How Aldi Makes Money and Stays Cheap

In late 2012, German discounter Aldi reported that its UK business had swung from a 56 million pound loss to a 57.8 million pound after-tax profit in a single year, a roughly 200 percent turnaround. In the middle of a recession, with wages stagnant and household budgets squeezed, the cheapest supermarket in town was printing money. How?

The model: ruthless simplicity

Aldi sells mostly its own private-label brands, which means no premium paid to big manufacturers for famous names, and the savings flow to the shelf price. Where a conventional supermarket splits its range roughly evenly between own-label and branded goods, Aldi's shelves are dominated by its own labels. For any given item it typically stocks at most one or two branded alternatives. Its "special buys" are one-off lots negotiated at a discount and sold cheap.

The stores themselves are stripped down: smaller ranges, pallet-and-box displays, minimal staffing, no frills. A 2012 Grocer magazine basket comparison found Aldi 16 percent cheaper than Asda, 20 percent cheaper than Tesco, and 40 percent cheaper than Waitrose on 33 items.

The recession tailwind

Aldi's 2011 surge was a recession story. Middle-class shoppers who once saw discount supermarkets as embarrassing started walking through the doors. UK management described a visible shift in the customer mix toward more affluent A and B demographic shoppers, both in existing stores and new openings. The chain responded by upgrading its fresh ranges: bakery, meat, fruit, and vegetables, all aimed at stopping the new customers from shopping elsewhere for fresh food.

The numbers told the story: 29 new UK stores in the year, a 181 million pound investment planned for 40 more by the end of 2013, a target of 500 UK stores, and 4,500 new jobs. Two-thirds of the UK core range was sourced from British suppliers.

Who owns Aldi?

Aldi stands for Albrecht Discount, after the German brothers behind it. Their mother opened a small grocery in an Essen suburb in 1913; Karl and Theo Albrecht took it over in 1946, owned 13 stores by 1950, and split the company into Aldi Nord and Aldi Sud in 1960 with 300 shops between them. Karl became Germany's richest man; Theo, who died in 2010, was not far behind. The first UK branch opened in Birmingham in 1990.

The quality question

The knock on discounters was always quality, and Aldi spent 2011-2012 attacking it head-on. Its Christmas pudding came second in Good Housekeeping's 2012 taste test, ahead of Fortnum and Mason's 24.95 pound pudding, which placed 29th of 32. Aldi's cost 7.99 pounds. Its UK television campaign hammered the message: "Like brands, only cheaper."

FAQ

Is Aldi one company? No. Since the 1960 split there are two groups, Aldi Nord and Aldi Sud, operating in different territories. The UK stores are Aldi Sud.

Why is Aldi so cheap? Private-label dominance, tiny product ranges, low-cost store formats, and minimal advertising in its home market.

Does cheap mean low quality? Not necessarily. Independent taste tests in this period repeatedly placed Aldi products ahead of far pricier rivals.

When did Aldi come to Britain? 1990, with its first store in Birmingham.

The takeaway

Aldi's trick is not a trick at all. It removed everything from the supermarket that was not the groceries, and discovered that in a recession, nobody missed the rest.