Aldi and the German model: structural change in German grocery retailing and the success of grocery discounters

Abstract

Most accounts claiming that there is a distinctive ‘German model’ have focused on manufacturing industries. Less attention has been paid to the service sector, in part because of the claim that many services are not exposed to the international economy. This article examines one service industry in Germany, grocery retailing. This industry is of interest because its most successful firms – the ‘hard discounters’ such as Aldi – deviate from the manufacturing model of production along at least two dimensions: labour relations and product policy. Nevertheless, the hard discounters are very successful, both domestically and abroad. The explanation for the success of the hard discounters offered here is based on both an institution central to Germany – the Mittelstand – as well as industry-specific factors. This complexity cannot be neglected when analysing changes in the German economy

Keywords:

• Retail industry
• Discounters
• Retail regulation
• Germany
• Mittelstand

Acknowledgements

The author would like to thank colleagues Christopher Bahn and Petra Potz, as well as the editor of this volume, Sigurt Vitols, for discussing different versions of this paper. The comments of two anonymous reviewers have also been very helpful in clarifying the argument.

Notes

In retail segments, such as furniture or toys,Verbundgruppeneven have a dominant position. In addition, co-operatives are a general feature ofMittelstandenterprises in Germany. They have been founded not only by retailers, but also by craftsmen and farmers (Olesch 1998).

The termMittelstandis very important in German public discourse, but is difficult to define precisely. Besides the oldMittelstand, consisting primarily of craftsmen, shopkeepers, farmers and (sometimes) all family-owned companies or small and medium-sized enterprises (SMEs), there is the newMittelstandof self-employed professionals, white-collar employees, and even skilled blue-collar employees.

This was essentially an equivalent to the traditional system of entry in GermanHandwerk, where theMeister(master) exam is a precondition for setting up a company. This system, which includes vocational training, is frequently described as a basic element of the German production model (Streeck 1991).

Since retail formats have developed differently in different national environments, it is difficult to translate the terms exactly. Large stores up to 2,500 m²in Germany are calledVerbrauchermärkte, comparable to the British term superstore. Large stores over 2,500 m²in Germany are calledSB-Warenhäuser(self-service department stores), comparable to the Frenchhypermarchéor hypermarket.

Another regulation, which is quite obvious to foreign visitors, is the restriction on opening hours. These are currently being debated intensively in Germany and have been liberalized in several steps. Effects of this regulation on industry structure are unclear.

Consumer co-operatives also had a much stronger position in France and the UK than in Germany (Soumagne 1988; Fairbairn 2000).

In Spain too, a highly regulated and very small-scale retail structure existed until the late 1970s. After the end of Franco's dictatorship and the following widespread liberalization, the independent retailers who were rarely organized in co-operatives had great difficulty in maintaining their position against the new formats being imported from abroad (Frasquetet al.2003). By far the biggest grocery retailer in Spain today is Carrefour, which is not only represented by itshypermarchésbut also owns the extremely successful grocery discounter Día. Finally it might be interesting to look at Japan, which also has a long tradition of a very restrictive trade regulation prohibiting the spread of new formats (Grier 2001).

The market share of multiple outlet stores in German retailing has risen from about one quarter to about one half since the early 1970s. The share of totally independent retailers owning four or less stores and not belonging to an association has decreased to 11.5 percent in 2000 (EHI 2003).

The Rewe group has even diversified into activities like tourism and television.

Thishypermarchéwas a large-scale store at the outskirts of Paris. It had a total sales area of 2,500 m², 12 checkout counters and 400 parking spaces. Discounters andhypermarchéshave learned from developments in US retail and adapted these to the different conditions prevalent in each country. See also Rehmann (1967) for an overview of the many early types of discounting that emerged in the USA and Germany.

This description of the origins of the Aldi discount strategy is based on one of the very few public statements of Karl Albrecht in 1953, cited in Brandes (1998).

Since 1990 partially in co-operation with Danish Dansk Supermarket group.

The number of Aldi shops in Germany grew from 600 in 1970, to 1,600 in 1980, to over 2,200 in 1990.

Netto and its parent company Interspar were acquired by French Intermarché in 999. Since 1987, the drugstore discounter Schlecker has also been expanding rapidly abroad, with over 2,000 outlets in Austria, Spain, the Netherlands, France and Italy.

On the general concept of global strategies see Porter (1986); for the retail industry see Salmon and Tordjman (1989); and on German discounters and Frenchhypermarchéssee Zentes (1998).

This is in clear contrast to other German retailers, who have been internationalizing by external growth through mergers and acquisitions. Examples of large take-overs are Tengelmann's participation in the US chain The Great Atlantic & Pacific Tea Company (A&P) in 1979 and Rewe's acquisitions of Austria's biggest grocery retailer Billa in 1996 and Italy's Standa group in 2001.

AssociatedMittelstandshopkeepers combine a relatively cheap centralized sourcing mechanism and other support from the buying group with the high motivation and hard work of theMittelstandbusinessman or -woman. Edeka sees a strategic option in setting up new supermarkets in the immediate neighbourhood of Aldi discount outlets.

This compares with supermarkets, which on average sell around 9,250 different grocery products (EHI 2003: 258).

See various reports in the German press, e.g.Stern28 November, 2002;manager magazin1 September 2003.

The nature of supplier relationships has often been said to hamper progress in the direction of lean retailing and efficient consumer response in German retailing (Möll & Jacobsen 2002). A good indicator is the average throughput time (i.e. from the supplier's packing line to the retailer's checkout) for dry grocery products. At the beginning of the 1990s, this was extremely short in the UK (29 days). The corresponding time for Germany was 47 days and the average throughput time in the USA was 100 days (Fernie 1996).

For a different view see Jacobsen (2001: 37), who tries to fit German retail into the German model of diversified quality production. She sees ‘a diversified production … in German retail insofar as very different formats, i.e. specialist retailers on the one hand and discounters on the other, have both enjoyed great success’.

Several manufacturing industries, such as apparel, shoes and toys, which employed high shares of relatively low-skilled female workers, have relocated their production abroad or have been pushed out of the market by foreign competitors. This structural change in manufacturing has, in turn, reinforced change in retailing, where larger and more vertically integrated retailers organize their own global value chains (Wortmann 2003).

Interestingly, the German public does not see the hard discounters as an exception in the German business world. In 2003, when asked about which German company they thought was most successful, more Germans chose the grocery hard discounter, Aldi, than traditional representatives of German economic success, such as BMW, DaimlerChrysler and Volkswagen (DGQ 2003).

The first foreign companies entered the German grocery market only in the late 1990s. The example of Wal-Mart shows the tremendous problems foreign companies are facing in this highly competitive market (Knorr & Arndt 2003), indicating that these companies are no competitive threat to German grocery retailers.

An exception is the study by Streeck (1992) on the semi-private organizations of GermanHandwerk.