Last month German retailer Aldi posted a 200% increase in UK profits. The UK business made a profit after tax of £57.8 million in 2011, having made a loss of £56 million in the previous year.

The privately owned chain opened 29 new stores last year and plans to invest £181 million opening 40 new stores by the end of 2013. This will take the number of Aldi stores in UK to 500 andcreate 4,500 jobs.

But how has it turned its fortunes around in such challenging trading conditions?

Essentially it’s cashed in on the recession. With household budgets being squeezed and wages stagnating, competition among supermarkets is intense. After all, people still have to eat.

Shopping at budget supermarkets was seen by some as a source of shame for the middle classes but it’s this group in particular responsible for the increased profits of Aldi.

The chain has introduced some new products to lure the squeezed middle away from Waitrose and Whole Foods, and the subsequent stampede of well-heeled customers has sent profits soaring.

“We’ve seen a shift in the socio-demographics,” UK joint managing director Roman Heini told Marketing Week. “Obviously we have kept the existing customers … but we now also see more A and especially B customers in our existing stores and also in the stores we have opened this year so far.”

So who’s behind Aldi?

Aldi is short for “Albrecht Discount”, Albrecht being the Germany brothers behind the supermarket chain. In Germany the company is divided into two: Aldi Nord (North) and Aldi Süd (South). The individual groups were originally owned and managed by brothers Karl Albrecht and Theo Albrecht.

Karl Albrecht is the richest man in Germany with a personal wealth of €17.2 billion. Theo Albrecht was the second richest when he died in 2010.

However, Aldi began when the brothers were just a twinkle in their mother’s eye; their mother opened a small store in a suburb of Essen in 1913. The brothers took over their mother’s business in 1946, and by 1950 they owned 13 stores in the Ruhr Valley, Germany. By the time the company split into two in 1960 they had 300 shops.

Their first branch in the UK opened in Birmingham in 1990. International expansion is not just confined the UK – the two groups also have stores across Europe as well as in the US and Australia.

Aldi’s plan

Aldi’s business model centres mainly on selling its own high-quality brands at low prices. It specialises in staple items such as basic foods, toiletries and cheap household items.

Selling its own generic brands means the store isn’t paying a premium to a major manufacturer for a well-known brand – and so it can pass discounts on to shoppers. In comparison other supermarkets tend to have around a 50% split of own products versus other brands.

Although Aldi does sell other brand names, these are normally limited to a maximum of two for any item. Its “special buy” programme consists of stock negotiated at a discount from other brands and sold at a reduced price.

That keeps the German store cheaper than the alternatives. A study by Grocer magazine found that on a shopping basket of 33 items Aldi was 16% cheaper than Asda, 20% cheaper than Tesco and 40% cheaper than Waitrose.

And despite the bargain basement image, some Aldi products are better than pricier rivals. Last month Aldi came second in Good Housekeeping magazine’s Christmas pudding taste test. While Waitrose came first, luxury department store Fortnum & Mason came a disappointing 29th out of 32 puddings tested. Aldi’s pudding was a fraction of the price too; costing £7.99 compared to Fortnum & Mason’s £24.95.

Innovating to stay ahead

In response to more customers flocking through the doors over the past couple of years, Aldi has developed bakery, meat and fruit and vegetable ranges to stop people looking elsewhere for fresh produce. Revenue from fresh meat, fruit and vegetables all went up in 2011.

Heini says the store has focused on understanding what consumers want and is working with a growing number of UK suppliers to quality products at everyday low prices.

Two-thirds of its core range in the UK is now sourced from UK suppliers and Heini claims a week’s shopping costs about a third less than the big name supermarkets.

In-store merchandising is based largely on price and, although perhaps bland, it’s successful in communicating what the store is all about: Low prices. Aldi has also spent time researching what matters to customers in different parts of the world: While the Germans don’t mind a queue in the supermarket, Brits do – so in the UK the store operates a different system.

And while Aldi has a policy of not advertising in its home market of Germany – it has realised that mass media advertising is necessary in the UK.

Much of its success in 2011 can be attributed to its TV campaign: “Aldi. Like brands only cheaper”, which has the core message that Aldi’s private label is just as good as major brands but is significantly cheaper.

It’s a message that has stuck home in these tougher times and as long as the price stays low and the quality high, it’s a success story that’s set to run and run.