How Aldi supermarkets created converts in Australia

Need a breast pump, a solar panel, a high pressure cleaner? Probably not. But visit Aldi and you may change your mind.

TWAM 16 Jan 2016

I am standing in Aldi, the discount supermarket, right by the central aisle — the part of the store that Aldi aficionados know, love and discuss obsessively at dinner parties, on social media, over the garden fence. I am not an Aldi aficionado. I don’t get the Aldi culture; I don’t understand how it works and I really don’t know why it appeals to so many ­people, my close friends and family included.

I once went into an Aldi in the Hunter Valley; just once, looking for some basic household item. I didn’t find it because I was instantly transfixed by the central aisle, by the containers filled with items I couldn’t possibly want, stacked high and sold cheap. All that I remember of that five-minute visit before I fled was the breast pumps in a big pile, on sale. Breast pumps on sale. In a supermarket.

But here I am, back in Aldi, standing by that central aisle. Only this time I have a guide; a financial consultant and former investment banker from Sydney’s eastern suburbs who last year posted a picture of himself surrounded by Aldi goods with the confession: “I am an Aldiholic.” Nigel Harvey posted the picture because he had gone into Aldi to buy some ­vintage cheese and organic honey and came out, thanks to the central aisle, $300 poorer. So he’s the obvious person to induct me into the world of Aldiholics, a world that seems to be growing so fast it will soon be deserving of its own AA group.

Days before we meet, Aldi makes the news (a not uncommon occurrence) for the crowds of women who descended on certain stores to fight over a new Collette Dinnigan kids’ wear range. And every day, it seems, I hear friends and colleagues discussing their Aldi wins and losses as seriously as they might the World Cup.

I know I am a supermarket Luddite. And ­having bought one too many blocks of mouldy cheese and rotting bags of salad leaves from mainstream supermarkets, I’m ripe for conversion. But as I stand in the central aisle of the Aldi in Edgecliff, Sydney, with Harvey pushing a solar panel at me, I still don’t get it. Why would I want any of this stuff? I have no use for it. Where is the conventional supermarket I know and understand? The one with shelves stacked with so much choice that you get dizzy: the shelves and shelves of juices, the scores of cheeses — so many types of brie! The banks of check-outs.

For a moment, as I entered Aldi, I felt comfortable, almost. It had the same air of familiarity you get in any supermarket; there’s the coffee, here’s the fish, the vegetable section, the cheeses. The packaging looks familiar, the displays are basic — many items are displayed in boxes or on pallets — and there is less choice than you’re used to. It’s only once you start examining that packaging that you realise there is nothing here you know; no labels you can recognise, none of your favourite brands. I pick up a packet of Vittoria coffee. Only when I look more closely at the packet, which displays the familiar colouring and design, I see it isn’t Vittoria at all but something called Lazzo, a brand I’ve never heard of. But it’s also half the price of the coffee in my usual supermarket so I slip it into my basket.

I don’t know it, but I’ve just started my own personal slide into the Aldi trap; a victim of “phantom branding”, one of this German chain’s most clever sales tools. More about that later. But in the meantime I’m still resisting the solar panel Harvey is pushing my way. “You should get this,” he says, selling it hard. “You could use it on your boat.” But I don’t want a solar panel, I tell him. And I don’t need it. “But that’s not the point, he says, pointing to the $120 price tag. In Aldi, the price tag is always the point. “And once you’ve got it, you might find a need for it.”

He takes me over to the box of motorbike jackets and starts digging around for one my size. “I bought my leather jacket here,” he says. “It’s not Dainese but it doesn’t look cheap and nasty. Practical and plain. Very German.” I point out that I don’t have a motorbike and I don’t need a jacket. He sighs again. Harvey started using Aldi when the discount store arrived in the eastern suburbs around seven years ago (it’s been in ­Australia since 2001) and quickly became an addict, regaling dinner parties with stories of the bargains he had found there. He runs me through his likes and dislikes. “I come in for the cheese, it’s surprisingly good,” he says. “Organic green tea’s not bad. Bread’s not bad, eggs are fine, veges and meat I think are quite good but I dare not admit it to the troops. Mind you, when I say troops I’m talking about people who have their weekly organic box delivered for $50.”

It’s the supermarket’s central aisle that empties his wallet. This is the area where, bi-weekly, Aldi displays its specials, which can include anything from a bar fridge to a food dehydrator, motor­cycle leathers to those Collette Dinnigan kids’ clothes. “It’s the bargain mentality,” Harvey says. “You can’t go there knowing you’ll get whatever you need but you do know that if you get something it will be good value on price and it will be reasonably good quality. And because they only have their specials up for a week or so, you know that you have to buy it now or you’ll miss out. It’s like going to a market, it’s very clever.”

A week later I’m in the Manly Aldi with Susie Jamieson. The IT consultant is a recent Aldi ­convert and now does most of her shopping there. She goes straight to what she needs: the fish freezer, the vegetables, the wine section, refusing to be seduced by the sales on the central aisle. “I get my fish here because it’s half the price of Woolies, and I always get my coffee here because it’s way cheaper than anywhere. And olive oil — look at that. Sixty cents for 100ml. You can’t beat it and it’s really good quality. Blueberries $2.50, strawberries two bucks. And the free-range chicken is good. I haven’t come here for the wine before but now I know they’ve got this vineyard [she picks up a New Zealand sauvignon blanc], I will. It’s only $8.” We go to the till. Her bill comes to just under $50. That bill would change minimally in any Aldi store — the company brought in a policy of national pricing in 2008, with the exclusion of fruit, ­vegetables and regional ­bakery products.

Since arriving in Australia 14 years ago, Aldi has become a retail phenomenon: the store that began in Germany as a discount supermarket aimed at lower socio-economic groups who wanted basic items with no expensive fripperies has not just entered the mainstream but is now as popular in hipster suburbs as it is in poorer areas. Research bears this out: a Nielsen report last year found that in 2006, 38 per cent of Aldi shoppers were from low-income groups and just 26 per cent were from high-income families. By 2014, the proportion of high-income shoppers had risen to 50 per cent.

As it grows its market share, Aldi is posing a very real challenge to the supermarket duopoly of Woolworths and Coles. It currently has 396 stores on the eastern seaboard (NSW, the ACT, Queensland and Victoria) and has gained 11 per cent of market share. And it has an aggressive expansion plan, opening its first stores in South Australia in the next couple of months and WA by mid-year. Although Aldi is still a way behind Woolworths (961 stores nationwide) and Coles (776), it is catching up; it has already overtaken the market share of its closest competitor, IGA. “If it continues to grow at the rate we’re seeing now, it’s not out of the realms of possibility that it could get up to 20 per cent,” says Ian ­Chitterer of Moody’s Investors Service.

In June, Moody’s reported that Aldi’s expansion — 60 new stores this year, 20 each in WA and SA and another 20 on the eastern seaboard — had brought serious challenges to the food retail landscape. Three months later, Aldi wrote to its suppliers announcing revised plans to open a further 20 on the eastern seaboard. At about the same time, in a submission to the Senate inquiry into corporate tax avoidance and minimisation, the company revealed that between 2010 and 2013 sales increased from $3.14 billion to $5 billion and pre-tax profit more than doubled from $121 million to $261 million. In response to questions last year over its tax arrangements, Aldi revealed it had paid an average effective company tax rate of 32 per cent over the four years to December 2013. A recent report from investment bank UBS labelled Aldi “unstoppable”, estimating the chain would take between $250 million and $350 million of annual sales from each of Woolworths, Coles and Metcash (owner of IGA) over the next five years.

What is it about Aldi? Why is it not only stealing market share from Woolworths and Coles but attracting people who would usually frequent high-end speciality providores? One investment analyst I approached to answer this question said he couldn’t be interviewed on the record because he found it hard to be objective. “I’d do all my shopping there if there was a big one near my home,” he said. “I bought some wine there recently for just $6 and it was lovely.” Most conversations with Aldiholics include mention of its wine, which has won a series of awards — most recently, at the 2016 Sydney International Wine Competition, at which Aldi’s 2015 South Point rosé ($5) won a coveted Blue Gold Medal while its Tudor Central ­Victorian shiraz 2014 ($12.99) also won a ­trophy. “My wife and I earn good salaries and we can afford to shop in Thomas Dux,” the analyst said. “But why waste the money? If I can save $300 a week by shopping at Aldi, I will.”

The story of Aldi’s success is famous among retailers. The Albrecht family, who founded the chain (ALDI is an abbreviation of Albrecht and Diskont, or discount), have managed its story and its image tightly; famously secretive, they never give interviews. Brothers Karl and Theo Albrecht grew up in a working class suburb of Essen before World War II. Their father, a miner, developed emphysema when they were children and was unable to return underground so their mother opened a tiny grocery store to support the family. Theo learnt the retail trade here in his teens while Karl trained at a delicatessen, both boys determined not to follow their father and their classmates into the mines. Watching their parents struggle to make ends meet gave both boys an understanding of value for money, which would underpin their business philosophy.

They both fought in the war and when they returned to Essen they opened their first discount supermarket in 1946 on the foundations of their mother’s ­grocery store. From the start, they based their business plan on the needs of their blue-collar customers — basic, day-to-day goods. By the 1960s the brothers had 300 stores in Germany, but then a feud between them saw the chain split into Aldi Nord, which ran in the north of Germany under Theo’s leadership, and Aldi Süd in the south under Karl. Aldi Nord expanded across Europe while Aldi Süd moved into Ireland, the UK, the US and Australia.

Even as they expanded, the brothers kept their goods basic and their stores spartan — lighting was harsh, and goods were stacked on pallets rather than shelves. But in the 1960s, this approach struck a chord with thrifty Germans across the social spectrum, as the new middle class discovered the supermarket’s cheaper wines, cheeses and olive oils. The same phenomenon has happened wherever they have opened: if I am a latecomer to Aldi in Australia, then Australia is also a relative latecomer to the store’s inter­national success story. By the time it entered ­Australia, Aldi was already huge across Europe and in the US. It now has more than 10,000 stores across the world.

Last year, it was named Britain’s top supermarket and Karl Albrecht — who was Germany’s richest man until he died in 2014, aged 94 — was described as “the man who destroyed Tesco” — one of Britain’s most successful supermarket chains. By the time of his death, Karl had a ­fortune estimated at $26 billion. Theo died in 2010, aged 88; his children inherited a fortune estimated by Forbes at $18 billion.

Despite their wealth, thrift marked the brothers’ lives. They were known to be the first people to turn off the lights in a room so as not to waste electricity, and were reputed to make their staff take notes with pencil stubs rather than fountain pens. When, in 1971, Theo was kidnapped by a lawyer with gambling debts and held for 17 days, he eventually paid a ransom of seven million deutschmarks (about $US2 million at the time) for his release but tried to claim tax relief on the payment, claiming it as business expense.

Obsessively reclusive, so few photographs of them existed that the lawyer who took Theo hostage demanded he show him his ID to make sure he’d kidnapped the right man.

When Karl died, the family waited until he was buried to announce his death and when Theo’s son Bertholdt died in 2012, his passing was revealed a month later in full-page obituaries that did not mention the cause of death.

The company is still known for its obsession with secrecy — when I approached Aldi Australia for an interview with group managing director Stefan Kopp, a friendly PR woman told me: “We are always encouraged to respond to interview requests, but we always say no.” Which just adds to the mystique. “They are fascinating,” says Megan Treston, director of Nielsen’s Retail Industry Group. “They’ve captured the dinner party conversation — people will say ‘Have you been there, have you tried it?’ That’s invaluable.”

Aldi has got under our skin and into our ­wallets not just because it offers value for money; it also employs a sneaky sales psychology. When you enter an Aldi store for the first time it feels familiar, a supermarket like any other, stocking the same brands. But this is a clever illusion. Most are “phantom brands” — goods from Aldi’s own suppliers that simulate the colour schemes and label designs of nationally known products. That Lazzo coffee I picked up was a good example; at first glance, it looked like Vittoria, a brand I knew and trusted. Only it wasn’t. The store’s Goldenvale cereals mirror those such as Kellogg’s, with similar designs, while its seashell chocolates look almost identical to the more expensive Guylians. “They make their brands instantly recognisable,” says Ian Chitterer of Moody’s.

The approach works: a survey by investment bank Citigroup early last year comparing 150 Aldi products with comparable products at Coles or Woolworths products found Aldi’s were on average 19 per cent cheaper than Coles branded items and 28 per cent cheaper than Woolworths Select items. Crucially, it also found that shoppers viewed Aldi private labels as an alternative to Coles’ and Woolworths’ mid-tier ranges, not their budget labels. Choice is also kept to a minimum; Aldi gives you just one or two types of each item, thus eliminating the price variables. This, combined with smaller stores (the floor size is much smaller than its bigger rivals), makes shopping there a simple affair. You find what you want, don’t get distracted by other brands of the same item, and get out. “They have made it radically simpler, cognitively, to make a shopping trip,” a Forbes report said recently.

Treston believes this philosophy is particularly suited to the Australian market, which is becoming one of Aldi’s largest. “Australians are promiscuous shoppers; we tend to buy over all the major retailers,” she says. “Only seven per cent of all households shop in just one store. But what we’re seeing across our data is that once shoppers go into Aldi, the quality and the value works for them. A new buyer will buy safe products; once they feel safe, they’ll add more. That’s how Aldi has achieved the holy trinity: more shoppers in stores, shoppers spending more, and shoppers visiting more frequently.”

Nigel Harvey, my guide at the Edgecliff store, gives an example of the Aldiholic philosophy which I’ve heard repeated among friends, one of whom describes Aldi shoppers as “a cult”. “I’ve got a 10-year-old Kärcher high-pressure cleaner that stopped working years ago. Recently I popped into Aldi on my fairly regular cruise and there for the very first time was an Aldi pressure washer — and it was selling for $100 as opposed to $160. So now lingering around my house is a brand new box with a Kärcher in it.”

It’s still in the box? “Well, yes. The point is it’s there for when I need it. Serendipity.”

All these tales of serendipity are fine. But if the bottom line is price, how is Aldi making a profit? Analysts I spoke with say it’s down to low overheads: there are only two to three staff per store, and no shop floor managers; stock is displayed in boxes and on pallets so the store doesn’t need shelf-stackers. Also, shoppers have to pay for plastic bags, which they pack themselves, and the smaller floor space means lower rent.

But it may be the relationship with its suppliers that is driving Aldi forward. Woolworths and Coles are famously ruthless with their suppliers — last year Coles refunded $12 million to its suppliers after the ACCC found it had engaged in “unconscionable conduct”, and the ACCC has also instituted proceedings against Woolworths with the same claim. Aldi, while tough, appears to cultivate a more collegiate ­relationship. It’s telling that the store announced its expansion to its suppliers rather than the media, and asked for feedback on how they could manage the production challenges this would entail rather than dictate the production levels needed.

Lack of brands and promotions also removes the power play between the supermarket and its suppliers; while smaller brands find their prices crushed by the big two, Aldi offers one price and doesn’t charge for shelf space or marketing fees. Smaller brands that can’t afford to deal with Coles or Woolworths find a home at Aldi.

But it’s not all good news; there are some clouds gathering over the company, here and in Europe. The ACCC is investigating complaints about the way Aldi and Woolworths set up supplier agreements required by the new Food and Grocery Code of Conduct, saying the companies have “not got off to a good start”. Aldi was also forced to correct labels on its Just Organic honey range which claimed, misleadingly, to be made with honey produced on Kangaroo Island.

In Germany, Aldi is embroiled in a furious price-cutting war with its discount competitors Lidl, Penny, Rewe and Edeka, and there are concerns that with Karl’s death the company may suffer a power vacuum. Last June, it was reported that Lidl was planning to move into Australia, which could lead to a similar price war here.

And the company has its detractors here. Entrepreneur Dick Smith, who supplies products to Woolworths and Coles, blames Aldi’s low prices for forcing the big two to pay less to their own suppliers to be able to compete. Smith also points out that its low staffing levels aren’t good for Australian jobs. There’s also the question of Australian made. Aldi told a Choice survey that 91 per cent of its fresh fruit and vegetables and 100 per cent of its fresh meat, eggs and bread are Australian grown and made. But last year Choice found that only 13 per cent of packaged Aldi products had ingredients that were sourced predominantly from local suppliers.

But, says Treston, the emergence of Aldi into the mainstream can only be good for suppliers and consumers: “Suppliers have more supermarkets to choose from and the customer will see more value for money.”

Back in Aldi Manly, I’ve just paid $50 for two bottles of wine, a bag of oranges, 12 loo rolls, a free-range chicken, a bottle of olive oil, two packets of halloumi cheese, 500g of coffee and a chiller bag. The same shop would have cost me around $75 in Woolworths or Coles. I also found myself lingering over the $60 food dehydrator in the central aisle — $100 cheaper than the one I bought recently.

Am I an Aldi convert? I can’t say I am. But I can feel myself teetering on the edge of that ­slippery slope.