Could German retailers' superior math be their secret weapon?

Unlike English retailers who focus on margin percentages, many German retailers prioritize profit per
unit (Deckungsbeitrag), focusing on actual money earned rather than relative percentages. This
seemingly simple difference in accounting can have significant consequences, as Dieter Brandes,
CEO of Aldi Nord & Trader Joe's, points out: "Many a company has calculated itself out of the
market with incorrect equations and inappropriate cost accounting."
This mathematical disparity may explain why giants like Marks & Spencer and Walmart struggled in
Germany.
A simple example illustrates this:
Consider this scenario: you sell two similar products. One is high-quality, priced at €4 with a cost of
€2. The other costs you €1. The question is: at what price should you sell the cheaper product to
match the profitability of the high-quality one?
Factory gets Customer pays
High-quality €2 €4
Other product € 1 €?
You sell the same quantity: the same number of units of both. At what price would the cheaper
product contribute the same profit to the store as the high quality product?
If you ask a room of retailers and they will disagree. Some will answer “€2” some will say “€3” (a
few might have another answer).
A hint was recently provided by the founder of Trader Joe’s supermarket “we considered how many
dollars we made on each sale. Thus, at the time, I was willing to make only 13 percent on a $20 bottle
of champagne, because that was a $2.60 profit. For a $2.00 item, however, I wanted to make a much
greater percentage.”
Strangely, at clothing retailer C&A for many decades the answer was €3 but after C&A Germany
merged with C&A UK the “answer” became €2…
C&A, once a dominant player in the European retail landscape, had abandoned the logical German
framework in favor of the more common practice of comparing gross margin percentages. However,
the traditional German method, centered around the concept of Deckungsbeitrag (Contribution
Margin Dollars or Gross Profit Dollars) and Opportunitätskosten (Opportunity Costs), offers a simple
yet powerful alternative in a 3 step framework:
1. Selling Price − Buying Price Per Unit = Deckungsbeitrag Per Unit (db)
2. Deckungsbeitrag Per Unit x Units Sold = Stock Keeping Unit's Deckungsbeitrag (DB)
3. Deckungsbeitrag From All SKU's − Firm's Operating Expenses = Total Firm Profit
The key to the German approach is that the actual selling price and gross margin percentage are
secondary. What truly matters is the Deckungsbeitrag, the profit generated per unit after subtracting
the cost of goods sold. This cost, the money paid to the manufacturer, is not considered income for the
retailer but merely a pass-through. This is particularly evident in the supermarket sector, where, as
Dieter Brandes explains, Aldi doesn't "buy stock" in the traditional sense. Customers often pay for
goods before Aldi even pays its suppliers.
Here's how to determine the selling price for the cheaper product to match the profitability of the
high-quality product:
1. Calculate the profit per unit for the high-quality product:
Selling Price - Cost Price = Deckungsbeitrag (db)
€4 - €2 = €2 Deckungsbeitrag (gross profit per unit)
2. Determine the selling price for the cheaper product to achieve the same profit:
Cost Price + Desired Profit = Selling Price
€1 + €2 = €3
Therefore, the cheaper product would need to be sold for €3 per unit to be as profitable as the high-
quality product.
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The concept of relative Deckungsbeitrag further refines the German approach. It measures the profit
per unit of a limiting factor, like shelf space. This helps retailers identify which products maximize
profit given limited resources. By understanding the opportunity cost of not selling a particular
product, retailers can make more informed decisions about their inventory and pricing.
Instead of focusing on gross margin percentages or allocating expenses like rent to products, German
retailers prioritize the concept of opportunity cost. This strategic approach optimizes resource
allocation, as evidenced by the success of C&A before it moved away from this methodology. This
German framework is detailed in a video, a white paper www.profitperx.com and a recently published
booklet titled "Breakthrough: C&A's Secret Formula Rediscovered."