I recently published an article in which I stated that high inventory levels are the most common problem in warehouses. Inventory levels are determined in part by SKU count, the number of products a company has in its portfolio. And so I thought it might be worth exploring this idea a little further and talking about some companies that have been extraordinarily successful with a low-SKU strategy: the German discounters Aldi and Lidl.
If you ask the average person on the street what makes Aldi and Lidl different from other stores, chances are they will say that the prices are lower. After all, that’s why they go there. Few people think about what has enabled these two discounters to offer products at low prices. Because offering something cheap isn’t just a decision you can make if you want to be profitable; your cost structure has to enable the prices of your offering.
Now, there are certainly a number of factors that contribute to the success of the two best-known German discounters. I would like to pick out two variables and explain how they significantly influence the success of Aldi and Lidl. To be precise, there is one independent variable and one dependent variable.
Via Negativa: Deciding What Not to Offer (the Independent Variable)
The most striking difference between a discount store and a full assortment supermarket is the range of items on offer (SKUs). While a Walmart (which is more than just a supermarket) has about 120,000 SKUs[1] (but varying with store type and size) and German full-line supermarkets offer between 20,000 and 30,000 SKUs in their larger stores and almost 60,000 SKUs in their largest stores (Edeka E-Center)[2], the two Aldis (Nord and Süd) in Germany only offer around 2,000 SKUs,[3] while Lidl offers around 4,500 different SKUs.[4] You will find different numbers, even on the retailers’ websites, as product variants (e.g., different weight, different color) are sometimes counted and sometimes not. But either way, we are talking about less than a tenth of the full-range retailers’ product portfolio. And from a logistical point of view, that’s a VERY big difference.
Operational Benefits With a Low Number of SKUs
There is a strong negative correlation between the number of SKUs and the productivity of warehouse workers. This correlation is easy to understand: Fewer SKUs mean less walking/driving distance for picking and replenishment, and fewer SKUs mean a shorter long-tail in ABC distribution. Fewer items mean greater turnover per item, so you can pick larger quantities per orderline, further increasing your picking performance. When you pick green olives, there is only one type of green olive and not ten, so you pick them all in one place. You’re also more likely to deliver full pallets of A-movers to stores.
A smaller number of SKUs allows for a higher picking density. You simply walk fewer meters before picking the next SKU. This enables the use of some useful automation technologies: In one discounter’s warehouse, I observed pickers working with a combination of automated picking trucks and pick-by-voice. The AGVs moved from picking position to picking position and the pickers could concentrate on the manual case picking. It was obvious that the pickers saved a lot of time because they did not have to operate the picking truck. And because the number of SKUs in the warehouse was so low, the AGV never traveled a long distance until it reached the next stop. The performance of the pickers was quite impressive, rendering a positive business case for fully automated mixed case picking pretty hopeless. However, this concept would not work if there were ten to twenty meters between picking positions, as is the case when you multiply the SKU count by ten or more, because then the AGV’s travel speed becomes an issue.
In Germany alone, Lidl operates 39 warehouses[5], so the productivity gains multiply. Also, a low number of SKUs makes warehouses smaller, which makes them cheaper to build and run (besides the improved labor productivity mentioned before).
Restocking Efficiency in Stores
Let’s think about the much larger impact on stores. Because there are lots of them.
Aldi Süd operates 1,980 stores in Germany, Aldi Nord operates 2,200 stores in Germany. Lidl operates 3,250 stores in Germany and about 12,200 stores worldwide at the time of writing.[6] Thanks to the small number of items, each store has a more compact footprint, which in turn makes it cheaper to build and run. But that’s just the obvious part. The less obvious part are the operational benefits that result from the low-SKU strategy. When replenishing shelves, larger quantities are replenished per SKU (just as larger quantities were picked per orderline). The replenishment density is higher, you move more boxes per meter walked. As productivity in terms of boxes per labor hour is better, fewer employees are needed in a store.
Food Waste in Warehouses and Stores
Since more SKUs means more slow-movers, the more SKUs you have in your warehouses and stores, the bigger a problem food waste becomes. In the US, just under 9% of all food waste occurs in supermarkets and similar outlets – 9% of about 106 million tons per year.[7] In Germany, it’s 7% and 11 million tons per year, respectively.[8] While these figures do not say anything about what percentage of what food is wasted in grocery stores, they do show that there is a big problem. And the biggest problem is, of course, fresh food: Fruit and vegetables, baked goods and meat. Food waste comes with an ethical baggage, but it is also a cost factor. It is much easier to reduce food waste if demand is spread over fewer items. If you make a sales forecast for 12 varieties of apples in thousands of stores, you can be wrong with your forecast thousands of times. If you only offer three apple varieties, the demand for the different apple varieties and flavors that customers want to buy will even out to a much greater extent. This is called the pooling effect and it helps discounters to create better forecasts for their products.
With a lower SKU count, there is only one SKU for many product types. Which brings us to the second variable.
Use of Private Label Products (the Dependent Variable)
A large proportion of the products at discount stores are private label products. At Lidl, 75% of all products offered are private label products (data from 2023)[9], at Aldi Nord in Germany it is 85% (data from 2022)[10] and Aldi Süd offers 90% of its products with private labels.[11]
Since the total demand at Aldi and Lidl is concentrated on a much smaller number of SKUs, at the very least you would expect favorable purchasing conditions from your suppliers. But there are limits to the suppliers of branded products: firstly, they cannot allow the discounters to offer their products much cheaper (and often not cheaper at all) than other chains, otherwise they’d undermine their other customers. If customers knew that their favorite brand products were significantly cheaper at Aldi than at Edeka, many customers would certainly not buy them at Edeka, and you irritate Edeka so much that you could lose them as customers. Secondly, suppliers want brand quality to be associated with high value, and high value and low price don’t go well together. Thirdly, why would anyone sell their brand products much cheaper?
The way out is to create private label products. They are similar to brand products and often come from the same brand manufacturers. And discounters can not only offer them cheaper without creating a brand value problem for their suppliers, but they can work with their suppliers to make them cheaper. They get simpler and cheaper packaging, some ingredients are cheaper, and quality standards are less stringent. Lidl employs a number of engineers who work on making the packaging of own-brand products cheaper.[12] And by working with suppliers to make cheaper products that are not associated with their valuable brands, they can also get better purchasing terms – much better than they could get through conventional volume discounts. None of this would happen if the demand for one type of product was spread across seven slow-moving SKUs instead of one fast-moving SKU.
It goes without saying that if you focus your business on a small number of private label SKUs, they should be “good quality”. But what is good quality? It is a subjective, multi-aspect, multi-faceted, time- and focus-dependent concept that in everyday language is simply slapped onto a variety of personal experiences in a large number of situations. Quality can refer to how good a product tastes, how healthy its ingredients are, how delicious it looks, how good it smells, what ecological impact it has and the perceived value you get for the price. Products from discounters often score well in some of these categories. Discounters often publish results of product tests by independent organizations (such as the renowned German Stiftung Warentest and Stiftung Ökotest) provided the results are positive, and they often do get good results.[13] This is quite something for products that are significantly cheaper than their brand competitors. Many products are “quite good”. And you certainly can’t say that about all of the retail chains’ own brands. Edeka’s low-price own brand “Gut & Günstig”, for example, cannot be recommended for human consumption in far too many cases (sorry Edeka, but seriously…). My cat won’t touch their cat food, either.
Other Factors for Operational Efficiency at Discounters
Let me remind you that all the operational advantages described above stem from the one important decision to offer a small number of products and to its extension to make these products into large private labels.
Of course, there is more to consider. Discount store staff are usually very busy. The queues at the checkout of the Lidl store across the street from our faculty building are always quite long; I never see employees sitting at the checkout waiting for a customer. However, I do see this happening at the Marktkauf near my home, which is Edeka’s top of the line outlet. In general, the staff at Lidl and Aldi seem busier than at their larger, full-assortment competitors; resource utilization is higher.
Also, I rarely see fruit or vegetables out of stock at Edeka, whereas it does happen at Aldi. I almost never see rotten fruit or vegetables in an Edeka store, but Penny, the discount chain belonging to Rewe Group, is a fruit and vegetable graveyard, at least the one in my hometown. These guys are obviously less stringent with quality control.
Another factor is the organizational structure of the various chains. Unlike their German full assortment competitors Edeka and Rewe, Aldi and Lidl are centrally managed and their stores are owned by the respective group. Edeka and Rewe stores are owned by individual store owners who receive their supply (and some rules and standards) from Edeka and Rewe, respectively. So, at Aldi and Lidl there are store managers, at Edeka and Rewe there are store owners – with all the advantages and disadvantages. There is something to be said for both models. But in terms of operational efficiency, the centralized model benefits from access to information and benchmarking between stores.
You might expect things like self-checkouts at discount stores as an attempt to further reduce operating costs. In 2019, only 1% of German grocery stores had self-checkout systems, and Lidl and Aldi had none.[14] In 2022, Lidl announced plans to introduce self-checkout systems in Germany in large numbers.[15] And in the Lidl store where I sometimes get my lunch when I’m in the office, there were some indeed. But they were removed again in the summer of 2023. I asked the store staff about this decision. They suspected that theft (“inventory shrinkage”) was the main reason for this decision, but they didn’t know for sure. I have no data on whether this has happened elsewhere; perhaps it has to do with the specific demographics of the location.
And then there are a variety of other factors that I don’t even know about. But the point of this article is that the ONE major decision to limit the SKU portfolio has major implications for operational efficiency across the entire value network (production, transportation and warehousing, store management) of discounters.
Conclusion
This article can be seen as a supplement or extension of my last article on the role of inventory in operational efficiency. I presented my view on why the German discount food retailers, especially Aldi and Lidl, are so incredibly successful. I have picked out one key variable, the number of SKUs on offer, and explained how this one decision has a huge impact on their operations. I have also explained how the decision to only offer a very limited number of items allows the discounters to successfully leverage their private labels.
Although I have no particular insight into the business of Aldi and Lidl, apart from some of their warehouse logistics, my observations correspond well with my knowledge of logistics and inventory management in food retailing. The number of SKUS is a highly underestimated variable for logistics efficiency.
[1] Conversation with an advisor to US grocery chains
[2] EDEKA ZENTRALE Stiftung & Co. KG (2024): EDEKA. Available online: https://verbund.edeka/unternehmen/was-ist-der-edeka-verbund/m%C3%A4rkte-vertrieb/edeka/ (last access: 2024-01-02)
[3] ALDI Nord Deutschland Stiftung & Co. KG (2023): Interim Report 2022. Available online: https://www.aldi-nord.de/content/dam/aldi/corporate-responsibility/de/nachhaltigkeitsbericht/2017/sonstige/downloads-und-archiv/en/ALDI_Nord_Interim_Report_2022_EN.pdf.res/1695643312695/ALDI_Nord_Interim_Report_2022_EN.pdf (last access: 2023-12-30)
[4] Lidl Dienstleistung GmbH & Co. KG (2023): Lidl-Eigenmarken schneiden im Qualitätsvergleich der Stiftung Warentest am besten ab. Available online: https://unternehmen.lidl.de/pressreleases/2023/230206_stiwa_qualitaetsvergleich (last access: 2023-12-30)
[5] Lidl Dienstleistung GmbH & Co. KG (2023): Verwaltungs- und Logistikzentren. Available online: https://unternehmen.lidl.de/newsroom/immobilien/logistikzentren (last access: 2023-12-30)
[6] https://unternehmen.lidl.de/ (last access: 2023-12-30)
[7] Environmental Protection Agency (2023): Distribution of food waste in the United States in 2019, by segment. Through Statista. Statista Inc. https://www.statista.com/statistics/1190673/distribution-of-food-waste-in-the-united-states/ (last access: 2023-12-31). EPA report available online: https://www.epa.gov/system/files/documents/2023-03/2019%20Wasted%20Food%20Report_508_opt_ec.pdf (last access: 2023-12-31)
[8] Bundesministerium für Ernährung und Landwirtschaft (2022): National Strategy for Food Waste Reduction . Available online: https://www.bmel.de/EN/topics/food-and-nutrition/food-waste/national-strategy-for-food-waste-reduction.html (last access: 2024-01-01)
[9] Lidl Dienstleistung GmbH & Co. KG (2023): Lidl-Eigenmarken schneiden im Qualitätsvergleich der Stiftung Warentest am besten ab. Available online: https://unternehmen.lidl.de/pressreleases/2023/230206_stiwa_qualitaetsvergleich (last access: 2023-12-31)
[10] Aldi Nord Deutschland Stiftung & Co. KG (2023): Interim Report 2022. Available online: https://www.aldi-nord.de/content/dam/aldi/corporate-responsibility/de/nachhaltigkeitsbericht/2017/sonstige/downloads-und-archiv/en/ALDI_Nord_Interim_Report_2022_EN.pdf.res/1695643312695/ALDI_Nord_Interim_Report_2022_EN.pdf (last access: 2023-12-30)
[11] Hullmann, Berit (2021): Eigenmarken bei ALDI – Die große Stärke der Discounter. Available online: https://blog.aldi-sued.de/eigenmarken-bei-aldi-die-grosse-staerke-der-discounter/ (last access: 2024-01-01)
[12] Which is likely to shoot back when automation is introduced, e.g., automated case picking.
[13] See, for instance, ALDI Nord Deutschland Stiftung & Co. KG (2023): Bestnoten für ALDI Eigenmarken im November 2023. Available online: https://www.aldi-nord.de/unternehmen/presse/bestnoten-fuer-aldi-eigenmarken-november-2023.html (last access: 2024-04-02), as well as earlier references to Lidl
[14] Gode, Solveig (2019): Warum es bei Aldi, Lidl und Co. keine Selbstbedienungskassen gibt — und das noch lange so bleiben dürfte. Available online: https://www.businessinsider.de/tech/lidl-self-checkout-kassen-bald-in-deutschland-2019-10/ (last access: 2024-01-02)
[15] Bernhard, Christian (2022): Lidl bring Self-Checkouts nach Deutschland. Available online: https://t3n.de/news/lidl-self-checkout-kassen-in-deutschland-1466517/ (last access: 2024-01-02)
