Norma: Survival of the fittest

Norma. The smallest of German hard discounters cannot survive without a strict lowest cost business model. However, it takes more to stay in business in Germany’s extremely competitive discount sector. Pragmatism, adaptability, shrewdness, prudence are the qualities that clearly distinguish Norma from the discount pack.
Elsevier Food International Vol.8, No.4, November 2005
Pascal Kuipers

With an estimated €2.7 billion of sales, Norma is by far the smallest player in the highly competitive hard-discount sector in Germany. Instead of being crushed by powerful competitors such as Aldi and Lidl, Norma fits its markets well and manages to survive and thrive.

In June 2004, the German hard discounter Norma hung huge posters in its stores, which read, “Norma is too cheap – Milka refuses to deliver”. The reason for this was a dispute with Kraft who put deliveries of its Milka chocolate to Norma on halt, after the discounter did a promotion, offering Milka products at a rock bottom price without consulting Kraft.
Influencing its customer base in this way is not the most ethical way of in-store communications, but who cares in the merciless German discount business with its wafer-thin margins? According to Armin Rehberg, member of the discounter’s executive board, Norma had a valid excuse for its behaviour as constant price promotions undercut Norma’s positioning as an EDLP-discounter. Referring to the numerous promotional campaigns that branded goods suppliers carried out with different retailers in Germany, Rehberg said that the price levels of leading brands were constantly below that of discounters. This, to the detriment of Norma.
“We expect our suppliers to give us products whose price-performance ratio is so attractive that we can offer it to our customers at a permanently low price. We have to question a product whose price is continually being undercut,” Rehberg commented in June 2004 in Lebensmittel Zeitung.
A hard discounter worried about eroding price perception of A-brands due to its fellow retailers’ promotional zeal. Welcome to the German market, where cut-throat competition is daily routine.

Shrewd and pragmatic
The incident characterises the boldness of Norma when it comes to defending its turf. A secret weapon, as Norma understands that a good customer franchise is vital for a relatively small discounter who has to take on much larger opponents such as Aldi, Lidl or Plus, the hard-discount banner of German retailer Tengelmann.
A similar example is how Norma took up the introduction of the euro in 2002. Then, Norma collaborated with the populist German tabloid Bild Zeitung that carried out its ‘Teuro’ campaign (‘teuer’ means expensive in German). Norma offered a ten per cent reduction on a basket of 60 products and was applauded for doing so by the majority of Germany’s Euro-sceptic and price-sensitive shoppers.
Norma is by far the smallest of the German hard discounters and it has to add large amounts of shrewdness for survival in the German business climate, where large numbers dictate the economies of scale, whose benefits are immediately forwarded to consumers via even lower prices.
Like all hard discounters, Norma has a low-cost business model that cannot afford added complexity and therefore cost. Due to its relatively small size, Norma strictly has to live up to this model. Where discounters such as Aldi and Lidl are broadening their assortments to some 1,200 SKUs, Norma uncompromisingly sticks to its 800 SKUs. In doing so, Norma protects its sales per SKU and therefore its purchasing power, which is essential for survival. Furthermore, a larger assortment would mean operational problems, especially in Norma’s smaller city centre locations where storage capacity is limited. As fierce competition among Germany’s hard discounters also happens in the fight for good retail real estate, Norma pragmatically added city-centre locations to its store base that used to be Aldi or Lidl stores but had been left due to these discounters’ migration to more spacious locations in residential areas.
Pragmatically increasing its store network, Norma’s store base is essentially heterogeneous. According to the German trade publication Lebensmittel Zeitung, some 60 per cent of Norma’s stores in Germany are over 500 m², which means that a large amount of its stores are not ideally sized (Norma’s ideal store size is some 800 m²). Lebensmittel Zeitung calculated that Norma renovated, extended or newly opened some 70 stores annually between 1999 and 2001. In the following years, it speeded up this process to some 100 stores but still its pace of expansion is relatively slow. Gradually Norma expanded its store network from its southern German stronghold to a national coverage with the exception of northwest Germany (the Hamburg and Bremen regions). In the late 1990s, Norma acquired 75 former Tip discount stores in eastern Germany from Divaco. This was the company that had to sell restructuring Metro Group’s non-core and underperforming assets. The troubles Norma had integrating these stores confirmed its belief in gradual and organic expansion.

Extremely prudent expansion
Abroad too, Norma has been breaking the golden hard discount rule that says that rapid expansion is needed to quickly build leverage and reduce overall cost per store. In 1989 – two years after Aldi and Lidl –, Norma set up shop in France by opening stores in the Strasbourg area, which could easily be supplied by its existing logistic network in Germany.
After testing the waters, Norma built a store network of some 114 stores, all in the eastern regions of France. As a comparison: west of the Rhine Aldi and Lidl built networks of 670 and 1,250 stores, respectively. According to PlanetRetail, Norma aims for a network of 300 stores in France by 2007, for which it intends to build a new 80,000 m² logistics centre somewhere between Lyon and Chambery in France’s Rhône-Alpes region.
Norma also crossed the border eastwards of its southern German stronghold, by opening stores in the Czech Republic in 1992. Since then it has opened 34 stores. As a comparison: the Schwarz Group introduced Lidl on the Czech market in 2002 and currently operates 120 stores.
Expansion to Austria finally happened in April 2005 by opening two stores that are supplied via Norma’s logistics centre in Augsburg, South Germany. “We will firstly look at the performance of these two stores and then we will see what we will do,” Lebensmittel Zeitung quoted Norma’s owner and founder Manfred Georg Roth, who attended the store opening. Asked why it took Norma so long before expanding southward to neighbouring Austria, Roth commented that Austria’s EU membership was decisive. Otherwise, it would have been too expensive, Roth said.
This illustrates Norma’s extremely prudent expansion policy, which rules out risk. Another characteristic is, that Norma takes its time to prepare market entry and adapt to local consumer preferences and market conditions. Austria is a prime example with some 25 per cent of the assortment consisting of Austrian products, slicing ham a little thicker, as Austrian consumers seem to prefer and spelling the word ‘discount’ the Austrian way: ‘diskont’.
Norma has an eye for detail and in its assortment, regional products and a large share of private label products – 75 per cent on average – is used to distinguish its offer from that of the competition. Norma clearly looks at best practises in any market where it operates.
In Germany, it is said that Norma was developed in the 1960s by taking a close look at Aldi South, and with regard to Norma’s Austrian stores, chief executive Rehberg does not conceal that Aldi South’s Austrian banner Hofer has been of inspirational value. “Clearly, our benchmark is Hofer. Here, we are apprentice and not teacher,” he said to Lebensmittel Zeitung.

Optimal instead of large volume
Rehberg himself is also a prime example of Norma’s pragmatism. The hard discounter is keen on hiring managers that formerly held management positions at Aldi or Lidl. Before joining Norma in 1996, he worked for Aldi South in the US.
A key success factor is that Norma – like other hard discounters in Germany – is considered an attractive employer among young managers. “Our human resource policy is characterised by transparency of our structures and the huge opportunities for proven qualified managers to quickly build a career,” Rehberg said in May 2004 in the German newspaper Frankfurter Allgemeine. Upon being asked, a young regional manager at Norma confirmed that quickly gaining job responsibility and career opportunities were crucial in his decision to build his career at Norma. The relatively high starting salary and a company car, also for private use, were attractive but of minor importance… Quality of management is vital for success in business, and also in this respect – such as in finding good store locations – competition among Germany’s hard discounters is intense. Pragmatism, adaptability, shrewdness, prudence. All these words are applicable to Norma’s way of doing business, which is built on a hard discounter’s lowest-cost operational model. Still, discount watchers are keen on investigating why Norma as a small player in an extremely competitive industry can overcome the disadvantage of its much lower buying clout. Combined, Aldi South and North are in Germany 8.5 times as big as Norma. Lidl is 4.7 times as big and Plus’ sales are 2.5 times higher than Norma’s sales figures in Germany.
When assessing Norma’s ability to counter its competitors’ huge economies of scale, Jan-Willem Grievink, a consultant for Capgemini, has an interesting observation. “The larger the volume, the lower the price isn’t a rule set in stone,” he says. “Retailers like Carrefour and Tesco discovered this years ago. In the UK market, Morrisons’ buying conditions have been much better than Tesco’s, due to the fact that Morrisons' store concept was a better fit to the commercial strategy of its suppliers. Furthermore, producing and supplying its lower volumes could be better planned. Often an optimal volume can be purchased at better conditions than the largest volume.”
According to Grievink, soft criteria like the brand and concept of the retailer should be valued by suppliers. This may also apply to Norma. After all, which branded goods supplier can resist a hard discounter who is honestly worried about eroding price perception of A-brands due to its fellow retailers’ promotional zeal?