Successful German Discounters

Wal-Mart gave up trying to compete in Germany in 2006, unable to compete effectively against Aldi and Lidl.

Nonetheless, I was surprised to read in the latest Harvard Business Review (link to a summary of the article), that six German “hard discounters” (their term for discounters like Aldi and Lidl) are in the top ten global players. Between them, these six make $178,6 billion annual revenue out of the $220,2 billion that the top ten make between them. That is pretty impressive.

Part of the reason that Wal-Mart failed in Germany is that although Wal-Mart is seen in the USA as a discounter, it follows a completely different strategy to the German hard discounters. Wal-Mart’s stores are much larger, and they carry a huge range of stock compared to the German hard discounters.

Wal-Mart stocks up to 100 000 SKUs (stock keeping units); a hard discounter stocks around 1000 – 1500 SKUs. Of these over 90% are own-brand goods (Aldi), compared to under 40% at Wal-Mart. This allows them to run a much more efficient distribution chain than the larger discounters in the States, and gives them a massive price advantage. The HBR cites an comparison in made in Australia – a 60m roll of Aldi plastic wrap sells for A$1.29 compared to A$3.71 for a brand-name roll.

In case you think hard discounters are successful because of the current economic crisis, that is probably not the case – Aldi is Germany’s third most respected brand, behind Siemens and BMW. Their products often get the best rating in consumer test reports in Germany, beating the well known brand names. The quality is good enough that in the USA Aldi offers a “double guarantee” – if you are not satisfied, they replace the product and refund your money. As a result of offering good quality and low prices 43% of Germans in the lowest income group shop at Aldi – not surprising, but what is surprising is that 34% of those in the highest income group also shop there.

Here’s an overview of those ten global hard discounters summarised from the HBR article (Of the ten, I would hesitate to call Carrefour a pure “hard discounter”. Although they run some hard discount stores, they also run a large number of hypermarkets, each having a floor area and number of SKUs similar to Wal-Mart’s stores) :