Notes on a business model - Aldi
Performance improvement is driven by learning from the best and adapting what they do to your business context, not by applying business theory. Aldi is a great example.
There is no shortage of business theory and teaching on performance improvement. One feature of the standard “best business practice” you are likely to be taught. If you assemble those practices into a business model, no company has ever looked like that.
Rather than study theory and try to make the real world fit, my preference is to study the business models of high performing organisations. Performance improvement is driven by learning from the best and adapting what they do to your business context, not by applying business theory.
So I love this interview with a former CEO of Aldi UK, Paul Foley. Its full of great insights into the Aldi way of doing business. The notes below share the points that struck me the most.
Notes:
No understanding of a business model is complete without the business culture. The two are inseparable in my mind. Aldi seems to have an especially strong and distinctive culture. So let’s start there:
Culture:
Pay well to attract the best people. Junior managers at Aldi earn 30-40% more than their peers. That gap flattens out a bit for more senior management, but they are still paid top dollar.
There are no bonuses, share options, commissions, or other financial incentives. Zero. None.
That translates into salaries which are 3% of revenue compared to 7-8% for the competition. Better managers and better management methods have a direct impact.
The only incentive is to embrace and thrive in the culture. This quote sums it up:
“...most of my colleagues…were motivated by the opportunity to work in a style that they felt really, personally, comfortable with. They not only identified with the culture but they actually sold that culture to new people and then your level of engagement is on a very high level if you are actually selling it yourself.”
A strategy of developing people within the organisation reinforces cultural fit and continuity within the organisation. Almost all Aldi senior managers joined the company after graduation and worked their way up from junior management positions.
The best leaders are those who grow and learn with the business. And then recruit and develop their successors. I loved this:
“One of the core principles of this Aldi Management System was, never give responsibility without giving an appropriate authority so that there is no chance that you could blame any lack of success on someone interfering or some kind of bureaucratic rule that meant, I’d like to do X, I’m responsible for it, but I don’t have the authority to change things.”
Notice that “accountability” does not appear in this paragraph. Responsibility and authority are about empowerment. Accountability is focused on blame.
All of this is founder led. The principles and practices of Karl Albrecht still echo through the business.
Long-term view:
The other thing that really stands out for me in this article is the long-term, strategic approach.
Long-term means Aldi understands the nature of investment. Investment is what you spend money on and what you spend time on. Raising funds is only money.
They focus on long-term growth not short-term profits. He tells a great story of a quarter in which the UK business smashed its budget numbers by 30%. Instead of plaudits, he got a frosty reception and questions like:
“Are you too expensive? Why aren’t you reinvesting those margins in more attractive prices? Why are we suddenly satisfied with this market share and are we allowing potential beginning of stagnation of the business?
The physical stores are a key long-term investment. Here, the objective is to have the lowest cost of operation.
Paul Foley tells two stories about the stores. Each is a combination of small details and a 30 year lifecycle cost view. One is a special floor tile, Its expensive to buy and fit but its faster to clean, better for spills and less likely to be damaged. The other is that no Aldi car park can have a slope of more than 2o. Better for customers and reduces losses and damage to trolleys.
The UK market was already highly competitive when Aldi started out. They invested in long-term relationships with smaller suppliers to ensure they could achieve low prices.
Fascinating bit where he talks about tough decisions. His example is balancing commitment to an established supplier with an opportunity to diversify or achieve a lower price. Business school logic would tell you this is a simple choice. He ends the story with:
“The guiding principle was always, if you’ve got a contract or a handshake and you’ve said, I will not do this, we never compromised that.”
I am going to end with the beginning. Right at the start of the interview, Paul Foley summarises the culture:
“The first thing that struck me was an absolutely rock-solid commitment to gaining the trust of the customer, the employees, the suppliers and business partners.”
Who could possibly disagree with that? Vision and mission statements, strategic priorities and PR don’t tell you much about improving business performance. Find companies you admire and look for those real world examples of behaviours and choices that make them stand out.
Reading:
Training by Kilian Jornet. Sports advice is not always relevant to business but its often a great read. These principles are from one of the most extraordinary endurance athletes ever. My favourite is “Eagle vision, snipper execution.” Honestly not sure if he intended to write sniper there!?
The power and danger of caring deeply - The Growth Equation quoting Pete Carroll. I really identify with this. You need a full throttle commitment to build a great business but its not life or death.
Tech’s Blind Spots: the startups building for underserved markets by Rex Woodbury. Great post picking out some huge underserved market opportunities for tech. For some reason, I especially identify with the baby boomer/ older generation market #gettingold.
The New American University by Nadia Asparouhova. Technology and social change open up opportunities to disrupt even the most established institutional models. So interesting to read how Arizona State University is disrupting the University model. For example, measuring themselves by how many people they accept, rather than how many they reject.
Aldi: Culture and operations of a hard discounter interview in In Practise. Great analysis of Aldi business model and culture through an interview with ex UK CEO Paul Foley. Read my latest blog for my summary of key points.
The point about the carpark slope made me smile. Reminded me of a 90 minute call with the archive studio for a music company... where they went on about the slope and floor material!
It feels a lot like Aldi's own take on 'unreasonable hospitality'. Probably explains why they've boomed so notably across London.
Thoughts on the remuneration scheme Kenny... could that ever work in professional services?