Money Finance News What are the secrets to Aldi’s super low prices?
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What are the secrets to Aldi’s super low prices?

Aldi store
Aldi's success would have encouraged other outside players.
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You probably either love Aldi, or know someone who does. It can be very, very cheap. And the source of that feeling is the very low prices it charges for the things everyone buys at the supermarket, week after week.

valiaAnd depending on what’s in your trolley, the bargains are big. For example, Aldi has been selling this yoghurt (right) at $6.99 for 18 tubs. At Woolworths it has been $9.25 for 12 tubs. That’s 98 per cent more expensive per tub.

Similarly, Woolworths has been selling lamb rack for $44.99/kg. Aldi has been selling it for $19.99/kg.

How can they do it?

Woolies and Coles are famously focused on the cost of goods, pushing suppliers to sell more and more cheaply. Aldi obviously negotiates hard too. But the savings at Aldi come from the things – visible and invisible – they do to keep costs down, even if the stores are less visually appealing or comprehensive.

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The cheap way

One of the most visible examples is trolleys. To get one you must insert a gold coin, which is refunded when you return it. That way Aldi doesn’t have to pay anyone to hang out in carparks retrieving scattered trolleys.

You may have also noticed they make you pay for plastic bags. Aldi has been doing that since before the Greens political movement took off (coincidentally, also in Germany), simply because it saves money.

They have only 900 core products on offer. Every item a supermarket stocks costs them money in managing supplier relationships, accounting and so on. The small selection means small stores, which means lower rent.

aldi-rice-crackersSimilarly, if you’ve ever queued to buy just one thing at Aldi, you’ll know it doesn’t bother with an ‘eight items or less lane’, saving on staff. They make sure products have multiple barcodes or enormous barcodes (see right), so the checkout person needn’t fumble and fuss to scan them. The check-out staff don’t bag groceries either. Another time saver.

Aldi often employs only two or three staff at the entire store. The guy with the mop could easily be the assistant manager. They pay those few staff well, however, with assistants getting $23.40 an hour, and assistant managers $76,000 to $84,000 per year. The stores are open less than 12 hours a day (8.30am to 8pm), which saves on labour and lights.

mineral-waterThe invisible things

Aldi forced pallet-maker CHEP to invent a ‘multi purpose beverage tray’ that can go from the factory to the truck to the supermarket floor without being unpacked. It can store 1.25L bottles or 2L bottles. You spend less on shelf stackers if you don’t need to stack shelves.

Aldi also ensures cereal packets are full. The trend to sell half-empty packets to convince consumers they are getting a lot when they’re not is incompatible with Aldi’s hyper-efficient supply chain.

One other innovation is especially welcome. Unlike the major companies’ incredibly annoying, incredibly frequent jingles, you probably don’t remember seeing an Aldi ad on TV. Aldi does advertise in Australia, just not terribly much. Even having TV ads is radical for this company. The only public statement company owner Karl Albrecht ever made was this one, in 1953: “Our advertisement is the cheap price.”

The Aldi effect

Aldi’s maniacal focus on prices has had spillover effects in Australia. An investigation found prices at Coles and Woolworths were lower when an Aldi was nearby. Sounds good! But Aldi’s effect has been more complex.

Lower prices at Coles and Woolies have caused problems with suppliers. And the deluge of home-brands those big supermarkets now own can be traced back to Aldi’s entrance into the market. While Aldi was caught up in a recent Four Corners expose on dodgy agricultural labour practices, some reports suggest Aldi treats suppliers better than the big two. Could it be that having stable, simple supplier relationships is more cost-effective?

Unlike the big two supermarkets, Aldi refuses to charge suppliers for shelf space and boasts it has very simple terms with suppliers, unlike Coles and Woolies.

Profit motive

Aldi claims it wants “to suck the profitability out of the [supermarket] industry in favour of the consumer”. Claiming to not be about profit is pretty radical for a business in the current era. It is likely Aldi’s claim is marketing spin. Likely. But not certain.

AAP
Aldi could become even cheaper for shoppers. Photo: AAP

If Aldi changes or makes a mis-step, it need not be the end of German discount retailing in Australia. Lidl is ready to open stores in this country. Lidl has a business model very similar to Aldi and in the UK it has proved even more popular.

Could it be that under the pressure of direct competition, Aldi will become even cheaper? If so, shoppers will rejoice.

But innovative efficiency measures can only make prices fall so far. The bigger question is how these businesses meet not only their shareholder responsibilities, but their social responsibilities.

Might Aldi be forced to tighten the screws on suppliers just as Coles and Woolies have? Is there a point where your yoghurt and lamb is too cheap? And is that the point where consumers are prepared to pay more to ensure the big retailers treat suppliers with greater decency?

Jason Murphy is an economist and journalist who has worked at Federal Treasury and the Australian Financial Review. His twitter handle is @jasemurphy and he blogs about economics at Thomas The Think Engine

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