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July 30, 2014updated 11 Jan 2016 1:14pm

Aldi’s success proves that family ties can make, not break, a business

By Spear's

I recently learned that Aldi is an abbreviation of ‘Albrecht discounts’, Albrecht being the name of the family who own the supermarket chain. This information was included in one of many recent obituaries for Karl Albrecht who with his late brother Theo built their family’s small grocery business in post-war Germany into an international brand.

The growth of the business was based on the brothers’ belief that everyone should be able to buy high quality food at low prices. One way to keep prices low is to have minimal spend on advertising, an unconventional approach that was consistent with the family’s frugal attitude to wealth.

Over decades the business has stuck to the family’s original vision and values. This should help to destroy the persistent myth that family values are always bad for business, but equally it does not make it safe to assert that family influence is inevitably good for business.

The reality is that every family, potentially, has resources that can provide a sustainable competitive advantage for their business because they are unique to the family and cannot be copied by other businesses. The Aldi story provides the examples of a compelling family vision combined with patient, affordable capital to fund the business’s growth.

However, when resources are not used carefully, a potential strength easily becomes a weakness. For example, the extraordinary level of commitment that family employees can give to their business can easily turn into them either being taken for granted or appointed to positions that are unsuitable for their talents.

A lot depends on how each family defines success. The world seems to have caught on to the fact that most families do not run their business to maximise either short-term financial return to shareholders or an exit value.

While family businesses are as driven as any business to achieve financial success, they all will have different views on how to balance generating return for the current generation with building value to pass on to the next.

Also, many families attribute value to other returns on investment that are not measured financially. The Albrecht family, for example, appear to have strong attachments to low cost food retailing as a type of business and looking after employees, who Karl regularly credited for the business’s success when declining awards that would have required him to step into public glare.

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What families do differently from other types of business is put financial and non-financial returns on investment at the core of everything they do and then work out the trade-offs that need to be made in order to achieve overall success. Those who cleave to a monochrome-PLC-private equity version of financial success will not understand this, and they might even claim that this is why family businesses are not real businesses, but if it works for business families why should any of them, including the Albrechts, care what others think?

In the early days of Aldi it appears that the brothers ran their business in the same way as many siblings. They divided responsibilities into silos so that Karl focused on purchasing while Theo was in charge of sales and store management. Given their success this obviously played to the brother’s strengths, but those closest to family businesses know that sometimes this arrangement happens because siblings do not get on.

In order to avoid the agonising experience of trying to form a close-knit team, siblings may prefer to have separate silos in which each can run part of the business without any interference from their relatives. This could be denigrated as another example of family businesses not following so-called best business practices, but the fact is that it often works incredibly well.

The original Aldi business was split in 1962 into Aldi Sud, controlled by Karl, and Aldi Nord controlled by Theo. It is reported that this was over a disagreement about selling cigarettes. ‘Brothers divided by a cigarette paper’ is a nice hook for another clichéd story about how business families descend into conflict and then fail. Except in this case the story would be wrong, because each brother went on to build an incredibly successful business.

We need another explanation of why the split happened, albeit one that has to be speculative given the Albrecht’s preference for complete privacy.

Maybe the brothers decided that they would get on better as a wider family if they were not in business together. Maybe they had descended so deeply into their respective silos that each just wanted to run a business on their own. Maybe the brothers had different ambitions and had the courage to face up to doing something about it rather than suppressing their differences to preserve a shallow version of family harmony.

In any case, both brothers honoured the initial geographical separation of the business and then collaborated on their expansions into different parts of the world. The fact that two successful businesses grew out of one should inspire families who worry that their only options for the future are either to preserve the business begun by their ancestors or to sell. In the family business world, continuity and success come in many guises.

Ken McCracken is joint managing director of Withers Consulting Group

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