When Aldi first came to the US, no one took the small stores seriously. In fact, a lot of companies assumed that because its business model was so different from what was seen before in the retail industry, the company would not take away their market share and serve an entirely different kind of customer. They could not have been more wrong.
Now, Walmart and many other giants in the retail industry see Aldi for what it truly is – strong competition. It was established during World War 2 in Essen, Germany, and has since grown into two global chains, Aldi Sud and Aldi Nord, with thousands of stores in countries like the US, Belgium, Poland, France, Spain, and Italy.
Aldi’s low-cost business model enables the company to sell to consumers at low prices, which is the main reason it is so popular. Karl and Theo Albrecht’s vision for Aldi has proven to be a huge success, with the company currently being the 8th biggest retail chain in the world. In this article, we’re going to take a look at that very Aldi business model, and how Aldi has managed to cut costs in its stores in a lot of creative ways.
Aldi was established by Karl and Theo Albrecht’s mother as a small grocery store in Essen, Germany, in 1913. In 1945, the two brothers took over the store and expanded it into 13 stores across the city by 1950.
From the start, the brothers operated the stores based on a stringent cost-cutting philosophy, which is what Aldi is known for to this day. They sold the goods at their stores at a discount and continued to remove items from the shelf that didn’t sell well. They also only stocked non-perishable items, and took steps over time to make their stores as cost-efficient as possible, taking those savings to their customers in the form of discounts and low prices.
The brothers could not agree on how their stores should operate, and by 1960, the company split into two – Aldi Süd and Aldi Nord, with the name being an abbreviation of the words “Albrecht-Diskont”, which means “Albrecht Discount” in English. The disagreement was allegedly on whether they should stock cigarettes in their store or not, with Karl believing that the product would attract shoplifters. Even though the two firms have been legally separate since 1966, there have been plans to merge Aldi’s private labels under the same brand name. This way, shoppers will be able to get the same thing no matter what Aldi they shop at – Nord or Süd.
Aldi Nord and Aldi Sud – What’s the Difference?
When the companies first split, they claimed different parts of Germany for expansion. The companies are also operating in different countries – the US being the only one where both of them exist and operate. Even then, the “Aldis” most Americans are used to shopping at are owned by Aldi Süd, and Aldi Nord owns Trader Joe’s.
The companies have been close in the past few years. In addition to joint marketing campaigns and partnerships, the two are also looking to merge their private labels to ensure that customers get the same thing no matter what Aldi they shop at across the world. There were rumors about a complete merger of the two a while ago, but they were formally denied by stakeholders.
Currently, the two companies are managed by two private family foundations after the death of their original founders – the Siepmann Foundation for Aldi Sud, and the Markus, Jakobus, and Lukas Foundation for Aldi Nord.
Aldi’s Financial Performance
Aldi has been doing better lately than it was in the last few years, mainly because of an increase in the demand for cheap groceries during the pandemic lockdown. In the year 2021, their sales grew by 15.3%, which is their biggest growth for a year so far. The company made a total of 134 billion, compared to $116.2 billion in 2020.
According to Statasia, Aldi is predicted to make about $142.9 billion in 2022, with growth eventually slowing down because of global economic conditions.
Aldi’s Low Cost, High Return Business Model
Aldi’s business model is both simple and innovative – the secret to its success lies solely in its cost-cutting strategies and how the company takes these savings straight to the customer in the form of savings, low prices, and discounts.
To make this happen, the retail chain employs a number of great strategies in all aspects of its operations. From the number of employees it has per branch, to the number of employees in each branch, and how many products are stocked in each store.
Limited Inventory and Private Brands
Over time, Aldi moved from stocking other brands on their shelves to making their products themself – this allows them greater price flexibility and control over their supply chain.
90% of all the products stocked in Aldi are its own brands, which is more than any other retail store in the world.
Aldi also avoids stocking perishables, and keeps its inventory to the point. When you go to an Aldi, you won’t find multiple brands of chocolate syrup in the store – there will be just one or two brands that are cheaper than what you could get anywhere else.
In an effort to save money, Aldi makes a lot of compromises when it comes to employees and customer service.
Every employee in the store is cross-trained to carry out multiple tasks, and there are three to five at one branch to begin with. Aldi keeps the stores small and lets customers more or less take care of themselves, removing the need for too many employees.
As mentioned before – Aldi’s stores are smaller than any other big retail outlet’s, with limited shopping options and a small number of employees.
Not only does this mean that Aldi gets to save on a lot of operational expenses, but it also means that the productivity of their stores by area is higher than average. In an interview with CNN, an expert estimated that Aldi’s operational costs are almost half of that of other grocery chains in the US, with revenues and customer traffic that’s giving companies a run for their money!
Aldi might be known for how cheap it is, but it isn’t known for the shopping experience or the ambiance. Most of Aldi’s stores are simple and small, with items stocked on shelves while still in their cartons and boxes – this saves time that employees would take stocking the shelves.
To hasten checkout, most of its products come in packaging with barcodes on multiple sides. This facilitates fast scanning and checkout, and customers can then take their groceries to the side to bag them.
At the same time, Aldi doesn’t invest much in the appearance of its stores. You will find cheap stuff there, but you shouldn’t expect a grand building or great customer service.
On the plus side, every corner Aldi cuts in terms of operational costs are passed down to its customers in the form of low prices, so you’re getting something out of the no-frills shopping experience anyway. For the right customers, I think savings matter much more, and Aldi’s multi-billion dollar annual revenues are proof of this fact.
Limited Customer Service
Most of Aldi’s stores only have three to five employees at a time. All of them are cross-trained to be able to do multiple jobs, and they’re not required to spend too much time on things like stocking shelves, putting back trolleys, or bagging groceries for customers. Customers even have to bring or buy their own reusable shopping bags.
When you go to an Aldi, you’re supposed to do all of this yourself. This lack of customer service was something that had competition all over the world convinced that Aldi was not a threat, especially in the US and UK.
Brands like Tesco and Walmart thought that Aldi was not competition and that it would probably attract a completely different kind of customer than theirs, but over time they were proven wrong.
Why Is Aldi Popular Among Customers? A Look Into Its Marketing Strategy
Simply put, Aldi doesn’t really have a marketing strategy. It takes a deep look into its business model to appreciate just how bare-bones but still incredibly massive it is. The grocery store chain is low-tech, low-expense, and low-priced. It would make sense if the grocery chain was profitable after having achieved economies of scale, but Aldi was doing well long before it became a global success.
It attracts its customers not because it tries hard, but because of the value it has to offer and because of the way it changed how customers saw grocery shopping. Aldi has been able to attract customers by word of mouth, and by offering cheap, affordable food options.
Bit by bit, Aldi brought a more European way of grocery shopping to all of its branches worldwide, and honestly, it’s good for all its customers. I personally don’t think that people mind minimal customer service if it means they can get groceries for lower prices. Clearly, a lot of Aldi’s other customers have the same view, which is something that most grocery store chains had failed to anticipate.
There is especially a focus on customer service and a positive customer experience in the US, with employees in the service industry adopting mottos like “the customer is always right” to make sure customers are happy and keep coming back for more. While that works for a lot of companies like Costco – a chain of warehouse stores known for its customer service as well as low prices – I think Aldi just realized that when customers are made to pick between great customer service with normally priced shopping options and okay customer service with some major savings, there’s a good chance people will pick the second option.
Plans for the Future
Aldi has long been changing the retail landscape in the countries it exists in, with giants like Walmart recognizing it as a fierce competitor, and not a company to be taken lightly. The CEO of Walmart, Greg Foran, has been heard talking about the company’s great competition, and that he never underestimates them. According to Foran, “I’ve been competing against Aldi for 20-plus years. They are fierce and they are good.”
But the question is, will Aldi be able to keep this up in the long term? Things are constantly changing in the economy, and some fear that Aldi might not be doing enough to stay ahead.
So far Aldi hasn’t invested a lot in things that keep its competition ahead. These include advertising and marketing campaigns, business automation, and hi-tech solutions that would increase end-to-end supply chain visibility or increase company productivity and efficiency. Even in its stores, Aldi maintains a no-frills approach that it might need to leave in the past now – at least in some aspects of the business.
In 2017, Aldi decided to set aside $6 billion for the company’s technological development. This includes steps to ensure a more robust online ordering and delivery system than its current partnership with Instacart, IoT integrations in its retail outlets to make store operations run more smoothly, and the overall digitization of its outlets. It might not be surprising to see some shelf-stacking robots or robot vacuum cleaners working around Aldi stores in the next few years!
Aldi’s SWOT Analysis
Now that we know a bit about how Aldi works, let’s talk about some of its strengths and weaknesses, as well as the opportunities and threats for the company.
- Brand Name: One of the biggest things Aldi has going for itself is its very name – people know and recognize the brand as somewhere they can go to get great products at affordable rates, which is why a lot of buyers flocked to it during the pandemic when money was short and they needed to budget. When money was tight, they knew exactly where to go thanks to Aldi’s brand awareness and brand image. The brand is so strong that it earns billions in annual revenues even without investing in any marketing.
- Loyal Customer Base: Aldi has a very strong and loyal customer base that keeps it in business, and it isn’t hard for it to gain that loyalty because of the cheap and good quality products it stocks its shelves with!
- Competitive Pricing: For years and years, Aldi has boasted the lowest prices for its products. This is a huge edge the company has over its competition and one of the reasons it has a loyal customer base all over the world.
- Private Brand Labels: One of the biggest ways Aldi keeps its prices so low is because 90% of the products at its store are private brand labels owned by Aldi itself. This allows Aldi control over how much it charges customers and to be able to keep prices down even when similar products are being sold at higher rates everywhere else.
- Limited SKUs: Aldi doesn’t waste time or shelf space on products that don’t sell well – when you go to a store, you will find a selection of a few of the most common selling goods, and that’s it. In the start, the company’s founders were very careful about what worked and sold well in different markets and what doesn’t, swiftly removing anything that wasn’t in high demand. This is yet another way that Aldi keeps costs low for its products, by making sure it doesn’t spend money on products that don’t sell much.
- Limited SKUs: While this is a sound cost-saving strategy, Aldi certainly stands to gain more customers if it shifts its image from a store where you can buy cheap basic groceries to one where people can go to for all their grocery-related needs and save big. More stock-keeping units (SKUs) will mean people have more reason to come to Aldi beyond basics like ketchup and sugar, and it is something that a lot of people think Aldi is lacking.
- Low Margins: Aldi has long been committed to keeping its prices low, sometimes cutting corners in customer service and store design that no other retailer was willing to risk cutting, but that comes with a price. The reason it sells private label brands is the same – keeping prices low for its customers – but that also means that Aldi itself doesn’t have very high profit margins. Even a little issue in its supply chain can deal Aldi a pretty heavy blow, which is a vulnerability Aldi should be more concerned about.
- Barebones Store Operations: Aldi’s stores are small, the number of employees in each one is limited, it doesn’t operate outside of peak hours, doesn’t have any big stores, and even has customers take care of most of the customer service themselves! It sure allows the company to sell its products for cheap, but I wonder if they could maintain the same prices with perhaps a few more employees per store, by extending store timings, and so much more that they’re currently not thinking about at all. The company has taken what a grocery retail store is down to its most literal and barebones definition and turned it into a reality, but that isn’t something everyone appreciates.
- Small Number of Employees Per Store: On a regular day at Aldi, you shouldn’t expect to find more than two employees there. Staff is cross-trained in various tasks and roles to ensure things can run smoothly, but more employees in a single location would definitely not be bad.
- Limited Customer Service in Stores: This is a direct result of having only three to five employees at all locations – customers are pretty much left to fend for themselves at an Aldi, with tasks like checkout, bagging groceries, and returning shopping carts being left to them to handle.
All of this said, I believe that more customers, better customer service, and all of these little things alone wouldn’t be enough to make a difference. Aldi’s image as a budget retailer has been solidified over the last few decades, and at this point, it would need a strong rebranding or marketing campaign to change how it is seen. But marketing is yet another thing that Aldi has never done!
- Digitization: Branching out into more digital solutions for Aldi’s lack of customer support and to strengthen its supply chain visibility, as well as to increase efficiency overall in the company is a great opportunity Aldi isn’t currently investing enough in.
- Online Ordering and Home Delivery Options: Demand for home delivery and online shopping options has skyrocketed. Even before the Pandemic accelerated this demand growth, companies like Walmart and Costco were investing in these options to facilitate customers and increase revenue.
- Advertising to Attract More Customers: One of the most important things Aldi can do to increase brand visibility is to invest in solid marketing and advertising strategies. In the past, Aldi has avoided doing so even for things like store openings, which may have led to more customers and bigger turnouts at its various branches.
- Catering to Higher Income Groups: Introducing a separate line of higher quality and higher priced products can be a great way to attract higher-income customers who might want good quality products that are still cheaper than what they would pay for similar products elsewhere. This way, Aldi will still be able to provide cheap products and stay true to its image while catering to a whole new kind of customer.
- Market Competition for Its Private Label Brands: Aldi stocks its stores with private label brands. In fact, 90% of all the products sold at Aldi’s are privately owned – but face fierce competition from companies that are able to sell their products at higher prices, and aren’t as budget-conscious as Aldi. While the price flexibility Aldi gets from making its own products is worth it for the company, it constantly faces competition from other brands in the market.
- Cannot Provide Customers With a Complete Shopping Experience: Aldi might need to rethink this in the future when economic conditions allow shoppers to consider stores with better customer service for their grocery needs.
- Disruption in the Industry Caused by Technology: Aldi has been big on keeping its costs low throughout all operations in the company. As a result, it might not be investing as much as it should into digitizing its processes. In the long run, this will only cost them more money as it falls behind competition and fails to remain cost-efficient due to obsolete company processes.
FAQs – Aldi Business Model
Question: Is there more than one Aldi?
Answer: Aldi might be recognized as a single brand by many, but it is actually two independent companies that split in the 1960s when the brothers in charge of the company had an argument about whether to sell cigarettes in the store or not. Today, Aldi Sud and Aldi Nord operate thousands of stores all over the world, with America being the only country where both are operational. They frequently collaborate in marketing campaigns and are planning to merge their products as well so everyone who shops at Aldi can get the same products no matter which one it is.
Question: Does Aldi own Trader Joe’s?
Answer: Aldi Nord owns Trader Joe’s in the US, while Aldi Sud owns and operates all of the stores in the US called “Aldi.”
Question: Does Aldi really offer the lowest prices?
Question: How does Aldi handle budget issues and economic crises?
Answer: Aldi mainly depends on its low-cost, low-price business model to bring in customers to the store. However, this leaves the company with a very thin profit margin as well. When things get tough in the economy, Aldi keeps its commitment to customers by maintaining its low prices, even if profits take a hit. This was what Aldi did in the UK amid prices for most products spiking, even though that meant losses for Aldi.
Question: What is Aldi short for?
Answer: Aldi is short for “Albrecht-Diskont,” which means “Albrecht Discount” in English.
Question: Is Aldi an American company?
Answer: Aldi is the name for two German companies, Aldi Nord and Aldi Sud, that were established during the second world war as a single grocery store. What was once a small establishment has now grown into the eighth-largest retail company in the world, with stores all over Europe and the US.
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