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The political cost of Germany’s uber-competitiveness

Published in Business Spectator (Melbourne), 24 July 2014

At first glance, the following two news stories may seem like they have nothing to do with each other except that they happened over the past few days. On Monday, the International Monetary Fund once again admonished Germany for being too competitive, as demonstrated by its enormous current account surplus. Cyclically adjusted, it now stands at 8.25 per cent of GDP. Also on Monday, we heard that Karl Albrecht, one of the two founders of the Aldi discount empire, had died at the age of 94.

On reflection, however, one might argue that there is a hidden link between Germany’s über-competitiveness and the business model that Karl Albrecht and his late brother Theo pioneered. It is the same basic principles of efficiency, hard work and modesty that made Germany an economic powerhouse — and the two Albrecht brothers multi-billionaires. (Karl’s net worth was estimated to be around $24 billion at the time of his death.)

If you have ever shopped at one of the now more than 300 Aldi stores in Australia, you would know that their business model is quite different from other retail chains. Where other supermarkets sometimes have dozens of brands of toothpaste, toilet paper or detergent on offer, Aldi usually presents one or two. Other supermarkets may display their goods in polished, bright aisles. At Aldi, you might need to pull them out of boxes or take them straight from pallets.

Truth be told, the words ‘shopping experience’ do not come to mind when thinking about filling your trolley at Aldi. However, what Aldi lacks in ambience it makes up for in other ways. The quality of its products is typically as high as their prices are low.

Before the Albrecht brothers appeared on the scene, shopping in Germany was not too different to other countries. There were department stores and corner shops, bakeries and butcheries, and weekly grocery markets. In other countries, the end of the war ushered in the era of the supermarket; in Germany it was the birth of Aldi’s discount shops.

Having taken over their parents’ small grocery store in 1945, the Albrecht brothers managed to develop and perfect their very own new retail concept — one that has proven extremely successful.

The core of Aldi’s approach to retailing is its simplicity. It stripped away anything from retail that was not product or price-related. In the early days of Aldi, there was no advertising at all. The most promotion you would get from Aldi was a poorly designed leaflet informing you of next week’s special deals.

Advertising was not the only thing missing — there was also little in the way of choice or brands. Aldi’s initial philosophy stated that no store should stock more than 350 different items. Although the product range has expanded, it is still minimalistic by conventional retail standards. Established brands were also absent in the beginning. In their place, a range of Aldi fantasy brands were established, disguising the big-brand names that were queuing to supply to the ever-growing Aldi empire.

Everything about Aldi was efficient, predictable and simple. The same could be said about its relationships with employees and suppliers. Hard work and loyalty was expected from both parties. In return, Aldi enjoys a reputation as an extremely well-paying employer and a reliable business partner. Renegotiations of existing contracts are a taboo in Aldi’s business philosophy.

Its efficiency-driven business model is only part of Aldi’s legendary status in Germany. The other is the secrecy and modesty which characterised both its founders. Few pictures have been published of the two brothers. They never appeared in public, did not seek the company of other business leaders (let alone politicians) and, despite their enormous wealth, did not lead lives of luxury.

Karl Albrecht’s two known hobbies included playing golf and growing orchids. His brother Theo collected old typewriters. There is a telling anecdote that when Theo was kidnapped in the 1970s, his abductors insisted he show them his passport for identification because his suit looked too cheap for a man of his wealth.

When thinking about legendary German companies and brands, most international observers would probably name carmakers like Daimler or BMW, chemicals companies such as BASF or Henkel, or maybe even software company SAP. They all stand for engineering-driven quality products, which have been regarded as synonymous with Germany’s business model.

However, in the same context Aldi deserves more than a mention. Aldi stands for another side of German business: a very down-to-earth, unpretentious, cost-effective, hyper-efficient and superbly profitable way of doing business. These are perhaps not the attitudes with which you could produce new fashionable products, like high-end smartphones or luxury goods. But they are ideal to establish large retail conglomerates, in which the Germans have been brilliant — and not just through Aldi.

As much as Aldi may have reflected the Germans’ preferences, it has also shaped them. Germany today has the most price-conscious consumers anywhere in Europe, and they are probably getting the best deals as well. Deutschland has become Aldi-land, where low costs and high quality form an unusual union of joyful frugality.

Unsurprisingly, the Germans now expect everything to be a bit like Aldi: their jobs, their relationships, their political parties. Germany is probably the only country in the world in which a large electronics chain could get away with the slogan ‘Geiz ist geil!’ (‘Stinginess is wicked!’). The Germans are more than a little irritated when not everything in this world runs as smoothly as a Mercedes diesel or as efficient as an Aldi discount store.

And this is the hidden link to the other news story about the IMF lecturing the Germans that their large current account surplus might be a bit too much of a good thing. There may be good economic reason to question the desirability of having such a large surplus. One might also argue that most ordinary Germans would be better off with a lower surplus and a higher exchange rate. But try arguing such theoretical points to the Germans — they would reply that their huge current account surplus was just a symbol of their hard work, stinginess and efficiency.

It is the same mentality that has propelled Aldi to one of the world’s most successful retail chains, one that is driving Germany’s astonishing competitiveness. Except the international economy does not quite run like a supermarket.

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