Aldi and the German Model: Structural Change in German Grocery Retailing and the Success of Grocery Discounters
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Competition & Change
Vol. 8, No. 4, 425– 441, December 2004
Aldi and the German Model: Structural Change in
German Grocery Retailing and the Success of
Grocery Discounters
MICHAEL WORTMANN
Wissenschaftszentrum Berlin für Sozialforschung (Social Science Research Center Berlin),
Berlin, Germany
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
KEY WORDS : Retail industry, Discounters, Retail regulation, Germany, Mittelstand
Introduction
Most accounts claiming that there is a distinctive ‘German model’ have focused on man-
ufacturing industries, particularly on the motor vehicle and machine tool sectors. Less
attention, however, has been paid to the service sector, in part because of the claim that
many services are not exposed to the international economy. Services, it has been
argued, have, therefore, not been subject to the same competitive pressures to find com-
parative advantage that most manufacturing sectors are facing (see introduction to this
issue).
Correspondence Address: Michael Wortmann, Wissenschaftszentrum Berlin für Sozialforschung (Social Science
Research Center Berlin), Reichpietschufer 50, D-10785 Berlin, Germany. Fax: þ49-30-25491-118; Tel.: þ49-
30-25491-153; Email: wortmann@wz-berlin.de
1024-5294 Print=1477-2221 Online=04=010425–17 # 2004 Taylor & Francis Ltd
DOI: 10.1080=1024529042000304446
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This article examines one service industry in Germany – grocery retailing – in the
context of the debate on the existence of a distinctive German model of production.
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.
Grocery hard discounting is a form of retailing that has expanded rapidly since the
1970s. Today, the 13,400 outlets of Aldi, Lidl and other discounters have gained a
market share of around 40 percent in German grocery retail, and this share continues to
increase. German discounters have also been successful in expanding their activities to
other European countries, where they are rapidly gaining market share.
The hard discount grocery store concept, or format, is based on high volume sales of a
limited and flat product range, low prices, relatively low product quality, a ‘no-thrills’
store design and almost no service. The sales personnel are unskilled and trade unions
and works councils are nearly absent. These characteristics contrast with popular ideal-
typical models of the German production system such as ‘diversified quality production’
(Sorge & Streeck 1988; Streeck 1991). The consensus view is that high wages and strong
unions and works councils pressure companies to compete internationally through high
product quality and product diversity. This article suggests that the discount industry
should not be seen as an ‘exception’ to the German model. Instead, the development of
discounters is also rooted in a very ‘German’ institutional environment which resulted
from the attempt to promote and protect small and medium-sized firms (the ‘Mittelstand’)
over the past century. The next section shows that the German grocery retail industry
is dominated by family-owned firms and co-operative associations of small shop-
keepers, rather than by large companies listed on the stock market, as is the case in
other countries.
The third section shows that these ownership structures thrived under the long tradition
of regulations protecting Mittelstand firms, which have survived up until the present. It is
argued that these protective regulations did not prevent structural change and moderniz-
ation. Instead, retail formats changed. There was an increase in the average sales area
of single outlets and a continuous process of concentration on the industry level. The
fourth section examines the origins of Aldi and the development of its business model
in the post-war environment. Aldi was the leader in the development of the German
hard discount grocer format in the 1960s within the regulatory environment intended to
protect Mittelstand shopkeepers. The expansion of the discount format since the 1970s
domestically and abroad is then traced. This expansion was enabled by a modification
of the original Aldi discount format, which allowed discounters to increase their market
share and become serious competitors to the traditional Mittelstand shopkeepers.
The article finally turns to some characteristic elements of the discounters’ production
model, namely relationships with employees and suppliers, and compares their character-
istics with those of the German model in manufacturing.
Family and Co-operative Ownership in German Grocery Retailing
Grocery retailing has undergone significant structural change in all industrialized
countries over the last decades (Dawson 2000; Wrigley & Lowe 2002; Wortmann
2003). These changes include the emergence of new formats, horizontal concentra-
tion through internal growth and external mergers and acquisitions, the vertical integration
of retail and wholesale, and changing relationships with suppliers through ‘lean retailing’
and the introduction of private labels.
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Table 1. The largest German grocery retailers, by domestic grocery sales in 2002
Group/company Ownership structure Main formats Turnover (Emillion)
1. Edeka Group co-operative supermarket, convenience 20,929
2. Aldi family discount 20,250
3. Rewe Group co-operative mixedd 19,645
4. Metro AG mainly familya mixede 14,430
5. Schwarz Group family discount þ superstores 13,797
6. Tengelmann Group family supermarket þ discount 7,762
7. Spar-Handels AG foreignb supermarkets 6,956
8. Lekkerland-Tobaccoland co-operativec convenience stores 6,945
a
stock listed company, majority owned by three families (Beisheim and others)
b
retailers’ association taken over by the French association Intermarché in 1999
c
minority held by Austrian tobacco company Austria Tabak
d
supermarkets, discount, hypermarkets
e
cash þ carry, hypermarkets, department stores
Source: M þ M Planet Retail (2003)
Despite these common trends, there are significant cross-national differences in grocery
retailing. One of these differences is the different patterns of ownership. German grocery
retailing is dominated by family-owned companies (for the most part not listed on the
stock market) and by co-operatives. Family-owned companies among the ten largest
grocery retailers include not only traditional companies, such as Tengelmann, but also
rapidly expanding new companies, including discounters such as Aldi and the Schwarz
Group (Lidl) (see Table 1).
In addition, several of the big retail groups are associations of larger numbers of small and
independent retailers and shop-keepers. The biggest associations by far are the co-operatives
Edeka and Rewe in the German grocery industry. These co-operatives and other associations
(Verbundgruppen) have significant status in Germany, accounting for almost a third (31.5%)
of all retail turnover. At the end of the 1990s, approximately 80,000 independent retailers
were organized in about 300 associations nationwide (Olesch 1998).
The historical origins of these Verbundgruppen go back to the co-operative (Genos-
senschaft) movement of the late nineteenth century, when smaller shop-keepers joined
together to form purchasing groups (Wein 1968). By pooling their orders, small shop-
keepers gained some countervailing power against wholesale companies, the dominant
actors in the distribution system. When retail concentration increased (see below),
co-operatives and other forms of association became important mechanisms for survival
for the independent shopkeepers.
Shopkeepers’ co-operatives spread in Germany and Switzerland, in particular (Jefferys
& Knee 1962). Edeka, founded in 1907 and still among Germany’s biggest grocery
retailers, was the first association of retailers’ co-operatives, organizing more than
30,000 independent shopkeepers in 1923. A second association, Rewe, was founded to
compete with Edeka in 1926. Many other co-operative associations were set up in other
retail segments in the 1920s.1
Regulation Protecting the Mittelstand
A policy of ‘social protectionism’ for Mittelstand entrepreneurs, such as craftsmen (Hand-
werker) and shopkeepers, has a long tradition in Germany (Winkler 1991). The economic
crisis of the early 1930s in particular led to measures protecting shopkeepers from
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competition. These measures were extended by the Nazi government through the 1933
Retail Protection Law (Einzelhandelsschutzgesetz), which restricted the opening of new
shops. Consumer co-operatives, single-price or penny stores and department stores were
declared ‘undesirable’ formats. Single-price stores and consumer co-operatives were sup-
pressed and shut down, but department stores were continued, in many cases after their
Jewish owners had been expropriated (Berekoven 1986; Winkler 1991).
Since the early years of the Federal Republic of Germany, the Mittelstand2 was seen as
the backbone of Germany’s social market economy – not only through economic perform-
ance and its contribution to post-war economic growth but also in terms of social cohesion
in a ‘levelled’ Mittelstand society, which had supposedly overcome capitalist class
conflict. The Mittelstand was the political backbone of the ruling Christian Democrat
government which continued a policy of social protectionism (Winkler 1991).
In the 1950s and 1960s the conservative Government followed a policy that discrimi-
nated against consumer co-operatives. These had close ties with trade unions and Social
Democrats and, thus, stood not only in economic but also in ideological competition
with Mittelstand shopkeepers (Kluthe 1985: 176ff.; Fairbairn 2000). In contrast, the
German government supported numerous forms of co-operation between Mittelstand
firms. This support included introducing several exemptions for retailers’ co-operatives
and other associations from monopoly regulations regarding vertical competition (Tietz
1993: 463ff.; Ahlert & Schröder 1999).
Provisions of the 1933 Retail Protection Law also remained in effect until the mid-
1950s, when the Federal Constitutional Court ruled that the licensing of new retail
businesses could no longer be denied on grounds of overcapacity, since this would contra-
dict the freedom of trade granted by the German constitution. In 1957 a new retail law was
passed which – officially at least – was not intended to protect shopkeepers from compe-
tition, but which nevertheless still had the effect of limiting competition. The law required
proof of qualification (Sachkundenachweis) for every person that wanted to open a shop.3
This regulation was abolished by the Federal Constitutional Court in 1965, which argued
that the requirement of extensive general business knowledge (Kaufmann) contradicted
the constitutionally guaranteed freedom of trade.
By the 1960s, the competitive environment for independent shopkeepers in Germany had
changed. While full employment eased the problem of overcapacity in retail, the motoriza-
tion of consumers led to the appearance of the first larger out-of-town stores. These were
perceived as a serious threat to Mittelstand retailers and to down-town department stores.
The commercial interests of ‘traditional’ retailers located in city centres and neighbour-
hoods overlapped with those of mayors and city planners, who feared a hollowing-out of
traditional city centres. Together they lobbied for a revision of spatial planning legislation
and, in 1968, the relevant regulation (Baunutzungsverordnung) was revised. According to
the new law, outside of city centres, shopping centres and single large stores4 could be built
only in special zones created through a complicated planning procedure.
This protection was extended in the following years through revisions of spatial
planning legislation in 1977 and 1986. Outside city centres and special zones, the size
of shops was limited to a maximum of 1,500 m2 (later reduced to 1,200 m2), effectively
limiting the maximum sales area to about 700 –800 m2. In addition, the type of goods per-
mitted to be sold in out-of-town large-scale store formats (outside of shopping centres)
was limited to a few non-grocery products usually not sold in city centres.
This system of retail regulation through spatial planning was designed to protect
Mittelstand retail.5 But, at the same time, it has not prevented structural change and
modernization of German retailing and has favoured the spread of new retail formats,
such as that of grocery discounters, which fit the maximum size restrictions.
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Structural Change
The regulatory protection of Mittelstand shopkeepers did not prevent fundamental structural
change in German retail (Spiekermann 1995). The number of grocery retail outlets decreased
tremendously, from 161,300 in 1961 to 60,400 in 1990 in West Germany. In post-unification
Germany it continued to decrease, from 84,000 in 1992 to 66,800 in 2002. Between 1961 and
2002 the total grocery sales area grew from 5.3 million m2 to 26.7 million m2 and the
average sales area per store increased from 33 m2 to 400 m2 (EHI 2003).
The growth of average sales area reflects a change in the distribution of different shop
formats. Despite spatial regulation, large retail formats, similar to British superstores or
French hypermarkets, have increased their market share in grocery retailing from below
1 percent in the mid-1960s to over 25 percent in 2002. Supermarkets, whose market
share almost reached 40 percent in West Germany in the late 1980s, are in decline, and
currently account for only 25 percent in united Germany. The share of smaller ‘traditional’
shops, with a sales area below 400 m2, has also decreased, from 24 percent in 1991 to 13
percent in 2002. Discounters, for whom statistics show separate data only since 1991, have
increased their market share from 25 percent in that year to 37 percent in 2002.
The outcome of structural change in Germany differs considerably from that in other
West European countries. German retailing is characterized by the dominance of mid-
sized stores. While the density of grocery outlets with a sales area between 400 and
2,500 m2 in Germany is 218 per 1 million inhabitants, in Italy it is 160, in France 148
and in the UK 100 (Metro Group 2003: 30). In the late 1990s, shops with a sales area
of 100 m2 to 2,500 m2 accounted for 70 percent of all grocery sales in Germany versus
only 50 percent in the UK or 54 percent in France. Larger stores (over 2,500 m2)
are more important in the UK and France, with 41 percent of turnover versus 23 percent
in Germany. Small stores (below 100 m2) are most important in Italy, with 28 percent of
total sales, versus less than 10 percent in Germany, the UK and France (see Table 2).
The development of grocery retailing in Germany can be compared with two other
developmental paths – that of France and the UK on the one hand and that of Italy on
the other. In France and the UK, shopkeepers were not as well organized as they were
in Germany. In France, shopkeepers’ associations played only a marginal role for a
long time (Colla 2003b: 25). Today’s successful French associations were founded in
1969. While Intermarché mainly organizes big supermarkets, Leclerc is a group of inde-
pendent hypermarkets (Colla 2003b: 43). In the UK too, shopkeepers’ associations did not
really exist until the 1960s, when the first buying groups were created in response to the
new competition arising from the abolishment of price maintenance (Howe 2003: 162). In
both countries, traditional Mittelstand shopkeepers never enjoyed the political protection
they received in Germany6 and spatial planning regulation was much more permissive
(Colla 2003b: 46ff.; Howe 2003; Potz 2003). This allowed the spread of large-area
Table 2. International comparison of market shares in grocery
retailing (%) according to the size of outlets (sales area) in 1997
Size of outlets
(sales area, m2) Germany UK France Italy
.2,500 23 41 41 5
100 –2,500 70 50 54 67
,100 7 9 5 28
Source: Costa u.a. (1997) as cited by Jacobsen (2002: 15)
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retail formats, i.e. of hypermarchés in France and superstores in the UK. Legislation in the
UK and France has became more restrictive only since the mid-1990s, when large-scale
formats had already gained considerable market shares (Potz 2003). The new French regu-
lation (‘Loi Raffarin’), which requires a license for all new stores with more than 300 m2,
is suspected to be directed against the expansion of German discounters in France (Colla
2003b: 47).
Italy has a long tradition of ‘social protectionism’ which is even stronger than in
Germany (Morris 1999). Restrictive retail regulation, introduced in the 1920s, has been
upheld until the late 1990s. Under this more interventionist mode of regulation, to run a
shop a licence is required which specifies the types of products that can be sold and allo-
cates a certain sales area quota. This regulation significantly slowed down any structural
change, limiting the spread not only of large-area retail formats but of new store formats
of whatever size. As a result the traditional small-scale retail structure has largely been
preserved in Italy (Potz 2002).7
The relative dominance of mid-sized shops in Germany has not prevented a strong
process of vertical concentration in German retailing. The market share of the five
biggest grocery retailers in Germany rose from 26.3 percent in 1980 to 44.7 percent in
1990 and to 62.8 percent in 2000 (M þ M Eurodata 2000). Germany has a medium
level of concentration in grocery retailing (food sales only) compared with other larger
European countries. The top five groups have a market share of 62.4 percent, similar to
the UK with 63.7 percent. Concentration was much higher in France (80.7%) but much
lower in Italy (28.8%) (M þ M Eurodata 2001). The number of shops owned by these
five top groups in their respective home country was 26,800 in Germany, compared to
13,900 in France and only 4,400 in the UK. This again shows the strong position of
mid-sized shops in Germany (see Table 3). Quite a few of these stores are multiple dis-
count outlets. But many others still are owned by shopkeepers associated in co-operatives,
which themselves have undergone significant change during the last decades.
In order to keep up with the growing multiple outlet stores,8 which usually integrate
wholesale and retail activities, shopkeepers’ co-operatives have intensified their vertical
integration. The central units have acquired a number of other functions besides that of
simple goods sourcing as buying groups. Traditionally important activities are centralized
invoicing and payment transactions and del credere insurance (liability for suppliers).
Newer functions include advisory and financing activities and the development and
design of products which are manufactured by suppliers and distributed exclusively by
affiliated companies (private labels).
Changes in the Monopoly Law in 1973 made it easier to tie affiliated shopkeepers closer
to the co-operative group. The changes legalized the recommendations of group headquar-
ters concerning not only price but also for all other areas of competitive behaviour (Olesch
1998: 19). Co-operatives have developed group marketing through a unified image, partly
in subgroups according to shop format or lines of business. A uniform image of the shops
and the product range, and a structural homogenization of the group members according
to outlet size and type have resulted in many co-operative groups having an appearance
identical to a franchise chain or an integrated multiple concern. In addition, co-operative
headquarters often own some outlets directly (Regiebetriebe), a strategy followed by
Rewe in particular. Since the 1970s, the group has taken over several multiple chain
stores in various segments, including the grocery discounter Penny. Today, most of the
outlets of Rewe are owned directly by the group rather than by independent retailers.9
At the same time, the number of shopkeepers which are members of the groups have
declined considerably. Membership at Edeka declined from a peak of over 40,000 in
the 1960s to 4,386 at the end of 2003. In addition, average sales area has grown from
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Table 3. Number and geographical spread of outlets (at around 2000) and European food
sales (in 2002 in E billion) of the five biggest grocery retailers from Germany (D), Britain
(UK) and France (F)
Home West East Food sales in
Retailer country Europe Europe USA/Canada Other Europe 2002
D Rewe 7,626 2,100 390 — — 29.6
Penny 2,300 213 222 — —
D Aldi 3,400 1,860 — 580 18 29.0
D Edeka (without AVA) 10,682 272 — — — 26.8
D Schwarz group 2,400 2,000a ,50a — — 21.2
Lidl 2,000 2,000a ,50a — —
D Tengelmann (grocery) 3,092 414 286 815 — 10.2
Plus 2,701 414 286 — —
UK Tesco 692 76b 107 — 32 30.9
UK Sainsbury 729 3b — 168 — 18.0
UK Asda (Wal-Mart) 232 — — — — 17.4
UK Safeway 1,476 — — 212 — 12.3
UK Somerfield/QuickSave 1,314 — — — — 7.0
F Carrefour 3,362 4,773c 142 — 725 52.6
F Intermarché ITM 3,668 4,412d 41 — — 29.8
F Casino 6,005 — 31 214 674 21.4
F Auchan 352 342 10 2 23 19.1
F Leclerc 5008 12 8 — — 15.9
a
rough estimate
b
Ireland
c
including 2.315 at grocery discounter Dı́a in Spain
d
mainly at the German Spar Group which was acquired in 1997
Some figures are probably incomplete; partly including 50 percent participations.
Source: author’s calculations from business reports and other company publications; sales data from M þ M
Planet Retail (2003).
260 m2 to over 600 m2 in 2003. The structural change of the whole German retail industry
is reflected in the internal changes within shopkeepers’ associations.
The Origins of Aldi
In the past few decades, many successful new retail formats emerged in several countries
more or less at the same time. Examples of these are large stores specialized in DIY
(do-it-yourself) or consumer electronics and domestic appliances. In the grocery sector,
however, two new formats were developed virtually in isolation in two different countries
in the 1960s. One was the hypermarchés in France; the second was grocery hard discoun-
ters in Germany (Zentes 1998). While Carrefour opened its first hypermarché in 1963,10
the first ‘real’ grocery hard discount store was opened by Aldi in 1962.
Aldi is clearly the pioneer and the leader of the German discount retail industry. When
the Albrecht brothers, Karl and Theodor, were released from detention as prisoners of war
in 1946 they took over a 100 m2 shop in Essen in the Ruhr Valley from their parents. By
1950 they had expanded and owned 13 shops. In this early period they developed some
central elements of their discount retailing strategy.
Like many shops in the early post-war period, they were only able to sell a limited range
of products. But later, when a diversified range of products became available on the whole-
sale market, the Albrechts discovered that they could do good business by sticking to a
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limited product range, since this allowed them to keep their costs low. In the early 1950s
their shops concentrated on the fastest-oving articles and offered only one product of each
kind (‘no parallel articles’). In all only about 250 to 280 different products were offered.
Besides helping to reduce purchase prices, this improved the efficiency of sales work,
since the lack of choice encouraged customers to decide quickly what to buy.11 As Karl
Albrecht explained in 1953, there was no ‘normal service’ but only ‘mass processing’
of customers. There were no decorations, counters and shelves were kept very simple,
and all products were clearly displayed for the customers. This allowed Aldi to keep
total sales costs down to 11 percent and personnel costs to between 3.1 percent and 3.7
percent of turnover. Advertising expenditure was less than 0.1 percent, since ‘our only
publicity is the low price’.
This concept allowed the Albrechts to expand dramatically. By 1960, the number of
outlets had increased to 300. The following year, the two Albrecht brothers divided
their business into two clearly separated areas, Nord and Süd (north and south), which
later was extended to a separation of foreign markets as well. The first ‘real’ Aldi
(Albrecht Discount) store opened in 1962 in the Ruhr-area city of Dortmund. It combined
the principles described above with the new concept of self-service, which had slowly
started to spread in Germany in the mid-1950s (Henksmeier 1988).
Aldi has remained true up to the present to its original principles of concentrating
on a limited number of high-sale, fast-moving goods, keeping in-store presentation of
goods as simple as possible (products are left in their cardboard boxes or even on the
palette), and reducing service to the minimum. The high turnover/space ratio and low
store and personnel costs, which allow low sales margins, combined with the low cost
of sourcing made possible by large-scale buying, enable Aldi to offer its products at
very low prices.
The Expansion of German Grocery Discounters
The first company to copy the discount format was Norma in southern Germany in the
1960s, but its expansion remained relatively limited. The real boom of grocery discounting
began in the early 1970s, at a time when Aldi had about 800 outlets. The family-owned
supermarket chain Tengelmann started with its own discounter, Plus, in 1972 and
Leibbrand followed with Penny in 1973. The Leibbrand group was acquired later by the
co-operative Rewe. The Schwarz group, then a family-owned wholesaler, began to experi-
ment with the grocery discount format in 1973 and started multiplication of its Lidl discount
stores in 1978. Finally, the Spar group started the Netto discount chain in 1984.12
This discount expansion was also triggered by the abolishment of price maintenance in
Germany in 1974, which was pushed through against the resistance of Mittelstand retailers
by the less ‘social protectionist’ Social Democratic government (Winkler 1991: 113). This
allowed price competition in the sales of many branded articles for the first time. Since
then, the number of grocery discount outlets has grown continuously, up to 13,400 in
2002 (EHI 2003).
Discounters currently account for around 40 percent of the German grocery market,
about half of this by Aldi alone. Aldi has about 3,700 shops in Germany.13 The second
position is taken by Lidl with 15 percent market share and 2,350 stores, followed by
Plus (2,600 stores) and Penny (2,200 stores). Norma and Netto, with 1,200 and 1,000
stores, respectively, are considerably smaller. The growth of discounters has not yet
come to an end, as discount stores are widely accepted today by German consumers. In
the mid-1990s, over 90 percent of all households were buying at discounters and Aldi
was used at least ‘occasionally’ by over 70 percent of all households (Brandes 1998: 39).
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German discounters, however, are successful not just at home. Outlets established abroad
realize an above-average growth rate. In many European countries it was German stores that
introduced the discount format for the first time (Colla 2003a). The international expansion
of Aldi started as early as 1967, when the company took over Hofer (a small Austrian
retailer), introduced its format, and used the Hofer stores as a platform for further growth.
In the 1970s, shops were established in the Netherlands, Belgium and Denmark. At end
of the 1980s Aldi entered the UK and France, where it also took over 74 Dı́a discount
shops from Promodés in 1996. Currently Aldi has about 2,000 stores in Western Europe.
Lidl’s expansion abroad started much later than that of Aldi, but recently Lidl surpassed
its competitor. Its international expansion was initiated in 1988 in France, where it has
over 1,000 outlets and is the clear leader in grocery discount today. It has also been
successful in Italy, the UK and Spain. Altogether it has 2,850 outlets abroad, most of these
in twelve West European countries, with another 70 in three Eastern European countries.
The internationalization of the other discounters is much less advanced. Norma started
expanding abroad in the late 1980s and has 100 outlets in France and 25 in the Czech Repub-
lic. Plus started foreign expansion in 1990 by opening stores in the Czech Republic, Hungary
and Italy; later, already existing shops in Austria were transformed to the discount format
and shops in Spain and Portugal were added. Today the group operates about 800 shops
abroad. Penny started its international expansion in Italy in 1994. Today, the group has
about 700 outlets in Italy, Hungary, Czech Republic, France and Austria.14
German discounters follow an internationalization strategy known in the business litera-
ture as ‘global’,15 i.e. a uniform strategy using identical shop formats and even selling the
same products in different national markets. In the case of Aldi, there is an overlap of 70
percent between the products offered in Spain and those sold in Germany (Gurdjaan et al.
2000). This global strategy has strong cost-saving effects, e.g. in sourcing from suppliers,
which improves Aldi’s competitiveness in all countries including the domestic German
market. The global strategy typically is realized through internal growth abroad, i.e.
through setting up new operations rather than through big take-overs. Foreign markets
are entered only occasionally through the take-over of a small local retailer (including
outlets and distribution centres) which is subsequently restructured and used as a starting
base for further internal growth.16 This is a clear sign that German grocery discounters
have developed what the foreign direct investment theory (Dunning 1979; 2000;
Wortmann 2001) calls ownership-specific advantages, i.e. competencies developed in
their home country environment which they can transfer into a foreign environment.
Although German grocery discounters have gained considerable market share in many
West and East European countries, non-German retailers were slow to imitate the new
format. The exceptions to this have been Dansk Supermarked in Denmark (Netto) and
the French Promodés in Spain with Dı́a in 1979. The Dı́a chain, now belonging to Carre-
four, has 3,700 stores in Europe. Less than 500 of these are in the home country France;
almost 2,500 are in Spain and the rest are in Portugal, Greece and Turkey. Discounters
recently have been the fastest-growing format for Carrefour in Western Europe (M þ M
Planet Retail 2003). Several smaller discount chains followed, like Casino with Leader
Price in France, but many of them are much ‘softer’ than the German variants Plus or
Penny. Overall, the market share of grocery discounters has reached 15 percent in
Western Europe and continues to grow.
Modifications of the Discount Format
In the 1960s Aldi was not drawing much public attention. At the time, new and undesired
competition was seen to come mainly from large ‘green-field’ formats, rather than from
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the limited operations of grocery discounters. Aldi’s outlets had an average sales area of
somewhere above 200 m2 (Rehmann 1967: 215) and only sold a small assortment of 400
fast-moving products.
The former Aldi manager, Brandes (1998), stressed the dependence of Aldi on a local
environment in which other shops fill the ‘gap’ and offer products outside of Aldi’s own
relatively limited range of goods. For a certain period of time and up to a certain point,
grocery discounters and Mittelstand grocery retailers17 complemented each other by
providing a ‘walking-distance’ shopping environment which was attractive to consumers,
thereby improving the competitiveness of the neighbourhood shopping system relative to
the green-field alternative.
But what was previously true for Aldi cannot be generalized to all German grocery dis-
counters today. The grocery discount format has undergone significant changes since the
entry of Penny, Plus and Lidl in the 1970s. Right from the start the business models of
Penny and Plus were not as ‘hard’ as that of Aldi since they offered a larger number of
products at a smaller (‘soft’) discount. Lidl also offered more products and preferred
stores with a larger sales area. The newer discounters also have a higher share of
branded products on their shelves than Aldi. These companies were, therefore, more
direct competitors to traditional retailers and supermarkets than Aldi.
All discounters have increased their product range, for example by offering fresh goods
such as dairy products, fruit, vegetables and meat. The number of regular products at
Aldi has grown to 600 or 700. Lidl’s shelves are stacked with about 1,200 different pro-
ducts. And the product ranges at Plus and Penny are even broader.18 In addition, grocery
discounters today are expanding their sales of non-grocery products, such as kitchenware,
stationary products, textiles, radios and computers. These are sold mainly through special
offers which change every week or fortnight. At Aldi, these products already account for
over 20 percent of total sales, making the company one of the top ten apparel retailers in
Germany. Its special offer computers have also become quite popular.
The leading discounters’ broadening of the product range has been accompanied by
rising advertising expenditure, mainly in print media (Tiede 2003). An indicator of this
overall change in the discount format is the increase of average sales area from 390 m2
in 1991 to 600 m2 in 2002. In the 1990s, most of the newly opened discount shops
were stand-alone shops with their own parking lot rather than parts of larger urban build-
ings (Zehner 2003).
The discounters, thus, have turned increasingly into competitors for the Mittelstand
retailers organized in co-operatives. Ironically, the policy of limiting the sales area of
the single outlets, which was supposed to protect the Mittelstand, has ended up providing
a haven in which the sharpest competition for Mittelstand retail has been able to develop.
This development was foreseen by Tietz (1993: 34), who argued that attempts to protect
the Mittelstand through spatial planning regulation would give rise to other formats, such
as discounters, which in the long run would harm traditional retailers more than
hypermarkets.
Recently, German traditional grocery retail groups started to lobby for a change in
spatial planning regulations. They demanded an increase in the permissible sales area,
which would allow them to build bigger supermarkets with a broader range of goods
and services (Klein 2001; Winkler & Küssner 2002). But this initiative failed because
companies and business associations could not agree on whether larger sales areas
should be authorized only for stores with broad product ranges, thereby discriminating
against discounters. Such a regulation would have violated the ‘business-neutrality’ of
spatial planning and would, therefore, have had a low probability of government approval
(BMVBW 2002).
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Discounters’ Relationships with Employees and Suppliers
The key to the discounters’ success is their low costs. This affects their relationship with
employees and suppliers. Similar to most other European countries, a high and increasing
proportion of the roughly one million employees in the German grocery retail industry
are women. More and more of these employees (currently over 60%) work part-time
(Schüttpelz & Deniz 2001; Voss-Dahm 2002). Traditionally, retail is an industry with
low trade union representation. Trade union organization in German retail is concentrated
in outlets with a high number of skilled employees, such as department stores. For much
of the post-war period collective agreements between employers’ associations and trade
unions were usually declared generally binding for the whole industry by the Ministry of
Labour. But this practice recently has been stopped, since it was vetoed by some employers.
In the discount segment there is almost no trade union representation. Labour costs come
to only 6.8 percent of sales at discounters compared to 13.8 percent at supermarkets (EHI
2003: 242). Labour costs at Aldi or Lidl are even lower. However, there seem to be differ-
ences concerning relationships with employees. While Aldi is frequently said to be a
reliable employer, paying somewhat above the industry average, other discounters like
Lidl are famous for their ruthless treatment of employees and even lower-level managers.19
Companies such as Aldi and Lidl are very hostile to trade unions and have only a
handful of shop-level works councils. Rare attempts to set up works councils have
frequently been frustrated by ad hoc changes in corporate structure in order to undermine
preparations for works council elections. The corporate structure of Aldi and of Lidl is
very complex and includes a large number of companies with the legal form of GmbH
& Co. KG. At Aldi, this legal form allows for a structure of formally independent compa-
nies held together by a group of formally independent self-employed managers (Brandes
1998: 28ff.). Legally, the group is not a ‘concern’; therefore, according to German labour
law, the few existing works councils (Betriebsräte) cannot join together forming a central
group works council (Konzernbetriebsrat). In contrast to traditional retailers and depart-
ment stores, discounters do not offer any service. Therefore, they do not offer any voca-
tional training or use any vocationally trained personnel in their shops. Vocational
training is considered one of the core elements of the German production model.
German grocery retailers’ relationships with suppliers are generally described as non-
cooperative and highly conflictive. These are very much dominated by annual buying
negotiations which focus on prices and numerous terms and conditions, such as the
amount and quality of shelf space (Behrens 1992; Bodenstein et al. 1992). This conflictive
character of supplier relations distinguishes German retailing not only from other German
industries (especially manufacturing), where the German model is characterized by a high
degree of co-operation with suppliers. Retailers’ relationships with suppliers in the UK are
also frequently described as very co-operative (Wrigley & Lowe 2002). The reasons
for the dominance of short-term, price-based thinking in the German retail industry
have not yet been researched adequately (Spiller 2000: 406).20 This seems to be the
case especially for companies mainly sourcing manufacturer-branded products. Aldi,
however, which almost exclusively sells private labels, has a reputation of being fair to
its suppliers, sticking to – sometimes long-term – contracts (Klusmann & Schlitt 2003).
The literature on the German production model (Sorge & Streeck 1989) and – more
generally – on the ‘German Model’ (Streeck 1997) or the German ‘variety of capital-
ism’ (Hall & Soskice 2001) identifies characteristic elements of successful German
firms. While the ownership structure (mainly companies not listed on the stock
market which, therefore, escape short-term shareholder pressure) in the German retail
industry is in accordance with popular views of the German model, in many other
Downloaded from cch.sagepub.com by guest on March 6, 2015436 M. Wortmann
elements there are strong deviations, particularly for the grocery discount retailers. This
is especially true for the product delivered: the limited-assortment low-price and high-
volume approach of discount retailers contradicts the diversified high quality approach.
This is, in turn, related to an employment strategy based on low-paid, low-skilled, fre-
quently part-time female workers, as opposed to vocationally trained, well-paid, full-
time male breadwinners. Industrial relations also deviate completely from those
assumed in the German model, especially at Lidl and Aldi. Works councils rarely
exist and relations with trade unions and works councils are very hostile. These compa-
nies are not members of industry or employers’ associations and, therefore, not covered
by industry-wide collective bargaining agreements.
Conclusions
Many observers of Germany have argued that there is a German production model
involving a ‘virtuous circle’ (see Jürgens article in this issue) linking high wages and
skill levels, co-operative relationships with the workforce and suppliers, patient capital
(frequently in the form of family or co-operative ownership) and high quality customized
or small batch production with international competitiveness. Most of these studies,
however, have focused on manufacturing industries such as automobiles, mechanical
and electrical engineering or chemicals. Services, particularly personal services like
retailing, have for the most part been neglected.
With the exception of ownership structure, retailing does not fit well into the stylized
German production model (see Table 4). This is particularly the case with hard grocery
discounting, where diversified quality products, vocational training, co-operative indus-
trial relations and supplier relations, and corporatism in the form of representation
through industry associations, are nearly absent.21
On the one hand it might be argued that deviations from the dominant model are more
likely to exist in non-tradable services than in manufacturing, where activities that do not fit
the dominant mode of production would be pushed out of the market by foreign competi-
tors or might be relocated abroad.22 These pressures have sharpened the profile of Germany
as a high-wage, high-quality production location. In retail such a relocation is impossible.
Retailers have to operate close to their customers. Thus, it might be argued that grocery
retailing is an exception which can be neglected when identifying a dominant industrial
model in Germany which determines its position in the international division of labour.
However, as the international expansion of Aldi and other discounters demonstrates, the
German grocery discounters are highly competitive in Germany and abroad, even though
Table 4. Stylized characteristics of the German model of traditional German
retailers and of grocery hard discounters
German model Traditional retail Hard discount
Family or co-operative ownership some yes yes
Diversified quality production yes some no
Qualified workforce yes some no
High wages yes no no
Co-operative supplier relations yes no no
Co-operative trade union relations yes some no
Strong works councils yes some no
International competitiveness yes some yes
Source: Author’s own compilation
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they deviate from the stylized German model along almost all dimensions.23 An explanation
that blames increased global competition for the abandonment of central elements of the
German model (Streeck 1997; Lane 2000; Vitols 2002) cannot apply in this case, since
the pressure of foreign retailers on the German grocery industry has been very limited.24
Due to family ownership, pressures from international financial markets, be it through
stock markets or rating agencies, are also absent. Instead, an explanation of the evolution
of grocery discounters in Germany must be based on domestic factors.
The explanation offered here is based on both an institution central to Germany – the
Mittelstand – as well as industry-specific factors. A distinction has been made here
between innovation in and the dispersion of this retail format. The innovation developed
from the no-thrills and limited assortment stores of post-World War II Germany, when the
Albrecht brothers integrated these principles into a retail strategy in the booming 1950s
and 1960s, i.e. at a time of growing wealth and increasingly diversified product range.
But the spread of this retail format really took off in the 1970s. This development was
closely related to the strong position of the German Mittelstand, consisting of Handwerker
(craftsmen and other professions like butchers or hair dressers) as well as shopkeepers.
Mittelstand companies and their specific forms of organization are an important
element of the German economy – not only in economic but especially also in ideological
and political terms. By focusing on larger companies many studies of the German model
have neglected the traditional Mittelstand.25
The strong position of the Mittelstand in Germany goes hand in hand with a long tradition
of social protectionist regulation for the Mittelstand. Thus, when large-scale ‘green-field’
stores started to spread in the 1960s, a legal regulation was introduced in order to protect
traditional down-town and neighbourhood Mittelstand retailers. These special planning
regulations, which limited the size of grocery shops, hampered the spread of large-scale
shops to a certain degree and led to a considerable deviation of the German retail structure
from those in France or in the UK. But the regulatory policy followed also had another
important effect. While the more rigid regulations in Italy prevented the emergence of
any new retail formats, the special mode of regulation chosen in Germany, i.e. the limitation
on the sales area of single shops, had the unintended effect of creating a niche for the growth
of hard discount grocers. While their market potential was underestimated for a long time,
discounters have gradually modified the original format and turned into the most aggressive
competitors to traditional Mittelstand retailers.
The success of Aldi and the other grocery hard discounters domestically and abroad,
shows that there is no single model which can explain the dynamics of development
and the international competitiveness of German companies. The Mittelstand model,
referred to in this article, is relevant in many sectors of the German economy. In addition
the institutional constraints regarding labour relations, which are strong in German
manufacturing, are much weaker in the personal service sector. Instead, industry-specific
institutions and policies, including those with unintentional affects, are important in
explaining the dynamics of development. This complexity cannot be neglected when
analysing changes in the German economy.
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.
Downloaded from cch.sagepub.com by guest on March 6, 2015438 M. Wortmann
Notes
1 In retail segments, such as furniture or toys, Verbundgruppen even have a dominant position. In addition,
co-operatives are a general feature of Mittelstand enterprises in Germany. They have been founded not only
by retailers, but also by craftsmen and farmers (Olesch 1998).
2 The term Mittelstand is very important in German public discourse, but is difficult to define precisely.
Besides the old Mittelstand, consisting primarily of craftsmen, shopkeepers, farmers and (sometimes) all
family-owned companies or small and medium-sized enterprises (SMEs), there is the new Mittelstand of
self-employed professionals, white-collar employees, and even skilled blue-collar employees.
3 This was essentially an equivalent to the traditional system of entry in German Handwerk, where the
Meister (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).
4 Since retail formats have developed differently in different national environments, it is difficult to translate
the terms exactly. Large stores up to 2,500 m2 in Germany are called Verbrauchermärkte, comparable to the
British term superstore. Large stores over 2,500 m2 in Germany are called SB-Warenhäuser (self-service
department stores), comparable to the French hypermarché or hypermarket.
5 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.
6 Consumer co-operatives also had a much stronger position in France and the UK than in Germany
(Soumagne 1988; Fairbairn 2000).
7 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 (Frasquet et al. 2003). By far the biggest grocery retailer in Spain today is
Carrefour, which is not only represented by its hypermarchés but also owns the extremely successful
grocery discounter Dı́a. 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).
8 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).
9 The Rewe group has even diversified into activities like tourism and television.
10 This hypermarché was 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 and hypermarchés have 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.
11 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).
12 Since 1990 partially in co-operation with Danish Dansk Supermarket group.
13 The number of Aldi shops in Germany grew from 600 in 1970, to 1,600 in 1980, to over 2,200 in 1990.
14 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.
15 On the general concept of global strategies see Porter (1986); for the retail industry see Salmon and
Tordjman (1989); and on German discounters and French hypermarchés see Zentes (1998).
16 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.
17 Associated Mittelstand shopkeepers combine a relatively cheap centralized sourcing mechanism and other
support from the buying group with the high motivation and hard work of the Mittelstand businessman or -
woman. Edeka sees a strategic option in setting up new supermarkets in the immediate neighbourhood of
Aldi discount outlets.
18 This compares with supermarkets, which on average sell around 9,250 different grocery products (EHI
2003: 258).
19 See various reports in the German press, e.g. Stern 28 November, 2002; manager magazin 1 September
2003.
20 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
Downloaded from cch.sagepub.com by guest on March 6, 2015Grocery Discounters and the German Model 439
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).
21 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’.
22 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).
23 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).
24 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.
25 An exception is the study by Streeck (1992) on the semi-private organizations of German Handwerk.
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