6 March 2019

Aldi, Lidl and the beauty of competitive capitalism

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One doesn’t expect to find the Guardian extolling the virtues of capitalism, but yesterday’s long-read on Aldi may be the exception that proves the rule.

The story of the deep discounting supermarket and its near identical rival, Lidl, is a fine example of how when markets work properly, we are all better off.

The arrival of Aldi and Lidl in this country in the 1990s and their subsequent expansion has not only offered price-conscious shoppers something different, it’s made the entire British groceries sector more competitive.

The way the German firms have gone about things is also a rejoinder to the idea, popular among some leftwingers, that companies succeed primarily by exploiting their staff, screwing over suppliers or ripping off customers.

Aldi pays its staff well, it just needs fewer of them because of its hyper-efficient business model. The basics are simple enough: fewer product lines, much smaller shops than their competitors and a preference for private labels over often overpriced big brands.

There are a few other neat tricks that help keep prices down: products are displayed in the crates they arrive in, so staff don’t waste time unpacking them, and items have lots of barcodes so they can get scanned through the tills quicker.

You might spend a bit more time queueing, but for the customers voting with their feet, that seems to be a sacrifice worth making – indeed, both Aldi and Lidl outdid their Big Four rivals on customer satisfaction in a recent Which? survey. And it’s not just about ultra-low prices, both retailers have built their UK success on evolution, gradually bringing in ‘posher’ products to appeal to different demographics.

Thanks to efficiency and evolution, the two firms now have almost 13 per cent of the UK market.

But the key point is not just that they imported an innovative way of doing business, it’s the impact their presence has had on the rest of the British groceries sector. While economists and commentators often talk about new arrivals putting their competitors out of business, perhaps less remarked on is the way that new arrivals can spur the rest of the market to up their game.

Nowhere is this truer than with Britain’s supermarkets. Before the Teutonic interlopers arrived with their spartan stores and unfamiliar product lines, the likes of Sainsbury’s and Tesco enjoyed profit margins of around 7 per cent. Fast-forward a few decades and that is down to just 2 per cent.

The German firms are the archetypal disrupters, bringing in a new way of doing things that forces competitors to sit up, take notice and improve. That competitive pressure is the bedrock of a successful capitalist economy, and one of the many reasons it ends up providing living standards far beyond anything achieved in a planned economy. Conversely, when capitalist economies drift away from competition, either through nationalisation of industries or monopolisation in the hands of a few big players, it’s always the consumer who loses out.

Of course, having a truly free market economy does mean some are rewarded more handsomely than others – and that is true here too.

Like US giant WalMart, both Aldi and Lidl were founded by families who have grown stupendously wealthy from their success. The heirs of Aldi founders Karl and Theo Albrecht are near the top of Germany’s rich list, as is Lidl’s chairman Dieter Schwarz, whose father Josef founded the company in the 1930s.

But if you were going to pick a bunch of billionaires to cheer on, the supermarket scions would be good candidates. After all, both families’ fortunes rest entirely on providing real benefits to their customers. Their personal wealth pales in comparison to the amount they have saved shoppers over the years.

And part of the beauty of competition is it’s not just those who choose the discounters who are benefiting – anyone who shops in a rival store that has reduced its prices to remain competitive is also reaping the rewards of disruption.

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John Ashmore is Deputy Editor of CapX