier bags is deemed green but Aldi has been doing this for years for cost reasons,” says Queck.

10. Last-mover advantage

While Aldi has frequently been innovative, it has also benefitted from being the last to introduce technology and therefore able to absorb the lessons learnt by other retailers before it.

Queck explains: “Aldi did not have scanners until 2001 and the store staff knew all the prices off by heart, but with the introduction of the euro this was no longer feasible so it looked into all the technology for scanners, which by then had been tried and tested by competitors. As a result, Aldi has one of the most state-of-the-art scanning systems of all the grocers.”

Another example is in-store bakery machines which are being tested at the moment by Aldi Sud in Germany. The machines are fully automated so do not require staff, but produce fresh bakery products. “Even Lidl’s bakeries are staffed in Germany, so Aldi has waited to find the right and most cost-efficient way of doing it before making the investment,” says Queck.

He adds: “Aldi generally spares no expense when it develops new technology, which many would not realise, but it will refrain for as long as possible, meaning it will usually pick the right systems.”