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A Secretive Family's Success What Makes the Aldi Discount Empire Tick

The death of Aldi co-founder Theo Albrecht marked the end of an era for Germany's largest discounter. The company has found success as it expands into foreign markets, including other European countries and the United States, but what does the future hold for the ultra-secretive grocery chain?

An old file in the public records office of the western German town of Essen contains two entries on Karl and Theo Albrecht, the billionaire founders of the Aldi discount grocery empire. According to one entry dated the end of January 1997, Karl purchased eight cemetery plots in a graveyard in the city's Bredeney district for 69,984 deutsche marks (€35,782) for himself and his family. Two months later, his brother followed suit and paid 65,912 marks (€33,700) for 14 plots in the same cemetery.

Nothing happened after that for a long time. Weeds sprouted on the land and the cemetery administration sent the Albrechts a reminder to take care of their plots. Finally, an Aldi truck appeared loaded with yew trees, rhododendrons and cypresses to adorn the site. The clan had simply waited until its own company had a discount on plants.

That sums up the Albrechts, that sums up Aldi. Theo and his brother Karl, who is two years older, laid the cornerstone for what became their discount empire in 1948 when they took over their mother's small grocery store. In 1961, they changed the name to Albrecht's Discount -- or "Aldi" for short. Within decades, they had built a retail chain worth billions, one which permanently changed the way food retailing was done in both Germany and across the globe.

On Wednesday of last week, the story of the most eccentric, secretive and mysterious pair of siblings in Germany post-war economic history came to an end with the death of Theo.

Theo was one of the richest men in the world, with a personal fortune estimated by Forbes magazine at $16.7 billion recently. Yet he would use outdated envelopes bearing the old four-digit German postcode for his correspondence, and simply had his staff replace the number with the new five-digit code.

A Withdrawn Life

After he was kidnapped and held for 17 days in 1971, he led a withdrawn life and refrained from giving interviews or appearing at public functions or being photographed. But years after the kidnapping, he went to court to try to get a tax rebate for the ransom payment. His request was denied.

He and Karl, 90, ran a global business with some 9,400 stores spread from Seattle to Sydney. But on Wednesday morning, when his closest relatives gathered in a spartan oratorium for a memorial service, his death had not even been made public. There was no procession, no requiem, no speeches. The 30 mourners present were just the families of Theo and Karl, children, grandchildren and close friends.

No paparazzi, no crowds. Three hours later the company informed all its executives and confirmed the news of the death which SPIEGEL had by then already reported. Theo Albrecht had already died on the previous Saturday at 2 p.m. in an Essen hospital after a lengthy illness.

The 'Aldization' of the World

He wasn't just an entrepreneur, just like Aldi isn't any company. Aldi is Germany, and Germany is Aldi. This sense of order, this devotion to efficiency, the sparse logic of logistics and above all, determined thrift.

So it's no wonder that Germany isn't just the land of poets and thinkers, but also of discount shopping. The concept of super cheap groceries wasn't invented in the United States, it was invented by the Albrechts. The concept had nothing to do with customer service, just with providing discount food for the masses. "Our advertisement is the cheap price," Karl Albrecht said in 1953. That remained the only public statement he made in the entire history of the company.

The "Aldization" of the world didn't just generate jobs and cheap food. It also entailed uniformity, an efficiency mania and anonymity that manifested itself in Aldi's no-name products.

Aldization also meant putting pressure on suppliers, occasional public scandals about alleged exploitation in the Third World, a suspicious attitude towards trade unions and unshakeable faith in the power of the market in all areas of life -- from discount airlines to discount burials.

And "Aldi-ized" society must regularly ask itself whether it wants to stick a price tag on everything. And it will eventually have to answer the question whether cheapness is the be all and end all. The company embodies a conflict that is in all of us. We all want the T-shirt for €3 ($4), but we're appalled when we find out that children in Bangladesh have to toil away to produce it that cheaply.

We are happy that companies like Aldi are great levellers when it comes to shopping. At Aldi and Starbucks, McDonald's or IKEA, all shoppers are equal. Eckhard Cordes -- the head of Germany's Metro retail group, which owns the country's biggest warehouse wholesale markets and other stores -- rightly lauded Theo Albrecht's "contribution to society." He said Albrecht "democratized shopping with extremely cheap groceries and products and helped to bring prosperity and stability to broader swathes of society."

Absolutely No Frills

But given the rock-bottom prices of some Aldi products, we do at times get an uneasy feeling about who is really paying the bill.

In the beginning it was the sheer poverty of customers that made the Albrechts rich. Afraid of stirring envy, the family was always careful to avoid flaunting its wealth, even after its brand had long reached cult status.

The group gave a bit of quality of life back to an exhausted and hungry nation after World War II. Generations of "guest workers" -- immigrants from Turkey, Italy and other nations invited by the West German government to make up for a shortage of labor after the war, supplied themselves with Aldi groceries laid out on pallets in the stores. The Germans and Aldi formed a symbiosis that would not have worked so perfectly in any other country. This nation of sensible shoppers got the grocery market it deserved: as cheap as possible, practical and with absolutely no frills.

A Family Shrouded in Secrecy

It took until the end of the 1990s for the product lines to change, in line with society, gradually and subtly, but with remarkable consequences. Smoked salmon replaced broad beans, Montepulciano wine lined shelves previously crammed with standard German Schnapps. And even middle-class consumers or good earners felt pleased with themselves when they wheeled an Aldi PC out of the store.

Aldi's firmly established presence in everyday German laugh contrasts with a dearth of information about its founders. The secrecy they shrouded themselves in at times seemed ridiculous. Questions to the management had to be submitted by fax. They rarely elicited an answer. This was generally attributed to the traumatic kidnapping of Theo Albrecht in 1971.

No entrepreneur and no company celebrated its own reclusiveness as rigidly as Aldi. The company would say that its founders had nothing to say because they were concentrating on the business. The company had grown because it did not feed a curious public with news, a close confidante once said, describing Theo's creed.

Enthusiasm, Perfectionism and Absolute Thrift

In Aldi's world, open communication was regarded as a mistake, or at least as a waste of time. Anyone who broke that code was a traitor. Almost everyone who provides information on the family or the company does so on condition of anonymity.

Enthusiasm for the product, perfectionism and absolute thrift -- those were the secrets of success for the Albrecht brothers. High-ranking executives would dig old pencils out of their desk drawers whenever one of the brothers paid them a visit, just to avoid causing any suspicion that they were wasting office supplies.

For decades, the brothers have focused on what they consider to be the essentials: the best quality product at the lowest possible price.

In the process, Aldi's product range has always remained relatively limited. The supermarket chain sells around 1,000 different articles. By comparison, the US retail giant Wal-Mart stocks up to 50,000 different products. But anyone who has ever stood looking at a supermarket shelf featuring 28 different kinds of fruit yogurt knows that sometimes less is more.

"From the beginning, Aldi has always focused on two, or a maximum three, varieties of a product, thereby helping the customer by making a useful pre-selection," says Thomas Roeb, a retail expert and former Aldi manager.

Reduced to the Essentials

The philosophy of reducing everything to the essentials is reflected too in the company's stores, where products are displayed on unadorned wire shelves or are simply placed in stacks on the floor, still in their protective plastic wrap. Every square meter of space is used. The aisles are just wide enough so that the customer does not perceive them as too narrow. Each store is like the others, so that customers can find their way around easily.

In no other supermarket are consumers confronted so directly with their own needs -- or with the bleak nature of discount shopping.

"Working for Aldi is hard graft, including on the upper management levels," says one top executive who has been with Aldi North for over 30 years.

The bare-bones philosophy also applies to the checkouts. While West German supermarkets started using scanners at the tills in the early 1980s, Aldi kept using classic price tags for years.

The cashiers had to learn the triple-digit code for each product by heart -- for which they got paid a bonus on top of their salaries. It was not until the turn of the millennium that Aldi South abandoned the system. Aldi North followed suit three years later. Both companies had optimized their own packaging before changing the system: For the chain's own-label goods, which account for 95 percent of the product range, the bar codes were printed on every side of the packaging. The innovation meant that the cashier did not need to turn the product around to find the bar code, thereby speeding up the checkout process.

It is this degree of perfection that still impresses retail experts. The company's internal processes are analyzed, monitored and controlled to an exhaustive degree.

Tough Standards for Suppliers

Aldi applies the same uncompromising standards to its own suppliers. Any firm that does not meet the requirements has a problem. At the end of May, Aldi North provisionally dropped the Italian manufacturer Tronchetti, a longtime supplier of paper tissues, toilet paper and kitchen rolls. The Italian company had apparently not implemented Aldi's demands for sustainability certification quickly enough.

All it takes is for there to be the suspicion of an irregularity or the risk that a product will be evaluated negatively for Aldi employees to turn up unannounced at a supplier's door. "They are faster than the food regulators," says one manufacturer. The Aldi workers demand to know about procedures, weak points and possible solutions, down to the smallest detail. They take their own samples and demand that improvements be made.

Should a supplier make public the fact that it does business with Aldi, a polite phone call will quickly make it clear that the company does not appreciate such publicity. Nevertheless, it is rare to hear any criticism of Aldi's business practices from manufacturers. The only information that can be wormed out of suppliers is that working with Aldi is hard but fair, and the company keeps to agreements.

"Every major supplier wants to work with Aldi," says Georg Heitlinger, a chicken farmer from Eppingen. "They are the best organized when it comes to the daily processing of orders -- they never let products go bad. They don't try to renegotiate deals after the fact, they stick strictly to the arrangements that have been made and they pay on time."

Opaque Structure

But even though Aldi's business model is simple and clear, the structure of the company -- which is actually two separate groups -- is very opaque. The two brothers have succeeded in making not only themselves, but also their firms, virtually invisible.

In 1961, Karl and Theo separated their spheres of retail influence into Aldi South and Aldi North. The dividing line separates a more sober, poorer and Protestant north from a pleasure-loving, wealthy and Catholic south. The difference can even be seen on the supermarket shelves. Aldi North stores exude spartan sobriety, while Aldi South sells such delicacies as vitello tonnato, an Italian veal dish.

Aldi North, which has its headquarters in Essen, is currently divided into 35 regional companies that rule over 2,535 stores. The southern branch has its headquarters a few kilometers away in Mülheim an der Ruhr and consists of 31 companies with 1,760 outlets. Those totals are constantly growing.

Legally, the regional companies are independent entities. Strategic decisions, however, are made in tandem by the two groups via an executive board. Purchasing is also done centrally using two purchasing companies. Profits do not flow directly into the pockets of the Albrecht brothers, but into two separate foundations, one for Aldi North and one for Aldi South.

With the intricate design, the brothers have not only ensured that Aldi's competitors do not know exactly how business is going at the company. The structure also prevents the company from being sold off one day, especially as the Albrecht brothers have not been involved in the day-to-day running of the company for some time.

Aldi's Global Empire

Whenever American newspapers write about Aldi, they always mention the quarters. Incredulous journalists like to tell their readers about how shopping carts in front of the German discount store can only be released after a coin is inserted. It's a clever trick: Customers are then sure to return their carts, meaning the company does not need employees to go and collect the trolleys from the parking lot, thereby saving money.

It seems that Aldi has finally arrived in the US, as a result of the current economic crisis. Penny-pinching shoppers have discovered the merits of the German chain.

Globally, the discount empire is now represented in 20 countries. "No matter which country Aldi expands into, their basic principles apply. That goes for the US as well as the rest of the world," says Constanze Freienstein, a retail expert at the Chicago-based consulting firm AT Kearney.

Just like in their home markets, the brothers divided up the world. The supermarkets in the US, Switzerland and Austria are part of Karl's Aldi South empire, whereas France, Spain and Poland are managed by Theo's Aldi North. Aldi also operates Trader Joe's, an American chain of specialty grocery stores.

Unknown to Customers

Internationally, however, the group does not have the same reputation as it does in Germany, where customers regularly choose it as the country's most trusted food retailer. "Every German customer knows that the quality of Aldi's products is good -- and should there be quality problems, then the product quickly disappears from the shelves," says Jens Lönneker, a psychologist and retail expert at the Cologne-based market research institute Rheingold. Aldi has worked for years to win the respect of customers, Lönneker explains. In foreign countries, however, that reputation is missing, making Aldi just one supermarket among many.

Additionally, in no other country are consumers so price-conscious when it comes to food as in Germany, a fact that is reflected in Aldi's market share. In France, for example, the discount chain only has a market share of 8.6 percent. In Italy it is 6.5 percent and in Britain just 3.3 percent.

Those figures prompt some observers to ask if the original discount retailer has passed its sell-by date. Is Aldi in danger of missing the boat, because it is clinging desperately to its established business model, without realizing that the world around it has changed?

The German Love of Cheap Food

Probably no other Western country has such cheap food as Germany. Canny shoppers can get a pound of ground beef for €1.79 ($2.37), a loaf of fresh rye bread for less than a euro or a tub of yoghurt for just 19 cents. In other industrialized countries, such prices would be unthinkable.

The company has never paid much attention to the consequences of this price spiral -- what it means for producers, farmers and for the society at large when low prices become the expected norm.

And there is a flip side to cheap foodstuffs. Dairy farmers, for example, have to struggle for their survival. And most of the non-food items are imported from Asia, where they are produced in sometimes inhuman working conditions.

But in Germany, too, customers are no longer looking just at price. "Aesthetics are becoming an increasingly important part of the food business. Aldi has to react to that," says psychologist Lönneker.

No Longer Welcome

"Even today, Aldi managers are not the types of people whose self-image depends on getting the better of their business partners," says Matthias Queck, a discounter expert with Planet Retail, a group which provides retail industry analysis. But for the most part, he says, they come up through the company. Very few ideas penetrate from the outside. Those who call the company's convictions into question are no longer welcome.

The Albrecht brothers' companies manage a turnover of €25 billion in Germany alone, much higher than Lidl (€15 billion) for example. But the market is becoming saturated. Last year, Aldi's turnover dropped by more than 4 percent for the first time ever -- and lost market share to its competitors. "The distance from its competitors is shrinking noticeably," says Queck. And resistance to the status quo is developing internally.

Aldi's Critics

Workers at Aldi branches have long been at the beck and call of management, having to clock in whenever they were needed. But unions have begun to push back. They complain of unpaid work and of chronically under-staffed branches. On average, only three workers are on the store floor. And they are responsible for everything: cashing out customers, stocking the shelves and cleaning. Often, they have to work beyond their shift.

Aldi has long justified the added workload with the comparatively generous wages paid. "The system that is used is fair and just for all. Nobody is shorted," said a highly-placed manager from Aldi North. "Even if the odd overtime hour isn't marked down, they are nevertheless compensated due to their higher than average salary."

Labor unions disagree. "At many discounters, Aldi included, employees have to fight for adequate working conditions," says Agnes Schreieder, a representative of the union Ver.di, Germany's largest services union. That fight is particularly difficult at Aldi South. The company does not allow works councils.

Aldi treats its workers as little more than a variable in its formula for success. To determine the performance of its individual branches, the company simply divides the store's monthly turnover by the number of labor hours. Large branches in high traffic areas can make up to €1,000 of sales per labor hour. In smaller branches, by contrast, performance can only be optimized when employees work faster -- or if they do work outside their shift.

Overwork isn't the only imposition Aldi employees have to deal with. Romantic relationships between Aldi employees must be registered. Piercings are not allowed, and even moustaches and beards are frowned upon. The company buys silence and avoids legal challenges with severance packages that are up to three times higher than normal. Those who receive them sign a vow of silence.

What the Future Holds

Following the death of Theo Albrecht, Aldi now faces the question which sooner or later confronts all family empires: Who will take over? And, how independent will the new leadership have to be in order to prepare the discount chain for the future?

Still, while Albrecht's passing was a tragedy for the family, the company itself sought to project confidence and stability. The death notice published in newspapers last week sounded more like a manifesto: "For several years, the company has been led by experienced Aldi managers who have made all operative decisions independent of Theo Albrecht and his family," it read.

The whole-page ad was likely the longest statement made by Aldi in its entire history. And the company will likely continue to be led by Hartmuth Wiesemann, who currently heads Aldi North and has been with the company since he was 14 years old. He was "to Theo Albrecht what Cardinal Ratzinger was to Pope John Paul II," says retail expert Roeb. Namely, his protégé and his able successor.

As such, there aren't likely to be any fundamental changes on the horizon. The problems of shrinking market share and dropping turnover are not yet serious and can be waited out. No one expects a revolution from below. "Have you ever heard of the worker bees revolting against the queen?" quips one insider.

'We Won't Forget'

Furthermore, the families no longer have nor want any say in business operations. Beyond Theo's widow Cäcilie and her son joining the board of trustees, there is no familial connection left. Dynastic feuds do not appear to be in the offing.

Still, Aldi South is considered to be the healthier of the two companies. The company is increasing its presence in both the US and Australia, two countries where discounters have not had a substantial presence. The goal of challenging market leaders like Wal-Mart remains ambitious. "Aldi would sooner collapse with dignity than deviate from its discounter principles," says discounter expert Queck.

Nevertheless, things are changing. Prior to Theo's death, Aldi North hired media advisors for the first time in the company's 60-year history. They were to lay the groundwork for a step-by-step opening up. Nothing has yet been decided for sure. And any opening would move slowly out of respect for the Aldi founders.

As recently as May, Theo Albrecht wrote a letter to a manager in which he called any kind of modernization into question. "I wanted to tell you that we won't forget our successful model."