Aldi has announced that it is to spend $3.4 billion in expanding its chain of stores in the United States, the effect of which is going to be to make Americans very much richer. For this is what competition does, most especially competition upon price at the low end of the market. It makes the consumer, that’s you and me, richer. Quite how much richer Aldi is going to make us is not something we can quite calculate yet but if we apply what we do know about Walmart then it’s certainly going to be in the tens of billions and edging up into the hundreds of billions of dollars over time.
This is, of course, just another example of why this capitalist free marketry works so well, the very reason why we lucky enough to live in countries that have used this socio-economic system for more than a few decades are the richest people to have ever waddled across the face of the Earth. Waddled seeming the appropriate verb for those of us who enjoy the cornucopia that the modern supermarket offers us.
We do so love us some price wars, don’t we? The various different suppliers have to keep plucking costs out of their delivery chains, there’s ever more pressure on their profit margins, and all to the benefit of us little ‘ol consumers.
We’re not talking about just a few more stores in one corner of the country here, we’re talking about the building of a new–near–national chain.
How we should really see this is as the irruption of a new technology into the marketplace. Sure, both companies are privately owned and they’re, obviously, owned by a different set of capitalists than the current stores out there. But we really are talking about a new technology here, just as Walmart was when it irrupted onto the scene. We’ll get to the implications of that in a moment but note that private label part.
Yes, we should refer to this as a technology. For it really is a new technology in that wider sense of what economists mean by a technology. We used to have specialists, the butcher, the baker, the brewer who made (the butcher perhaps preparing rather than making the meat) and then directly supplied their specialties. We would trot from one to the other and it really wan’t all that long ago, certainly well within my own lifetime in my native Britain, that this was how food shopping was done. This was then replaced by that supermarket the exemplars of which might carry 10,000 to 15,000 SKUs (“stock keeping units”) these days. Thus we find that if we go to the deli section and we look for ham, then there will be many different kinds, traditional, honey roast, turkey ham these days and so on. But to get out to that massive number of SKUs we also have the choice of several different brands, almost certainly at different price and quality points, of each of those different types. Thus possibly 5 or 7 honey roast hams, 4 or 5 Virginia and so on.
Hey, don’t knock it, I lived in the dying days of the Soviet Union where such did not exist and you’ll not believe how much you miss it when it’s not there.
But it is true that the entire supermarket is a technological package. And the bit that Walmart brought to it, in the economic sense, was the command of the new technological possibilities from the barcode. Sure, we can talk about Sam Walton’s commitment to everyday low prices and so on but the technological heart of the deal was that Sam knew how to plug the information from the cash tills, what was rolling out the door, back into the entire supply chain. So that the sale of diapers at the front of the house was known by the guys loading the trucks at the regional depot, that the manufacturers knew how many were walking out the door. It’s this increased efficiency that allowed those low prices, the whole process then feeding upon itself in a virtuous spiral.
What Aldi and Lidl do is turn that technology once again to an even more efficient tuning. They carry perhaps 1,000–1,500 SKUs. You can still get honey roast ham but there will be only one brand of it, one type. It’ll be perfectly acceptable, that one type, and many of their offerings win in blind taste tests. They also, usually at least, contract to have these things made for them. There are no brand advertising expenses, over and above those by the store chain itself. The reduction in choice and the absence of brands other than own leads to lower prices once again. And again another turn of that virtuous spiral where we consumers get our lives catered for us at ever lower prices.
There are two interesting pieces of research, much mentioned around here by me, which tell us why this does work. Schumpeterian profits in the US economy doesn’t sound like something that’s going to excite but it’s a wondrous explanation of why this capitalist free marketry works:
Note that I’ve described the evolution of the supermarket as a series of technological advances and to the economist that is what these have been, the evolution from the single product shop through the vast pleasure gardens of the full service supermarket to today’s smaller discount store a la Aldi. And the actual number is astonishing, the entrepreneur who deploys that new technology usually ends up with less than 3% of the total value created. The rest of it flows to us consumers in the form of lower prices or the consumer surplus. Yep, sure, Sam Walton’s heirs have $100 billion but that’s a once off number, a capital sum. As Jason Furman has pointed out about the effects of the existence of Walmart:
We out here, the consumers, have been gaining $263 billion a year over each of those in the past few decades, while Sam’s heirs get that $100 billion just the once. Sounds like a heck of a bargain really and it is why this capitalist free marketry makes us do fantabulously rich. Sure, the capitalist wants to make oodles of lucre so that’s what they set out to do. Design that better mousetrap so the world beats that path to their door. But the existence of competition is why they’ve got to moderate their demands upon us. Which is where the $263 billion comes from, it’s not what we save by shopping at Walmart, it’s what we save by the existence of Walmart. Everyone else has to moderate their demands, lower their prices, make more efficient their supply chains, as a result of this new competition for the profits that can be made from our wallets.
And that’s why the system works. Yes, of course capitalism is driven by greed, greed for the hot and cold running Ferraris that can be afforded from the plucking of our wallets. It’s the market, the free competition part of it, which so moderates how we can be plucked so that it is we, the consumers, who benefit from the system overall. And that is why we who live in those places which have had the blessed capitalist free marketry for anything more than just a few decades really are the richest human beings ever to have waddled the Earth. Simply because capitalist free marketry is the one socio-eonomic system which delivers the goods, a substantial, sustained rise in the livings standard of the average person, Jane Sixpack.
All that Aldi is promising us with this $3.4 billion investment and expansion is the opportunity for us to spend our money that way. And if we like it then we’ll be richer, just as Walmart’s offering made us so much richer before.