A Lean Business Model

While in route to the nearest Lowes a few weeks ago, I noticed a new store in a strip shopping center. It occupies less than half of the space that had been used by a Winn-Dixie (grocery chain) store that had closed. The name of the new store is Aldi.

A couple of weeks later Time ran a story about Aldi and informed me it was a grocer that had some radical concepts about lean operations. The story made it clear that I had to visit Aldi. This morning I did, not to buy groceries but to observe firsthand their version of lean business.

Before I recount my visit, let me give some perspective. The grocery industry is already a very lean industry. We have much to learn from them. While the DME industry yields net profit margins in the neighborhood of 5 percent, grocery chains are yielding less than 2 percent of sales to the bottom line.

Supervalue (including Albertsons) put 1.3 percent of sales to the bottom line in 2007. Kroger did better at 1.7 percent, and the chain that vacated the space now occupied by Aldi put 0.17 percent to the bottom line. Gross profit margins for grocery chains are in the range of 25 to 29 percent, or less than half the gross margin that DME companies work with.

Along comes Aldi and offers prices that range from 10 to 30 percent less than what we pay at our neighborhood Publix. We don’t have to be a math whiz to question how a business in an industry with net margins of less than 2 percent can sell its goods for prices that are at least 10 percent lower than the rest of the industry.

Aldi is focused on providing staples, so you won’t find a bag of casaba chips and a stack of carambola for your next tropical-themed party. Nearly all of the items the store sells are private-labeled, so prices don’t include the cost of large marketing budgets.

They generally carry only one brand, one size. So when you get to the beverages you won’t find their brand plus Coke and Pepsi. If you want cola, you get their 24-pack of cans for less than $5.

The focus on staples with one brand and size: concentrates purchasing power, enabling Aldi to negotiate lower prices from vendors; reduces purchasing and receiving activities, and thereby warehousing and administrative costs; utilizes retail space much more efficiently; and makes cashiers more efficient because they have fewer potential exceptions to deal with.

The focus also reduces the amount of space they acquire for a store. The Aldi Web site says its stores are 10,000 square feet.

On the topic of staff, the Time article said they have up to five employees in a store. When I went in Aldi, I counted four employees. There is not a butcher in the store; all of the meat is packaged.

There weren’t any grocery carts in the parking lot. They were all locked together near the front door. To use a cart you insert a quarter in the lock and it releases the cart. When you return the cart to the locked position, the quarter is returned. This system reduces the number of carts that have to be retrieved from the parking lot and the cost of personnel to retrieve them.

The grocery store we shop in provides the customer a choice of paper or plastic bags, an employee to bag the groceries and take them to the car and a recycling bin to return the plastic bags. At Aldi, customers bag their own groceries in their own bags. If a customer doesn’t bring bags, they can purchase what they need for 10 cents each.

At Aldi, customers pay cash. That doesn’t mean they pay with a check or credit card at the time of purchase, that means they pay with U.S. currency. This policy reduces transaction fees, banking fees, bounced check charges and the time it takes for accounting.

What I learned today won’t make me change grocers because I am willing to pay for having the choices, conveniences and services my grocer provides. However, it did remind me that DME providers should be adjusting business practices to reflect what the customer is actually paying for.

Are customers paying to have a choice of three brands of wheelchairs? Are customers paying to have expedited delivery? Are customers paying to have an open account for their co-pays? How many more questions should be asked?

Wallace Weeks is founder and president of Weeks Group Inc., a Melbourne, Fla.-based strategy consulting firm. You can reach him at 321/752-4514 or [email protected].