Quotes of the Day
It's 11 a.m. on a drizzly Saturday in downtown Aachen, a city in western Germany near the Belgian and Dutch borders. With Germany teetering on the edge of recession, most stores in the neighborhood are half-empty. But on a street called Löhergraben, one store is packed: Aldi. With brown speckled floor tiles, garish neon lights and a limited assortment of products in half-opened cardboard boxes, it's the least-inviting place around. But it's also the cheapest, and so the line to Aldi's two cash registers stretches the entire length of the store — about 30 people in all, their carts overflowing with cut-price milk, sugar, coffee, socks and other generic, non-branded items.
One man clutches a box with a €79.99 computer printer. Ine Lendemeyer, a social worker, has a bag full of frozen chicken and Top Star cola, €1.49 for six. "Aldi used to be for people who didn't have much money, but now everyone goes — bank managers, lawyers, everyone," she says.
The worse the economy, the better the business at Aldi. Last year it racked up €27 billion in sales. And discounters, including Aldi, Lidl and Plus, boosted their share of the German food market to almost 38%, from 33% in 2001, fueling a price war with more traditional supermarkets.
You might think that officials would be happy that consumers are saving money in tough times. But the discounters' success is controversial in Germany: Renate Künast, the government Minister for Consumer Protection, last month vowed to "break their power." She was quickly chided by Chancellor Gerhard Schröder. But her remarks came just as Germany's Justice Ministry was working on a revision of the unfair trading law, and others rallied to her defense, including agricultural groups and makers of brand-name products. It's a microcosm of a divisive and peculiarly European debate: How low should retail prices be allowed to go?
Predatory pricing — selling below cost to drive competitors out of business — is illegal everywhere, including in the U.S. But many European nations also heavily restrict or ban outright the promotions and discount prices that are standard practice in America, usually in the name of protecting consumers or competitors. Eight of the 15 E.U. members outlaw "loss leaders" — the sale of products below their cost price — a tactic designed to tempt consumers into the store. And discounts on individual products or fully-fledged store sales are subject to rigid rules. In the Netherlands, for example, retailers can offer two products for the price of one as a special promotion, but Belgium only permits three for the price of two. In France, the value of a gift premium must not exceed 7% of the cost of the goods it comes with. "That means, if you buy two shirts and get a free tie, you'll only get a bad tie," says Axel Tandberg, head of government affairs at the Federation of European Direct Marketing in Brussels.
Enforcement is tough. Germany, France and others have specialized bureaucracies that are quick to sue. A commercial court in Brussels last month ordered France's Carrefour supermarket giant to halt a campaign that offered price reductions on dozens of items, including microwave ovens and cameras, after the Belgian Economy Ministry sued, alleging that the company didn't have sufficient stocks to satisfy demand for the products and thus was engaging in "deceptive publicity." Carrefour dismisses the charge — "Our objective is not to lose clients but to gain new ones," says a spokeswoman — but admits it was surprised by the big demand.
Philip Circus, a London-based specialist in marketing law, says there's a fundamental philosophical divide: there are countries — such as Britain, Ireland and the Netherlands — that have a liberal approach, believing that sales promotions work in favor of the consumer. And then there are others, including Germany, France and some of the Scandinavian nations, that are deeply skeptical about the value of promotions, arguing that they distort rational purchasing decisions and thus work against the consumer's best interest. "The inherent question is whether people buy the product just because it comes with a free daffodil," Circus says. "When it's a product they wouldn't want or wouldn't buy without [the daffodil], that makes it an improper decision." Heaven forbid that the consumers be allowed to decide this question for themselves.
Whatever the rationale, the European Commission has proposed sweeping away this patchwork of national restrictions and replacing them with a uniform set of lighter rules that would require retailers to provide specific details about the promotion, such as the date it ends and any special conditions, and take steps to protect minors. The Commission argues that sales promotions are essential to the development of cross-border trade in products and services, and estimates that their design and execution accounts for more than 1 million jobs in the E.U. and investment of over j40 billion.
The proposal has won approval of the European Parliament — but only after the Commission agreed to take out the most contentious issue: ending bans on sales below cost. European governments must still agree to the measure, but the Commission isn't waiting. In January, it hauled Belgium before the European Court of Justice over rules that limit the use of customer loyalty cards, which enable consumers to accumulate points when making purchases and then exchange them for free products. (Such cards are legal elsewhere.)
Some retailers are also fighting back. When the euro became legal tender at the beginning of last year, the clothing-store chain C&A, fearing chaos at its tills, gave a 20% discount to German shoppers who paid with credit or debit cards instead of cash for the first four days. German authorities said the discount breached unfair trading laws and a court agreed, fining C&A €1 million. C&A in December decided to take its case to Germany's highest court. "We think we are in the right," says a spokesman.
These days it's Aldi that has been making waves as it transforms the German retail landscape. Owners Theo and Karl Albrecht took over their parents' grocery store after the war and built it into a retail powerhouse. To keep costs — and prices — down, the stores are deliberately Spartan and understaffed, and feature a restricted number of staples, about 700 in total. The formula has been a smashing success: in the low-margin world of grocery retailing, where many chains earn a net return of just 1%, Aldi nets as much as 7%. The Albrecht brothers are now among the richest people in Germany. When the euro was introduced, Aldi rounded its prices downward, while many others rounded up.
If it comes down to a choice between Germany's paternalistic leaders and Aldi's prices, Aachen's shoppers have no doubt which side they support. "I'm fed up with all these politicians," says a middle-aged woman who gives her name as Renate, making her way out of Aldi clutching several bottles of €1.99 Beau Reve white wine. Ferdinand Knerlich, a 38-year-old software engineer, says he fell out of his chair when he heard Künast's remarks. "It angers me, it really angers me," he says. "If there are people who want to buy cheap, they should be allowed to buy cheap." Not many governments in Europe have yet got that message.
- PETER GUMBEL/Aachen
- State controls on sales promotions still hurt consumers in Europe