Established in 1995, BIM Birlesik Magazalar (known as “Bim”) was the pioneer of the “hard discount” retail model in Turkey. Established in 1995 by former managers of the German discounter Aldi, Bim embodies the perfect alignment between a firm’s business model and its operating model. Its business model—offering staple groceries at the lowest possible price—is enabled by its diligent execution of its operating model, which is based on judicious cost management and a superior procurement strategy.
Low cost operating model
At the heart of Bim’s discount supermarket model is its low operating cost base. The typical store is small and located on secondary or tertiary streets in crowded residential neighborhoods with heavy foot traffic. This has allowed them to attract large traffic without having to rely on advertising, while minimizing real estate lease costs, which could be 2x as expensive on main streets. In fact, Bim has spent virtually zero advertising dollars since inception thanks to its strategic placement in crowded neighborhoods.
As you can see in Figure 1 below, the stores employ cheap, portable fixtures (often just cardboard boxes!), allowing them to expedite the opening of new stores (it takes only a couple of days to set up a new store) while significantly reducing costs. The no-frills atmosphere inside these warehouse-like stores, which are lacking in even the most basic of decoration, further helps to reduce costs.
Human capital is managed judiciously, with each store only requiring 2-3 full time employees (a cashier, an inventory manager, and an assistant in more crowded stores)
Superior procurement and constant price reductions
Low prices are at the crux of Bim’s (and other hard discounters’) value proposition to customers. This is enabled not only by the shrewd cost management discussed above but also a procurement strategy focused on few SKUs. While a typical convenience store might carry 2,000-3,000 SKUs and a supermarket might carry 30,000-50,000 SKUs, Bim limits its product portfolio to no more than 600 items. This means only one kind of orange juice, one kind of eggs, one kind of bottled water, and so on. By concentrating its supply, Bim is able to consolidate its bargaining power against fewer suppliers and demand constant price reductions. The bigger it gets, the stronger it becomes in such negotiations. And as it has become large enough, Bim has gradually shifted production to private label goods – i.e., manufactured exclusively for a retailer, often by the same suppliers from which the retailer had originally procured its goods – thereby further reducing cost, strengthening Bim’s brand name, and improving profitability while enabling Bim to reduce the end price to consumers. This operating model is perfectly aligned with its business model of low prices. As we can see from its financials, Bim has maintained a remarkably stable 5% EBITDA margin while reducing prices each year. Reduced prices, in turn, attract more consumers in what is the ultimate virtuous cycle.
And, as BIM gains even greater control over its supply chain, it is able to dramatically reduce its working capital requirements via more favorable payment terms—typically a few months—while customers mostly pay by cash and sometimes 30-day credit. This had resulted in large negative working capital which has essentially been the key enabler of Bim’s dramatic growth with virtually no use of debt financing (it has grown from 21 stores since its inception in 1995 to 4,502 by the end of 2014).
Superior results and international expansion
As we see in Figure 2 below, Bim’s diligent exaction of the model I describe above has resulted in some of the highest (and most consistent) long-term growth rates (20%+ per annum) and returns on equity (30-65%), all while growing entirely organically and with virtually no use of debt!
The success of Bim in Turkey is not a one off instance. They’ve proven that it can work elsewhere and recently expanded into Egypt and Morocco with hundreds of stores. In Turkey and elsewhere, they have become driving forces in the formalization of the economy, helping to increase the tax base while ensuring sufficient standards of quality.
Ultimately, we can attribute the success of Bim to management’s brilliant operating model that is superbly suited to satisfy its business model. Its operating model—focused on judiciously low cost and superior supply chain management—enables Bim to offer the lowest price for staple goods, thereby transferring value from large suppliers of these goods (the P&Gs and Coca Colas of the world) to consumers and Bim’s shareholders and employees.
Figure 1: Bim’s “no frills” approach to store layout, with portable fixtures and minimal design
Source: Bim
Figure 2: BIM’s superior returns and growth since its 2005 IPO
Source: Capital IQ
Sources:
- http://www.bim.com / investor relations / annual report and financial statements
- FT: “Bim rings the changes for Turkey’s shoppers,” October 5, 2010
- CapitalIQ