Aldi's Approach To Managing Costs

Just to go into a bit of detail on a really important part of the discounter model being the control that a business like Aldi would have on its operating cost base. It’s overheads, store operating costs, logistics, head office costs. Could you bring that to life for us a little bit? If you have any benchmarks off the top of your head, that’s really interesting. Or just for a feel of how tight cost management is and what sort of cultural philosophy underpins that?

I would say that in a discounter, costs are of the highest importance. Actually, even higher than sales. That’s really quite a dramatic statement for anybody that calls themselves a retailer. It’s costs first is the mantra. What that means is that the business has to find a way to bring its management into the industry in a very specific way so that costs mean something. The Aldi philosophy which was incredibly successful was actually to forgo experience but just get extremely bright people. It went to the universities. It focused on the universities with the highest entry requirements in terms of educational results. It looked for the math, business studies, or anything commercial type topics and looked for the very best candidates. Now, these candidates were also the targets for most of the merchant banks and for some of the really big worldwide businesses. Like, Procter and Gamble or Mars. You’re in tight competition for these people. The key when you’re starting is sheer economics. You actually have to make an offer that is better than Goldman Sachs would offer. This is the philosophy of the business. It pays double the starting rate. I mean double. Not a few percent more. A hundred percent more as a starting rate for a graduate leaving with excellent results.

It has all kinds of guarantees about early responsibility, which is also a very big attractor to these kinds of people. Then you put them through a very professional, tough but very professional program where they learn what costs really means.

You’ve got to remember that Aldi is a very specific business. It does basically one thing, it runs Aldi stores. Aldi stores are around the world. Pretty much identical in size. Pretty much identical in terms of what it costs to build the building. Pretty much identical in what sales per square meter it’s expecting. Pretty much identical in terms of what costs it’s doing. The whole thing is run on a lead table type basis. It’s hugely competitive. When you get your results as a business manager within the company, they are compared with everybody else doing a very similar job in a very similar environment. You do not want to be in the bottom 25 percent. You just don’t. The kind of people are very competitive. The whole company is setup on that kind of basis. You want to be in the top 25 percent of performers. Costs are measured first. This is the philosophy.

After only a few years, most Aldi management can tell you exactly how long it will take to clean a store in minutes. How long it will take to merchandise a pallet. How long it will take to unload a truck. How long it will take to process a hundred customers through the cash registers. There are prizes given for people who can invent a small change to the business process that can quicken something up even if it’s only a few seconds because that few seconds is multiplied by thousands of stores and hundreds of days per year.

The final bill for this super, little idea is often worth an astronomic amount of money in terms of cost reduction. That’s the philosophy for which the business is built on. A nice little example. If you pick up a product, I don’t have one in front of me, but if you pick up a product and you show it to a normal food retailer, he will look at the colors. He will look at the messages that the product has on it. He will look at how beautiful this item is. He’s thinking how many of those I can sell. I’ll tell you, you put this product in front of any Aldi operating manager and the first thing he’ll look at is, how big is the barcode? If that doesn’t scan with one sweep of the arm across the cash register, that’s going to cost me money. That’s just one of a thousand examples I could give you of how this cost mentality is built in from day one.

Paul, in terms of what that translates to in terms of benchmarking for logistics costs or operating costs versus a mainstream retailer, are there some patterns that have emerged with any degree of consistency that you could share with us?

On average, if you just take the store operational expense, which is pretty much the biggest expense any food retail has, it’s half. As a percentage of sales, it’s half what a general supermarket would be. A well-run general supermarket. A well-run general supermarket needs eight percent of its sales to run its business at a store level and an Aldi level can run at four. That’s four-percentage difference. There’s a whole host of other differences across the business, but that’s the biggest single one. The labor productivity. That comes from a culture of understanding how long every single task takes. Are you meeting those targets? How can you improve, so that you are even further ahead of the competition in the future?