Interview Transcript

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

You spent over a couple of decades at Aldi; could you briefly share exactly what you were involved in, across the business?

When I first got involved with Aldi, starting the business in the UK, with its base in Germany, by that time, it also had foreign operations in Austria and the US. Starting the business in the UK was an idea. First of all, there was some internal due diligence to do and I was recruited on the basis of, we were pretty sure about it, but we need to check a few things. They looked for a young executive team to do that, with the idea that they would be the same team that would actually manage the business, when we got it off the ground.

This was 1988 and I joined, having had 10 years previously at Iceland frozen foods. It looked a very interesting story, when I saw how powerful the business idea and concept was, in Germany. I was sold on the idea, almost from day one and didn’t look back from that point on. Perhaps I should mention, I finished up the last 12 years as the CEO of the business. We also opened in Ireland and this became one business unit; the UK and Republic of Ireland and I enjoyed every minute.

What made it so clear to you, early on, that this was a very powerful model? What did you see in the leadership of the business that gave you confidence in what Aldi was doing at the time?

The business had been running, as a company, since the early 1950s. But actually, in earnest, it had been running for 25 years, prior to me starting, in the format that it was. There were certain things about the business where it was obvious – speaking to people who had been on that journey for 25 years before I joined – that they were not likely to change in the future because they hadn’t changed in the previous 25 years. The first thing that struck me was an absolutely rock-solid commitment to gaining the trust of the customer, the employees, the suppliers and business partners. Almost every rule or method or procedure of the company was built around ensuring that. To be frank, I hadn’t seen something like that before.

Yes, looking after your customers is a standard prerequisite for a good retail company, so that wasn’t so different or difficult to understand. But really looking after your employees, that was something new to me. For example, having a mantra that says, let’s pay our people as much as we possibly can. I had been involved in the complete opposite before. What do we need to pay; don’t pay a cent more, would probably be the mantra of most of the other business conversations that I had been involved in.

Then, dealing with suppliers in a way where, actually, you didn’t need a contract. I’m not telling you I never saw a contract, because that wouldn’t be true, but you didn’t need it. If you said you were going to go do something and the supplier said the same, a handshake was undertaken and that was it. The contractual side was almost purely administrative, in order to satisfy rules and regulations of inter-country or inter-company dealings. That was new and refreshing and, somehow, such a strong set of ethics that ran through that, you gained a very quick confidence that, if these guys said they were going to do something, they were going to do it.

How was this brought to life to you? Are there any stories you can share with us, given that you mentioned this is unusual behavior, in retail?

I’ve got many stories that will support it. The first thing, of course, is that we had to launch on the market by recruiting people at all levels, to run the logistics, to run the stores, to occupy the commercial jobs in the headquarters, buying product and that kind of thing. We did quite a bit of market surveying, looking into what were the normal costs, and we did our own business plan. The remarkable thing was, the business plan involved a level of revenue which was not really justified with profitability. What the business understood, from the previous two countries that it had entered – Austria in the 1970s and the US in the 1980s – is that when you come with an idea that you are going to sell 90% plus of your own products – not brands – you would try to match the quality of big brands and you would try to sell around a quarter to a third cheaper – depending on the product category – than those brands.

The first people that would oppose the idea were the current incumbents. Actually, what you were saying was, I’m here and, if I’m successful, I’m going to disturb – would be one word – or ruin your business. The current incumbents, in the UK, were understandably not very enamored with the idea that Aldi should pitch up on its shores and try and do the same kind of thing that it did in the previous three countries, particularly in Germany, where supermarkets complained there wasn’t any room, financially, for them to operate properly because the margins and profits were so minimal, based on the fact that Aldi and Aldi lookalikes dominated the market. They wouldn’t want the same thing happening in the UK.

Everybody did their best to ignore us. Nevertheless, the business insisted, when we recruit people, we do so with long-term contracts. Also, that we recruit people on salaries so we can identify the best talent in the industry, with absolute confidence that this will work. It will take time, and what we need is great people who have a solid belief.

Show me around the world where there are entrepreneurs who are so confident in their business longevity, that they would do that in a way that was not really affordable. There was zero chance of making money in the first five years, with what the business saddled itself with, in terms of a team and facilities. But it was always understood – and it wasn’t too difficult for new people joining to see the evidence – that this was being built for the long term. It would work long term and, therefore, it’s a question of just getting down to your job and your work, not worrying about whether this company will be here in two or three years’ time. I never encountered anybody who said, “The results are not that good on the P&L this month or this quarter or this year; I wonder if I will have a job next year.” That was never a discussion amongst anybody and I think I would have known about it, if it was. I think that’s a very special thing.

How present was Karl Albrecht in the business, when you joined, and in this experience you had, in your early years, with the UK business?

When I joined, he was pretty much at early retirement; he was 60. This was his life’s work, to get the company to this position, not just as a business that was actually very, very profitable, with zero borrowings and a very strong business idea, but he was very present, culturally. I think he took it upon himself, in that period between 60 and 70, as he eased back in executive responsibility, to just ensure that the culture of the business didn’t change and that it was as strong as ever.

There were two things that I remember him preaching, wherever he had an opportunity. He did it in many different ways. The first point was very clear and that was, turn the penny three times before you part with it. In other words, think about what you are spending the company’s money on, in a way that it is really important to you, as an executive. You can have the authority, you can have the responsibility, but I demand that you think about it very carefully. There is no cost too small not to concentrate on, to think about, is that really the lowest cost of operating. Many of his questions and discussions in board or conferences were to illustrate that point.

It wasn’t always about not investing. In fact, it was often the opposite. If you invested a bit more, could you get a lower cost of operation? That manifested itself in the juxtaposition of, how come we have higher salaries than anybody else in the industry and, at the same time, there is constant messaging about being very careful with your spending. For him, it was always very clear. If you have the best people, you will get the best results, you will have the lowest cost of supervision and you will have the highest productivity and highest level of innovation in cost management.

For him, investing in really good people was not a way to save money; reducing the salaries of people was never a way to save money. The way to save money is in expertise, in low levels of supervision, in high levels of autonomy and responsibility, which create a very productive environment. Interestingly, even though we had the highest salaries in the industry, when you looked at the ratio of cost to sales, it was the lowest. A typical supermarket would run on 7% or 8% of its revenue in salaries and we were 3%.

Jim Sinegal used to walk the stores and was extremely present at the front lines at Costco. How did Karl and Theo behave?

Very dynamic managers and owners live on two things. They live on how strongly, culturally, they are able to develop their direct reports. And they live on their history. Even without personally experiencing some of the stories that I knew, I understood what it was that was important. If you built a new store and the car park gradient was more than 2%, this was an owner that could spot it before he drove onto the car park. He would claim, if the customer lets go of their trolley, while they are trying to fill their car up, the trolley will roll away, if it’s more than 2%. It will either hit another car or it will roll away so someone will have to go and collect it at the edge of the car park. All of that means that you will lose trolleys, they will get rusty, they won’t have the same life length and you will need labor to collect the trolleys. For him, 2% maximum car park gradients were a way of saving money and woe betide anybody who didn’t pay attention to that and take care of those kind of things.

There were these myths or legends in the business, which I didn’t, personally, experience, but I knew about them and I could tell you 50 stories like that. Clearly, the involvement level, the understanding of every aspect of the business, was Karl Albrecht’s forte. Even after he stepped back a bit from executive responsibility, those stories were still so strong that no country manager, operations manager or expansion manager would not understand that rule. Not only understand it, but why it was so important. That is very interesting when the character and the persona is so powerful that the messages live on as though people are telling fables about their time, 20 years earlier in the business, when they maybe suffered because they made a mistake building a car park which had too much of a slope on it.

How extreme was the response, or the immune system of the organization, in your time there, to violations of these core principles?

It was very strong. I don’t believe it’s any different today. There were core cultural rules about taking care of your responsibility towards customers, employees and suppliers, which were really very strong. In fact, you knew things which would get you instantly fired – which were nothing to do with financial performance – if you just broke those cultural rules.

But there were some less obvious rules. I even remember some personal story of wrath. In the early days, after we had matured as a business and the UK had been going about 10 years, it had started to become quite profitable. When we became profitable, the ramp up of profitability happened very quickly. We crossed the line, in terms of being able to cover our costs, and we got to a scale where we could encourage ever better product quality; mixing cases so the range widened without costs being changed. There was almost an explosion of growth. It happened about the time of the financial crisis, where the whole country was beset with media telling you how you can save money, and one of the ways was to look at these new discount supermarkets.

This kind of circumstance meant that we were suddenly profitable. There was one quarter where I was really profitable; supremely profitable and way over any kind of budgets or business norms; 30% over the business norms. The normal process was that you sent your quarterly figures in, you had a call, a few days later, with the mothership in Germany, to just talk them through. I thought, this is going to be an exciting one because we really hammered our profit projections for that quarter. I was totally shocked; they were not impressed at all. They were asking questions like, are you too expensive? Why aren’t you reinvesting those margins in more attractive prices? Why are we suddenly satisfied with this market share and we are allowing potential beginning of stagnation of the business?

I actually wasn’t prepared for that. I thought I was going to get tons of congratulations. The notion was very clearly stuck in my brain, after that conversation. Market share growth is much more important that short-term profits and profits, in general. The whole business had been built, for the previous 10 years, on ramping up the number of stores, getting more customers, getting more loyalty amongst the customers and you are suggesting, now, that we can make more money than other supermarkets and that is not very sensible, Paul; please reconsider. Which, of course, I did, pretty rapidly.

It was another clear case of, we are aiming to get 1,500 stores, 12% market share and the opportunity for every consumer to have the chance to shop in Aldi, and then the job is done. Don’t come with one quarter and boast about high levels of profit in that quarter; just focus on getting through that long-term strategy and goal. When I thought about it, I was pretty impressed with that. I went back to the whole team and explained, actually, we’ve not done it right here. We should take some of this profitability and not repeat it, but invest it in ever-lower prices. That was a very good lesson for all the management team, including me, as its leader, that we are on a journey here. Just because we are profitable, it doesn’t mean we’ve made it. Let’s get to 1,500 stores in the country.

The guys are still on that journey, by the way. They are much closer to it now, with 1,100 stores, when you include Ireland. But still, it’s not done.

I recall us having a conversation about a story that I’d love to invite you to share here. It was around the lack of willingness, on the part of Karl, to compromise on the quality of the store state. I remember us talking about the expansion and the incredible like-for-like sales that you were seeing in the mid-2000s, and there being opportunities to compromise on store formats and, perhaps, locations [which would have allowed for even faster growth]. I wonder if you could share a bit about that experience?

There were two directions that that whole program took. The first is, again, longevity. We installed a sales floor, which was actually quite expensive. Remember, your whole life is focused on, can you do certain parts of the operation cheaper? Can you achieve a certain result and spend less money doing it? If you can, you should be seriously thinking about that. The floor that we put into the supermarkets was legendary. You needed to get a certain floor tile from a certain part of Italy because it was, virtually, non-porous. That meant you could spill beetroot juice or red wine on it, it could stay there for 10 minutes and you could just wipe it off. You need no preparation on this tile to be able to do that. It’s just a really, really dense format. It can also take the weight of one kilonewton. That means you can point load a ton on that floor and you can’t break it. But it’s very expensive. Worse than that, it’s bloody difficult to lay. You really need a good floor layer. The average Joe would make a bad job of it; it wouldn’t be even and you would hear the trolleys going clunk, clunk, clunk as they hit the edges of the tiles, if it wasn’t completely flat.

We found other floors, which didn’t have quite the same longevity, that were about 30% cheaper and that was a big part of the construction of the store. Of course, Mr Albrecht was keen to listen to the story but, interestingly, he never got involved in any kind of products; he never got involved in any kind of marketing schemes. But if you wanted to alter the floor, which was the same floor everywhere in the world, for him, that was a big deal. What he wanted to know was, what is the 30 year life cost of this floor, including the cost of cleaning, because you can just whizz over the floor we laid. In 22 minutes, you could do 760 square meters, with a floor cleaning machine. Were you still going to be able to do that or was it going to take 30 minutes? How many times will you have to repair this floor and where is the evidence?

In the end, he was right. The 30-year cost of this floor was cheaper, if you stay with the existing floor tile. For him, it was just common sense. The store is going to be there for 30 years; we’ve invested in a location; we’ve built the store itself. Why do you need to bring yourself problems with the floor which is the most difficult thing to fix, in a retail store. When the floor is a mess, you need to cordon off areas for several days, to be able to fix it and you don’t really have several days. This is a seven day a week operation and that floor just needs to perform, for 30 years.

Again, it was this absolute solid logic that he had that the idea is to build the floor for 30 years and it needs no maintenance. Don’t bring me an opportunity for building it for 20 years, and it then needs a lot of maintenance, and save some money at the beginning, if you’re not going to have the lowest cost over 30 years.

I think what he is, in many of these circumstances, he just picked on one aspect to prove the whole idea of the thinking of Aldi. Lowest cost, but over the long term. No shortcuts, which look good at the beginning but, after five or 10 years, you start to pay the price for not putting the investment in, in the first place. From time to time, he invited senior executives to his home, for a dinner, and we were all laughing like crazy when we saw the same bloody floor tile in his house.

That is incredible.

It was a funny story, that he is so in love with this long-term, he even built his own house using those floor tiles.

I also recall a conversation we had around the selection of sites and the possibility you might have had of making slight compromises on the quality of the site, that would have translated into much faster growth?

Yes. For him, the store estate – particularly the stores that stood alone, which was the vast majority of the stores in the startup phase, or the first 20 years – encouraged that you had the perfect productivity. You built them yourself, they were all exactly the same and the whole building was ergonomically perfect for the operation. In those stores, his attention to detail and his demand for everybody’s attention to detail, was absolutely non-negotiable. If you couldn’t get the store to the right shape, if you couldn’t get the loading bay in the right place, if you couldn’t get the entrance to the store in the right place because of some particular about the site, just forget it; just go somewhere else. Don’t tell me it’s the last place in that city that will ever be possible to open a store. Just do it properly.

It didn’t take very long before everybody in the company, including myself and all my colleagues in other countries, understood these kind of things are non-negotiable for the business. It needs to be perfect, or just forget it and go somewhere else.

We’ve spoken about this relentless focus on being the lowest cost operator, managing this paradox of, yes, market share really matters, but not if it comes at the expense of a increase in the cost structure, that would undermine long-term competitiveness. What else, for [Karl], was non-negotiable, that would be uncommon in retail?

This culture is easier to absorb and perpetuate when you find people of a certain type and at a certain stage in their career. You put those people through the same initiation process, to bring them into their final roles. One of the unique things about Aldi – and it’s still unique today; I still enjoy looking at the job ads of competitors, in different markets, but I’m still related to the UK – is it’s not possible to join Aldi today in any kind of senior management position unless you start in a junior management position and you learn the business from the shop floor up.

This was another part of the Aldi culture. Today, if you go and meet somebody who is my age, 65 years old, in the Aldi organization, I guarantee you that they have got between 35 and 40 years’ experience with the business. There is nobody, who started with the business, in any kind of management role, who started at the age of 40 or 45. Pretty much everybody joins somewhere not too long after their university degree and joins the business in a trainee role that, first of all, introduces them to the business, and then they actually start their career by running a group of Aldi stores. From there, they can go into any kind of direction; expansion, buying, IT, operations, logistics. It doesn’t matter where they end up; they are going to spend those first three to four years operating the business in one store and then, very quickly, in a group of stores.

That is unusual because that is really long term. You are recruiting your next regional director – running 100 stores and having a whole geographical area of the country, having your own warehouse, your own expansion team and building a business in a certain geography – 15 years earlier, aged 25, 26, 27 and growing them through the business, as opposed to recruiting them having come and done that job for Lidl, Tesco or some other company.

When you start a new country, of course, that’s very difficult to do. What is possible, now, is that you can bring, from the Aldi world, a whole bunch of people who started 15 years ago and say, for the next two years, we would like you to go to a new country. We would like you to help set up and grow these people through our normal process. This is an amazing machine for making sure that all that culture that we are talking about today, is protected. There is some of it written down but, in the main, nobody goes to a manual for these cultural things. They are just there because everywhere you look – left, right and center – there are examples of it. That is when you know a culture is strong. It is even self-cleansing. When someone comes up with a new idea but it is opposed to the culture, you get 100 peers telling you, no, we can’t do that; that would affect ethics with a supplier or that would not be fair on the employee, or that’s not long term. We will save money for the first five years, but we would spend more money in 10 years’ time. That is not your boss telling you that; that is your peers. Sometimes, it’s even your subordinates telling you that.

Actually, it means that innovation is quite hard to do, because there are always some good ideas. But the strength of the culture protects so many good things, it’s worth having that challenge to get anything new accepted in the business.

How did the company look at incentive plans and compensation, throughout your tenure, as a tool to align behavior with these values?

That’s a very interesting story. There are a lot of books written and there is a lot of best practice which talks about you organize fixed salaries and how you organize incentives to align managers with the company goals. Maybe I’m going to shock you because I don’t think we’ve ever talked about this before, but across my 23 years, there were no – zero – incentive schemes. Bar one, but I need to explain that to you.

For managers, it was a very good salary that was, actually, outstanding at the early stages of your career. It flattened out as you went to become more and more senior. It was never uncompetitive, but the gap between the market for someone who was 25 years in the industry, and the Aldi salary, was much smaller after 25 years than it was at the beginning. There was good sense in that. If you want the very best people, you need to offer the very best package at the beginning. Once you’ve got them, your job is to make sure their careers are exciting, make sure that their careers are really motivating and to give them the opportunity to really realize their potential.

Once you’ve done that, I have to say, most of my colleagues who had similar kinds of experience to me – 20 to 30 years plus – they were motivated by the opportunity to work in a style that they felt really, personally, comfortable with. They not only identified with the culture but they actually sold that culture to new people and then your level of engagement is on a very high level if you are actually selling it yourself. It wasn’t so much about, am I earning more than I would do in any other position, although I never saw a circumstance where somebody would have said, actually, if I switch to company Y, I would earn 20% more.

The incentive came from knowing that you are doing a job which is to the best of your ability, it fits within the culture and there was a lot of feedback. To keep this culture understood, there was a lot of, either, one on one teaching with your boss, or there was a lot of time spent on conferences for people of the same level, within the organization, to share best practices, to share stories of successes or failures, which just seemed to always end up in consolidation of the culture. I’m very quickly moving from financial compensation to, I would say, emotional compensation, but with a salary that everybody considered to be very fair.

Another feature of it was that there was a lot of consistency. For example, when the country managers understood their pay increase, on an annual basis, we all got told in a group. There was no one on one discussion; it was all done in a group. You didn’t need to sneakily find out, I wonder what they pay Jim in the US or Joe in Australia; you knew. You also knew all the salaries of the people junior to you. You didn’t know the salaries of people senior to you, out of respect, but you knew all the salaries of your peer group and those underneath you. I never once found that that somehow reduced the motivation of somebody.

Salaries were very fair and very competitive and you had grown up in an environment where you knew – especially in the early days – that you probably made 30% or 40% more than your peers in other companies.

In the absence of an actual equity stake in the business, where did your sense of ownership come from? Listening to you, it does seem as if there was, and is, a palpable sense of ownership for the outcomes that you were involved in?

First of all, the people who were progressed right to the most senior levels in the company were those who enjoyed this responsibility, not only for producing results, but for building teams and businesses in the way that Aldi wanted. There was a pre-selection, if you like, without you even realizing it, until you look back. That was a quality that was prized by those who were choosing individuals that progressed in the business.

That was strongly backed up by the idea of something called the Aldi Management System. It is a kind of rulebook on how you must treat people and how you should expect to be treated yourself, in leadership terms. One of the core principles of this Aldi Management System was, never give responsibility without giving an appropriate authority so that there is no chance that you could blame any lack of success on someone interfering or some kind of bureaucratic rule that meant, I’d like to do X, I’m responsible for it, but I don’t have the authority to change things.

When you have the complete responsibility to do what you like, but you are controlled in your own mind by what you know to be a very strong culture, which you identify with, personally – you would subscribe to that culture, naturally, even if it wasn’t imposed upon you – then you get a bunch of people that behave as if it is ‘my part of the business’ and I have to take care of it. I have to make sure that everyone who works for and with me also understands these rules. It is an incredibly clever way of motivating leaders from within and it’s very powerful. When you work for somebody who has got this this strong sense of ethically correct ways of doing things, if you are normal person, it’s quite hard to say, I don’t want to do that; I think I can screw him or get away with something. The minute you found somebody who was even thinking that way, you start to come to the conclusion that, perhaps, that is not the right person for my team, or certainly not the right person I could trust with that level of authority in the future. Self-cleansing comes in, once again.

In terms of the culture that you’ve described, if we look at what would, typically, be considered the hard choices in retail, such as how you treat your suppliers, how you manage margins, do you give more of the benefits of scale back to the customer, it doesn’t sound as if it was particularly hard, within the Aldi context, to make those [long-term] choices?

You’re right. Everything seemed to be very easy to decide in an ‘Aldi logic’. The truth is, there were some times when you had to make some kind of hard choices. When you feel responsible for a business, you often have two or three ways to tackle a problem. There are several examples. Especially in the UK, which was a very strong, very rich and successful retail supermarket industry, with four top players, who were considered amongst the best in the world at producing a very good result for their customers, a very good result for their shareholders and, by any kind of benchmark practices, a high level of profitability for the investment that was made, there was one thing that became very obvious. That was that because there was so much legitimate but, nevertheless, tough practices to keep Aldi out of the market and having that very nice profitable party disturbed, you began to really value the private-label suppliers that you had, in a way that would be suicidal to not organize the relationship in a way that was win:win, for both sides.

You had a situation where you built, from the beginning, a relationship with small manufacturers, who understood the growth story and growth plans and were prepared to grow with you. Sometimes, we used a little bit of our own money to help them; we made investments in those production factories, to enlarge them or put more sophisticated plant in. Sometimes, we wrote contracts that were good enough for the business to take to the bank and say, I have this long-term contract; providing I don’t muck it up, I’ve got this business in the bag for the next five years; lend us the money to extend the factory or improve the plant.

These were the kind of tactics we used to build up our supply base and to have branded quality product at lower prices because of the method and assurability of the business relationship.

If somebody came in and said, I can do that and I can do it for 10% less, and you know that, one day, maybe I will need more than one supplier, you have to think very carefully about whether or not to do that. This guy has been with me for the last 10 years. Everything I have asked of that supplier, he has done. Now I have the opportunity to maybe take 25% of that business away and divide it amongst two. I’m probably going to need to do that at some stage because, just out of supply security, you can’t put all your eggs in one basket and you’ve already explained that to the supplier. But it wasn’t now.

The opportunity stares at you, there and then, and you have to make the decision as to what you do now. Do I retract and go back on a promise that I made and risk that the supplier that I have been with for the past 10 years loses a bit of faith that, if I can retract that, I can retract other things? At the same time, this opportunity needed to come anyway; it has just come three years too early. These were hard choices, to be honest. Lidl is also there and, if you don’t make the deal, you know where the next address is going to be for that manufacturer.

How did the culture help you make those choices?

When it was really a tough choice, there was the opportunity to talk to the guys in Germany and say, this is how I see things; this is what I think I should do; these are all the facts. Do you support this? Generally, always sticking to our promises was the way forward. Sometimes, if we went down a slightly different path, we made sure that there was some other compensation which was really fair and reasonable and, perhaps, a little bit unexpected on the part of the supplier.

What I’m saying is, it’s not possible to say that everything was just crystal clear and easy to do. Not only did we have Lidl breathing down our neck – and that still is the case – but there was also Netto, at the time, which was wanting to be a third leg of the discount scene, in the UK and all the supermarkets, despite what they say, were also very interested in our business model and were thinking about, how can we either copy some of that or do something similar ourselves? All those suppliers who, potentially, might have been able to fall out with us, could then easily have been potential suppliers for the big four who ramped up their own private label programs.

We saw Tesco try to develop an Aldi MeToo type of operation but, before that, they were experimenting in categories with products. You don’t want to just give your competitors to make that easier. It was complex, to be honest, but the guiding principle was always, if you’ve got a contract or a handshake and you’ve said, I will not do this, we never compromised that.