Learning from Aldi

Much of our time at Masters Invest has been spent on reviewing a couple of key things - Good Companies, and Investors and Business people who have stood out from the crowd; those few who have made a name for themselves through their innovative investment strategies or business practices, and the enviable track records they have created because of them.

And standing out in Retailing is as difficult as it is in the Airline Industry. Few have done it, and even less have consistently done it well, but one of those is a brand name that’s known globally.

Aldi.

I recently read a fascinating story on ALDI authored by Xan Rice in the British newspaper, The Guardian. The Aldi name, which is short for ‘ALbrecht DIscount’, was the brainchild of two German brothers - the late Karl and Theo Albrecht. From humble retailing beginnings in 1946, the brothers, through trial and error, developed one of the most successful retailers in the world. The company has an estimated worth approaching $50b.

What stood out to me in the article were the similarities between ALDI and the other great companies we have studied; a decentralised structure, above market wages for employees, a win-win mentality, continuous innovation, promotion from within, a long term horizon and a strategy based on simplicity. In fact it should be no surprise to you to learn that so many of the unconventional characteristics that define ALDI are also found at Berkshire Hathaway. These include things like simplicity, rigorous decentralisation, no annual budgets, no consultants, minimal head office, freeing up subsidiaries to focus wholly on the business [as opposed to appeasing shareholders] and a philosophy of treating others as you wish to be treated.

The article talks of the advantages of taking a long term view; a competitive advantage public companies often can’t compete against.

“Aldi, which is still family owned and unburdened by the short-term pressures for profits faced by its stock-market listed rivals, has changed the way we shop.”

“The best way to fight Aldi early on is to slash prices, but few bosses of public companies are happy to accept lower profits, and thus lower bonuses, by pursuing long-term strategies.

Most other companies don’t have a 30-year view – or even a five-year view.

Xan Rice’s article referenced a book called Bare Essentials - The Aldi Way to Success, written by Dieter Brandes. In the book Mr Brandes, a 14 year ALDI veteran and member of the company’s administration board, reveals how this highly secretive company has achieved such phenomenal success over the last 50+ years. Eager to learn more about ALDI, I ordered the book and read it over a weekend.

At the beginning of the book Mr. Brandes makes an important observation:

Quantitative data can form only a limited basis for comparing companies and is not very helpful. It should be much more important for competitors to think about the purpose and goals of their own businesses.”

Having finished the book, I realised it’s largely the qualitative factors that define ALDI’s success. The keys to ALDI’s prosperity won’t be found in a spreadsheet.

ALDI’s success is driven by its DNA, which is wholly unconventional in nature. Without the benefit of Mr. Brandes book, gaining an understanding of such a business demands the curiosity to keep asking ‘why?Channel checks and taking the time to think are prerequisites.

With my newfound knowledge of the business, I could see why ALDI’s supermarket competitors, with their much wider and more expensive branded product range, lower product turnover, relatively inefficient operations and inconsistent focus struggle to compete. Over the years, ALDI has crept up on them. ALDI is all in. And unless ALDI’s competitors are prepared to start afresh, which isn’t feasible, their future is likely to be challenged.

I’ve included some of my favorite quotes below. You’ll be familiar with most of the sub-titles from previous posts on other success stories we’ve analysed.

Keep it Simple

“Those imitators who tried to copy ALDI apparently ran into the problem described by the poet Marie Ebner-Eschenbach: ‘Most imitators are attracted by what cannot be imitated.’ The problem was that ALDI was much more than just a marketing concept. It was founded on simplicity.”

“The case for customer orientation appears to be self-evident and simple - customers’ needs are the obvious focus for company strategy. The problem is that few people are good at sticking to what is simple.

“ALDI was and remains a success because of its focus on simple issues.”

“The success of ALDI in inseparably linked to the simple design of systems and processes. The path of ‘fanatic simplicity’ is always the more intelligent one.”

“ALDI never had a mission statement and never needed one. The reason, in my opinion, is as clear and simple as the company’s goals themselves; the goals of lowest prices and best quality are simple, understandable and sensible.”

The simpler an organisation is the better it can perform. Simplicity requires less management capacity - at least in terms of quantity.”

ALDI won its enormous competitive lead with its principle of simplicity, with its rigorous approach, and its work on details. ALDI was able to make use of the time which competitors kitted themselves out with rigid organisational structures, looked down arrogantly on the newcomer, and maintained and expanded their complexity.”

“One can only repeat ‘back to the basics’, or ‘keep it simple’. An independent corporate culture with good organisational and business principles, focused on the core question ‘Why should the customer shop in my store?’ will deliver solutions and positive developments.”

Commitment to Principle

The original concept remained, in essence, the same over the decades - changes were confined to incremental adjustments made in response to a wide range of internal and external developments.”

Commitment to principle is the quality that provided the foundation for Aldi’s expertise.

Customer Focus

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“The customer pays for and finances everything. He pays the salaries, he pays the suppliers’ bills, and he pays taxes. In addition, he also - it is to be hoped - contributes to profits so that owners and shareholders can get some ‘fun’ out of their efforts.”

Improve value to the customer instead of merely concentrating on increasing profits”

ALDI’s success is based largely on simple and committed customer orientation. I do not remember seeing anyone, in all my years at ALDI, put profits or operational efficiency above the interest of the customer.”

“ALDI adheres to the principle of offering good or even the best quality at the lowest possible price. Customers can trust the offer. They come to know shopping around for a better price would be pointless.”

“ALDI is something of a customer trustee. It never wants to mislead the customer: what you see is what you get.”

“As a principle, ALDI takes back anything that the customer does not like or that is not in perfect condition.”

“ALDI’s commitment to its goals - all of which are underpinned by a strict faith in customer orientation - is consistent down to the smallest details. That is why it is different from the opposition.

Close-to-customer procedures are much more important than the painful exercises which take place at headquarters in an effort to get control over the reams of data.”

ALDI’s success is not ultimately based on purchasing - as many competitors believe - but on the selling-out side, on its sales and customer orientation strategies.

ALDI puts together its product range based on its own considerations and, primarily taking into account its own customers’ needs. Suppliers’ terms and conditions do not play any role at all in the product range strategy, while at their supplier-orientated competitors they are often the only ‘strategy’ they have.”

Touch the Business

What does the customer want? How can we find out? For a start, the senior manager has to come down from his Ivory Tower and visit his own stores. Market research and Nielsen are not very helpful. Tests, surveys, listening, observing and sensitively stepping into customer’s shoes - being one’s own customer - are what help.”

Low Prices

“Customers are not supposed to believe ALDI is low-price. ALDI is low-price.

“The company’s inbuilt principle is to sell products at the lowest prices possible. It was never a goal to get the highest possible prices allowed by the competitive environment.”

Every price is a long-term price. The prices of our items only change in response to changes in the purchase prices.”

“Our only consideration in pricing a product is how cheaply we can sell it. Not how much people will pay for it.

Culture

The contribution ALDI’s corporate culture has made to its success should not be underestimated.

Corporate culture is the key to success. ‘What is essential is invisible to the eye’. This observation by Saint-Exupery is probably the best way of summing up ALDI’s secret. What is visible - store decorations, product ranges and prices - have been easily copied by competitors. It is the invisible that has determined ALDI’s success. To understand the company, you must understand the essential defining characteristics that lie beneath the surface.”

“A
corporate culture feeds on examples and role models, on the special ‘characters’ of the company, especially the founders and owners. Theo and Karl Albrecht are just such ‘characters,’ standing for the corporate culture they endorse. ALDI is decisively shaped by its founders, and this is probably why attempts to copy the company have been doomed to failure.

Owner operated companies generally start small and take many years to mature. A culture which is largely determined by an owner cannot be easily copied.”

Unconventional

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“If anyone were to ask why ALDI’s competitors still have not decoded ALDI’s secrets: Everything which ALDI did contradicted the assumptions and convictions of German retail managers. ALDI does everything differently from all the others.

“Although ALDI always kept an eye on the competition, the competition were never a source of ‘benchmarks’ for ALDI’s own practice. ALDI has always set its own course.

No Budgets

“There is hardly a manager or corporate executive today who can imagine working without annual or departmental budgets. Yet budgets and forecasts are not necessary. ALDI has proven it.”

Tone at the Top

To reinforce a specific culture in a company, the role models and the examples set by owners and managers are very important.

Theo Albrecht is known by everyone as someone who turns off the light when he enters a room to save on electricity if - in his opinion - there is enough light without it.”

“There has never been any attempt to ignore or evade statutory regulations. How can you expect your employees to behave correctly if you set a poor example?

Consultants & Experts

ALDI never spent any money on market research. ALDI people thought about their customers needs and then pursued a suck-it-and-see-policy. They acted on their feel for what customers might like, and never paid for expensive research.”

“Given that, like Einstein, the Albrechts preferred to ‘grope their way forward’, it is no surprise that ALDI operates completely without consultants - there are no management consultants, no market researchers, no advertising consultants.”

Innovation & Experimenting

Trial and error is the ALDI way.

“The ALDI strategy was the result of a dynamic process, driven by intuition and decisions whose consequences were not always foreseeable.”

ALDI has developed a system that allows three pallets to be transported simultaneously by forklift trucks, In a co-operative effort with suppliers, ideal box sizes were established, eliminating the frequent need to cut boxes.”

ALDI required its suppliers to apply the bar-code to the packages at three or four different places, enabling scanners to register the items faster.”

Each effort, each solution is a manifestation of the guiding principle and an endorsement of the corporate values of the company, waste avoidance and extreme cost consciousness.

ALDI people are doers. Everything is tried out as fast as possible; they don’t get tied down in endless, in-depth analysis. There could hardly be a better driver of the innovation so frequently lacking in business than opening up the opportunity to invent and try absolutely everything that could serve the company’s objectives.”

New products are piloted in ‘three stores’. This avoids burdening the whole organisation with a possible flop.

A by-word at ALDI is the ‘three store test’. These tests are used to try out the potential success of new items or changed package contents and the like. This kind of test tells you fairly accurately nearly everything you need to know, and at the lowest possible effort.”

“Companies need to ask the kind of simple questions children do. Asking ‘Why?’ clears things up. The more frequently ‘why’ is asked, the question about the sense and purpose of things, measures and ideas, the clearer and simpler the answers become.”

“ALDI has benefited above all from the fact that no generally valid rules were established as is the practice at many other companies.”

“Shelves, aisle widths, and if possible - even the length and width of the store itself are determined solely in terms of logistics (box size, pallet size, the maneuvering need for forklifts and similar matters.)”

Accept Mistakes & Learn From Them

If something flops, the result - the insight which is gained in the process - is the centre of attention rather than the question: ‘Who is to blame?’ There are very few decisions that are right or wrong. Using the ‘trial and error’ method ALDI succeeded in avoiding major catastrophes and mistakes.

Quality & Product Range

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Reliable, uniformly perfect quality was and remains decisive for ALDI’s success - more important than any distribution system. A distribution system can be watched, analyzed and copied. Such a fanatic and no-compromise quality policy, however requires a specific corporate culture.”

“Even starting from 2000 [products versus ALDI’s c650], and certainly when the range goes up to 20,000 items, managers at other retailers must resort to generalised methods of quality assurance and product range management.”

“One of the most admirable achievements for ALDI’s business policy, of a strong culture, that it has not succumbed to the temptation of widening its product range.

Decentralisation & Maintaining Smallness

Decentralisation - a core principle of the ALDI corporate management.”

“The ALDI organisation is a model of decentralisation. Only central cash management, purchasing and ‘a little bit’ of data processing are brought together in centralised functions. ALDI has learnt by experience that it is not centralising functions that cut costs, but breaking them up!

“Each ALDI company operates approximately 40 to 80 stores. When they become large enough to require two sales managers, a kind of cell division generally takes place.”

Decentralisation enables methods, experiences and results to be compared and creates the freedom to make decisions for or against based on these comparisons.”

“As soon as a certain number of stores has been reached (60-80 stores) .. a split-off in the form of a new company is created. The new entity is complete in itself, including separate bookkeeping, a separate balance sheet and all the functions found in the former company. The increasing competition between ways of handling daily details has frequently led to costs being reduced in absolute terms across all ALDI’s decentralised units.”

Small units are more flexible and more adaptable. Several small errors are easier to weather than one ‘large error’ which can be made by one powerful leader.”

“Experience generally shows that mistakes and problem areas involved are more easily isolated in a decentralised system.”

Decentralised companies give more authority to their local employees who are in direct contact with customers.

The secret of success is that decentralisation turns many employees into entrepreneurs inside the enterprise, ‘intra-preneurs’. I consider this principle of leaders and organisation to be the dazzling recipe for success at the ALDI organisation.”

Head Office

“If you compare the cost of managerial staff and offices at competing companies that earn a fraction of the profits, the cultural differences appear even more stark. I think this one factor - if not the biggest factor - behind the differences in the annual statements.”

Key Variables

“At ALDI the number of statistics is so few they can nearly be counted on one hand. They are simple, manageable and comprehensible, and not a bit scientific. Only the vital data are prepared for the internal auditing and information systems.”

“[ALDI’s focus is] ‘not too many numbers and analysis’, rather, think about the concrete inter-relationships and about how one can achieve higher sales to customers.

At ALDI they only work with very few figures, but with key figures, focusing on the most important business processes. And these are not budget figures, but true and actual figures which can be easily established and understood, and which result in transparent conclusions.”

Win-Win

Retailers should treat their suppliers as they wished to be treated themselves.”

“A company’s core cultural value - fairness towards others, especially suppliers.

ALDI was just as correct in its relationship with suppliers - many of which have continued for decades - as it was in its treatment of customers.”

“Every company can only survive in the long term if its profit margins are big enough - so it simply does not make sense to drive a partner into insolvency or - one step short of that - to kill his appetite for business.”

“The ALDI companies are seen by everyone as partners who know that they need good capable suppliers that have to be allowed to survive, i.e. to earn money.”

Employment Policy

“To ALDI, the right character is generally more important than, say, a degree from Harvard: none of our executives are from McKinsey; no one boasts any other kind of exclusive background.”

Promote-from-Within

“Self-discipline is also a necessary and typical quality of ALDI executives - one that promotes the company’s core cultural values and rules of frugality, publicity shyness and fairness towards others, especially suppliers. Practising this type of asceticism day on day is no small feat, and there are some who completely fail at it. This has always provided cogent arguments for recruiting trainee managers from within the company. ALDI’s executives, in general, have come up through the ranks, through the various departments in sales and supply chain management. Among today’s regional managers, for example, you can find former district managers, sales managers, administrative managers, distribution centre managers and even store managers. These trainee managers know the organisation, the ‘front line,’ and have been initiated into the corporate culture early on.”

Correct Incentives

Correct practices also include the rejection of bribery. A bottle of champagne at Christmas may seem like an innocent enough gift but the giver has an ulterior motive. There is no such thing as a free gift.”

Quiet Success

Competitors were blind to the development of ALDI. To this day, even trade journals barely know who the members of the company’s management are.”

The principle for dealing with the public, especially the trade journals, was: what we do, we do for our customers. For this purpose we do not need journals that are read by curious competitors.”

Listen To Ideas

The collective knowledge of employees is greater in every company than is generally assumed. To unearth the treasure trove of information, facts, ideas, experiences and insights one needs an organisational framework, a corporate culture, in which employee input is encouraged. A genuine culture of success is one where employees make suggestions on their own initiative and even implement them on their own.”

Value Employees

“ALDI achieves its best values for prices by cost-cutting in all areas - with the exception of wages and salaries which generally are among the highest but, due to the high productivity of staff, nevertheless generate the lowest personnel costs.”

Lowest Costs

“With a powerful ability to come up with simple solutions that repeatedly lead to extremely low costs, ALDI is many years ahead of the competition. It has developed what Cuno Pumpin has called ‘strategic success factors’. This ability cannot be developed easily and is impossible to copy.”

“An utterly uncompromising stand has given ALDI a cost advantage on store rents. Its motto is: a low rent - even in the best locations - or no rent. It would rather do without a unit than pay a high price for it.”

“The targets set by ALDI are extraordinarily simple. The only concern is lowest costs, or rather maximum performance and productivity in all areas, lowest possible sales prices and best quality. This is understood by every cashier, and by every packer in the warehouse. These are goals that can be applied and implemented in all departments by any employee on an ongoing basis. Differentiating between short, medium and long-term goals is unnecessary, nor is there any need for hierarchy of objectives from the top executives to the lowest ranking employees in the stores.

“ALDI was never stiff-necked or short-sighted in the sense that it gave an ‘order’ to reduce cost category X by a certain percentage. Cost reduction was never forced. The basic concepts of value analysis played more of a role.”

By not having an enormous selection we are in a position to order enormous quantities of each individual item at the best possible price.

None of our employees needs to unpack individual packages or put up decorations for the merchandise.”

Summary

Aldi has succeeded where so few retailers have in the past. And there have been many well known brands that have come and gone, or those who have remained but who don’t create the same incredible business results to be found in the German giant.

Even Buffett bought into Tesco and then later sold it when he realised it had been a mistake.

“I bought Tesco in the UK and I got my head handed to me.” Warren Buffett

Buffett had mis-assessed the fundamental economic characteristics of the business. Charlie Munger was asked about this at the 2014 Daily Journal Meeting…

Tesco owned the world for a long time. It looked inevitable. They had a formula that really worked. Then one day it stopped working so well… Tesco got in trouble when Aldi came in one side and other people came in on the other. It got tougher. How many big companies stay totally on top forever? Basically, the normal result is what happened to Tesco. Listen, Aldi is a tough competitor. Ruthlessly low cost, limited assortment, all private label. It's terribly efficient.” Charlie Munger

Simplicity is an art form. It’s hard to create, but even harder to emulate. Aldi has done this well.

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Further Reading:

Bare Essentials: The ALDI Way of Retailing’ by Dieter Brandes.

The Aldi effect: how one discount supermarket transformed the way Britain shops - The Guardian -by Xan Rice.

The Aldi effect: how one discount supermarket transformed the way Britain shops – The Guardian [Podcast].