ALDI Business Model – What Makes Aldi Sell so Cheap?
Aldi business model – the revolutionary discount store
Most supermarkets and grocery stores are known for selling their products at huge discounts. But when you talk about discount one company pioneered it. There is one company that is famous for offering discounts. And that company is Aldi of Germany.
Aldi with its revolutionary business model was the first to offer discount anywhere in the world. They are also the first known self-service store around. And they are equally the brain behind several efficient ideas to increase productivity, profits, and consumer satisfaction in superstores and grocery stores around the world.
So today, in continuation of our series on business models we are taking an in-depth look at this revolutionary business model of Aldi. And we will find out how and why this business model allows Aldi to sell so cheap.
But first, the key question, ‘what is Aldi?’
ALDI Business Model – What is ALDI?
ALDI is a brand of two German discount supermarket chains with over 10,000 stores in 18 countries. The brand was founded in 1946 as two brothers Karl and Theo Albrecht inherited their mother’s small grocery store. But the business only existed as one unit till 1961 when they split into two over a dispute on whether they should sell cigarettes or not.
Karl Albrecht owned and operated ALDI Nord which is now present in north Germany, Denmark and France. Its outlets also stretches to Belgium, Netherlands, Luxembourg, Poland, Spain and Portugal.
While Theo Albrecht owned and operated ALDI Süd which is now present in south Germany, Ireland, the United Kingdom and Hungary. But it also Greece, Switzerland, Austria, Slovenia and Australia.
As at the time the two brothers inherited the grocery store Germany was not such a prosperous place to be. After all, that was just after the World War 2. So the brothers quickly adopted a model of just-the-essentials sold at the lowest possible price points.
As you can see, right from the very beginning, the mission of Aldi stores has been to provide customers with the essentials at prices anyone can afford, and in this, they have never wavered, while succeeding admirably.
It’s even built right into the store name: So the name ‘ALDI’ is actually a combination of ‘AL’ from ‘Albrecht’ and ‘DI’ from the word ‘discount.’ Can you now see the history of the ‘excessive’ discount Aldi offers and why it is a fundamental part of their business model?
ALDI Business Model – The Value Proposition
ALDI business model was built upon 3 core values. Quite admirably, over 75 years after they started, those values are still central to the strategic direction and decision-making principles today. The uncompromisable values are consistency, simplicity and responsibilty:
Aldi Business Model – Consistency
Most supermarkets out there actually offer seasonal discount coupons. You hear of Black Friday sales – where some companies offer as high as 50% to 80% discounts on certain products. You also hear of Christmas discounts. And several other seasonal discounts depending on the company and their location.
But for Aldi and their business model, there is no such thing as seasonal discount. They are focused on providing products at a cheaper price 24×7. Discount is part of their culture. No matter when you come, you are guaranteed massive discount and unbeatable prices. And guess what? That consistency does not only apply to their prices. They also apply the same consistency in dealing with their employees, customers, and stores.
So consistency is one of the things that makes Aldi have a business model of an everyday discount supermarket.
Aldi Business Model – Simplicity
ALDI focuses on a no-frills shopping experience with the characteristics of simplicity, efficiency, and clarity. They have no business with any form of aesthetics that adds no extra value to customers. In fact, even if it adds marginal value and it is likely to make the price higher Aldi business model is not eager about such.
Aldi Business Model – Responsibility
The company values its employees, customers, and other parties it deals with. It pays its employees well enough to increase their efficiency. They focus more on customer satisfaction and less on marketing, and sources most of its products locally.
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ALDI Business Model – Why is ALDI So Cheap?
There is an Adli Truth you see on most Aldi stores that reads ‘We don’t match other stores’ prices, because that will mean raising our our’. That is not been arrogant, it is just the fact. Aldi is not in competition with any brand when it comes to price. They are simply on a class of their own.
Whenever someone mention the name Aldi, the first thing that comes to mind is ‘cheap’. That is what Aldi is known for and competitors acknowledge that also. It is a common knowledge that no brand anywhere in the world can compete with Aldi in terms of prices.
It has maintained its discount supermarket reputation for several decades now and there is no sign that it will change. Of course it has become so successful riding on that premise. In fact, it offers as much as 50% discount on some products as compared to competitors. Even the almighty Walmart cannot compete Aldi in terms of prices. As a matter of fact, products at ALDI are about 30% to those at Walmart.
So the question everyone kept asking is, ‘how can ALDI afford to be so cheap?’
The answer is however very simple to see if one understands the ALDI business model.
So here are some of the reasons ALDI business model affords very low prices:
1. Aldi avoids brand names
At most supermarkets, you’ll find tons of big-brand items. But at Aldi, a whopping 90% of the products are private label. By avoiding brand names, Aldi can skip going through another company and offer you cheaper prices.
ALDI believe most of the big brands make the customers pay for all their excessive marketing and branding expenses and not necessarily the actual worth of the product. The company, to counter this, partners with the local vendors and white label their products at much lesser prices but similar quality.
Selling private label brands also enables the company to negotiate prices, cut out middlemen, and reduce marketing costs.
While these off-brand names might save you so much from your shopping budget, they in no way mean less quality.
In fact, items like their Happy Farms milk come from the exact same dairy and processing plant as some of the big label milk you would see in your Kroger or Wegmans but you pay half the price.
As a matter of fact, if you have read my detailed post on White Labeling you will discover that those big brands sometimes rip you off just for the name. So smart shoppers know that they get exactly the same product for less at Aldi. I recommend you read that post on White Labeling if you want to use disruptive innovation to unseat the big brands in your industry.
2. They have a small selection of Items to stock
When you get to a typical supermarket how many different items do you find on their shelves? Research shows it is an average of 40,000. Many supermarkets have more. But Aldi is not a ‘typical supermarket’, it is a market with a difference. It is a uniquely built supermarket to serve the exact needs of customers.
So for Aldi, they offer you a selection of only 1,200 core products. And it is easy to understand that. Imagine have 10 different brands of sugar on the shelve for other supermarkets, Aldi will just have one – because of their private label arrangement.
Now, I am not sure you understand how this translates to so much savings for Aldi .
First, imagine other brands need to have 10 pieces each of their 10 different brands, they will be looking for space to display 100 pieces of same product – just different brands. But Aldi can afford to sample just 20 pieces since they have just one brand. With this, they have less to warehouse and display in the store. This means having smaller stores compared to most other grocery retailers, and in return, smaller rent prices to shoulder
Next, because it has to order from just very few suppliers, it can afford to order more quantity and get bigger discounts which leads to lower prices. Let’s stick to our sugar example to explain this. Other supermarkets need to order 10 different brands of sugar. So if they have a budget to order 1,000 cartons, they will need to split it to 100 cartons per brand. But for Aldi, they are ordering from just one supplier they can get all 1,000 cartons from same supplier – and you can bet that the rate someone buying 1,000 cartons pays might not be same as someone buying 100 cartons.
3. They take less time restocking shelves
Aldi’s design was specifically made for minimal stocking and upkeep. Other stores may have beautiful displays, but employees have to constantly restock them. At Aldi, products are inside boxes or simply stacked on each other, making it much easier for employees to restock.
4. They use boxes, milk racks, and pre-packaged produce
Boxes aren’t the only way Aldi saves time and money. Products such as milk and even produce help reduce the upkeep at an Aldi store. Milk already comes in racks, and produce is pre-packaged and ready for checkout. Most other products are also pre-packaged in Aldi.
5. They have fewer workers
If you think in a similar way like myself, then you must have already guessed why this is so.
By eliminating many ‘frills’ services and streamlining all their store processes, a typical Aldi building just does not need that many people working at one time. With the way Aldi is designed, not as many workers are needed to stock the shelves or keep things in order.
In fact, Aldi will often have cases where they schedule less than 5 staff at a time. Of course that’s nothing compared to the dozens of employees you’ll see at other markets. Need I tell you that, fewer employees means fewer salaries or weekly wages.
However, you must not confuse fewer wages with lesser wages. Aldi actually pays well above minimum wage in the United States, even to start, and their benefits package is considered generous. Few other supermarkets matches their pay.
And it is also easy to understand why this is so. Why other stores are splitting their wage bill among many staff Aldi have more to pay the few staff they have. This also means that high-performing employees have incentive to stick around. Naturally, the longer they stay, the better and more efficient they get at their jobs, helping operational costs stay stable. And it also gives a better shopping experience to customers. And finally making them spend less on recruitment and training.
6. Aldi bring your own bag policy
Aldi encourages recycling of bags for shopping. And this is really a wise thing to do. Sometimes I wonder what to do with the myriad of nylons Shoprite keep giving me each time I go for shopping. In fact it ends up becoming nuisance in my house. And this is the practice with so many other stores. Of course you know that the cost of those nylons are built into the products you are buying.
But for Aldi, they don’t bother buying as many plastic bags as other stores, thanks to their ‘bring your own bag policy’. So most customers keep their bags after each shopping and use it for the next.
It is not though as if Aldi don’t have bags if you need one, but you will have to pay for it. So naturally, this encourages customers to bring their own bags. This does not only bring about lower prices for customers but also encourages greener and cleaner environments.
7. Small ad budgets
If I ask you if you have seen Walmart, Target, Costco or Shoprite ad on TV you will most like reply ‘several times’. But if I ask the same question about Aldi, you will struggle to remember if you have.
First, the company has a policy of no advertising in Germany. So it relies mainly on weekly offline and online newsletter called “ALDI Informs”.
In other parts of the world, it advertises in newspapers and on television where it compares its products with the common name-brand products. Other strategies like simpler store layout and fewer employees remain the same everywhere.
This reduces the expenses of the company and results in more discounts to the customers.
In fact, if you compare Aldi ad budget to those of other big brands you can safely say they don’t spend money on ads. For example, in 2016 they spent about 42 million dollars on ads; in comparison, Walmart spent 2.75 billion dollars in 2019.
8. They have a smart shopping-cart rental system
No need to have someone working the shopping carts all the time with a system like Aldi’s! In order to use a cart, you must put a coin in the cart to unlock it. This method of ‘cart rental’ serves dual purposes, both of which enable lower prices on products.
First, it helps ensure customers return their own carts to the corrals at the front of the store, so as to get their coins back.
This, in turn, means that Aldi doesn’t have to pay extra employees to monitor the carts in the parking lot, constantly corralling them and bringing them back.
9. They’re about consumers, not profits
Most supermarkets charge suppliers for shelf space. But Aldi doesn’t. If they must allow a supplier in, it is free and the terms are simple and easy to meet. They believe that by so doing the suppliers will be able to keep their prices as low as possible – in line with Aldi business model and core values.
Every decision the company makes always has the customer in mind, and it pays off. So they are more in business for the customers than for the profit.
10. They use energy-efficient lighting
This might sound weird and probably seem not to have so much impact on costs, but it does. It still helps Aldi save some money in line with their business model.
In a press release in February 2017, Aldi announced its initiative to save money by remodeling some of the stores. A modern design (and even using open ceilings) will bring natural lighting into the store, making it environmentally friendly, too. They’ll even use recycled materials, energy-saving refrigeration, and LED lighting.
11. No fancy megastores
Aldi’s stores are a no-frills affair. They’re not about aesthetics; they’re practically functional and minimalist. Naturally, they cost less, and on the whole, contribute to the store’s relatively lower overhead.
Aldi even takes it to the next level. Their stock goes up on shelves right in the packaging they arrived in from the truck, with the newest boxes going in the back or the freshest produce placed beneath the older. So there is no such thing as extra cost of re-packaging to make it look more beautiful or fanciful.
12. They Source Their Products Locally
Aldi’s produce is sourced exclusively in the U.S. In fact, some stores buy from local farmers close to them. The company’s website states that its fresh produce is sourced locally and stocked on a daily basis.
This goes a long way in saving a lot of money from transportation. It also reduces the chances of goods getting bad on transit.
13. There are no staff discounts
Some stores offer discounts to their staff when shopping. Well, though this is a good practice, Aldi don’t. But why should they? Their products are already discounted, just that it applies across board.
So, whereas other stores give discount to their staff and transfer the cost to customers, Aldi share theirs equally to benefit both customers and staff alike.
14. Smaller Stores
Aldi stores are estimated to be six times smaller than your typical Walmart store. And guess what? Every less square foot of space is less room that has to be cleaned, heated, or cooled. And of course you have to pay less for this services.
It’s also less space to be structurally damaged or requiring fixing, maintenance, and monitoring for damage.
Along with their smaller stores comes less storage in the back. While this might not seem like a boon, it benefits the customer in two ways.
15. Limited hours
Most Aldi stores open from 8/9am and close by 8/9pm. This is unlike other big stores that sell late into the night and even wee hours of the morning.
In Walmart for example, walking into their stores at 1 a.m. amd pick up anything you want is one of their special thrill. They list it as one of the things that makes them unique. But Aldi is not moved by any such thing. In fact, you won’t get that experience at Aldi.
And I think it is not just been thrifty of Aldi, it is managerial and cost cutting intelligence. Limited hours mean lower utilities, less wear-and-tear on stores and fewer employees needed (for overtime).
Now, this strategy of closing after peak business hours reduces the wastage of money by catering to very few customers just to build up the brand reputation. Or tell me, how many customers do you actually see in Walmart by that 1am ? But they still have to keep all their lights and other appliances on just to serves those few.
ALDI Business Model – Top Competitors
Every top supermarkets are competing with Aldi in one way or the other. But I will discuss 2 major competitors due to Aldi type of business model.
Of course Walmart appears to be the supermarket to beat. Everyone tries to benchmark with Walmart who is the clear market leader.
But even though Walmart is the world’s largest brick-and-mortar retailer, it yet faces a strong competition from ALDI which provides similar quality of goods at a 30% cheaper rate than Walmart.
Nevertheless, Aldi stock very less products when compared to Walmart. So it is understandable that Walmart still retains most of its loyal customers but many American shoppers are beginning to choose Aldi and their so cheap business model.
Won’t you be surprised if after so much success with this model it has not been replicated by other brands? Of course that is the problem with innovation – it is just a matter of time before others copies it.
Therefore, following Aldi’s success in Germany, a new competitor with similar business model started its operation in 1977 under the name Lidl. Just like Aldi Lidl is well known for their thrifty practices and less price.
The only difference between the two lies in their selection of brands. While Aldi relies on its private-labeled brands and doesn’t actually entertain other imported and big brands, Lidl sells its own brands, imported brands and other non-own brands at competitive prices.
Conclusion on Aldi Business Model
Isn’t that wonderful how a brand can decide to differentiate itself with the most unexpected variables? Who would have thought that it is possible for anyone to sell at 30% discount off Walmart price.
But here we have seen 15 different ways Aldi cuts costs and transfers the savings to customers.
One thing you must however understand is that lower prices don’t affect Aldi’s quality at all.
Did you learn anything from this Aldi thrifty business model? Do you think it can help you creatively disrupt the big brands in your industry or in your country?
Do you have any questions on business models or brand buildings? Feel free to talk to me and I will be willing to help. You can drop comments in the comment section or chat me up here.
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