Staying in the Rapids

Some businesses get in the Rapids by picking a fast growing market and then trying to keep up with exploding demand. Such as PC manufacturers in the 1980s and laptop manufacturers in the 1990s.  Or internet companies in the late 1990s.  The market explosion means these companies keep selling more and more primarily due to robust demand.  And revenue growth covers a world of sins, as they can raise external money to fund growth even if not profitable.  But in these instances, when the explosion stops many of these competitors rapidly disappear – unable to maintain growth as the market shifts.  The Rapids is a temporary phenomenon which disappears, and these businesses are not able to keep growing.

But Phoenix Principle companies create above-average growth and maintain profits in shifting markets often considered low growth.  Take Aldi in grocery retailing.  That market grows along with the population – about 1 to 3% per year.  The vast majority of "good" competitors grow no faster than that.  And those who do sport better growth usually obtain it merely by making acquisitions – so there’s no "real" growth just mashed up bigger numbers under one name.  Worse, as Wal-Mart and other discounters have started selling groceries it’s caused many traditional grocers to see declining revenues as customers started buying more groceries at the new alternative.  So, you’d think yourself hard pressed to get into, and stay in, the Rapids as a grocer.  But Aldi, one of the world’s largest grocers, has done just that.

Aldi may seem small to Americans, with only 900 stores in the USA.  But the company is $45B in revenues.  And their success, growing at 5-10% per year, can be traced to following The Phoenix Principle:

1. Aldi is always looking for places to expand.  They don’t just try to sell in one geography, like most U.S. grocers, nor in just one country.  They cover most of the developed world, with plans to expand into growing markets as well.  They don’t focus on what they’ve done, but rather on where they can go and what they must do to keep growing.
2. Aldi doesn’t follow the competition.  They do what competitors are too locked in to even consider, much less do.  While large grocers carry upwards of 45,000-80,000 items, Aldi stores carry 1,300. While most grocers rely on branded goods, Aldi is almost exclusively private label. While large grocers advertise weekly with specials, Aldi advertises very little and instead provides dramatically lower prices.  Major grocers constantly rotate "deals" pitching suppliers to offer money to cover the deal cost, but Aldi just has the same price low price all the time.  Where major grocers have lots of staff to help people, the typical Aldi has only 7 or 8 employees thus maintaining revenue/employee almost triple the national average.  Aldi doesn’t ask customers what they want.  Instead, Aldi competes by attacking competitor Lock-ins and beating them for customer sales.
3. Whenever opportunities come along, Aldi remains open to Disruptions.  In every country Aldi allows local management teams to build the concept tailored to customer needs.  Aldi doesn’t force every country, or even every store, to be similar.  Instead, they Disrupt their pattern and open stores where they can be most profitable – not necessarily where they will create "market density" – and each store is built to take advantage of its location.
4. They don’t shy away from White Space.  Recognizing the upscale shopper is not inclined toward an Aldi because of the merchandise available and sparse layout the company bought Trader Joe’s Market in 1979 which sells considerably more upscale merchandise, and has aggressively expanded.  And instead of the typical grocery circular, Trader Joe’s mails out something that looks and reads more like a newspaper with recipes and discussions about featured merchandise, rather than just focusing on price (even when prices are very competitive.)  And Aldi even allows Trader Joe’s stores and Aldi stores to exist in the same market – not worrying about cannibalization, but instead trying to maximize revenues.

Aldi is probably the most profitable grocer in the world (it’s hard to say definitively because the company is private.)  It certainly is the most successful – opening a new store somewhere almost every week for the last 20+ years! With a growth rate more than double the industry average, and the highest net margin in the industry, Aldi has long been a quiet game changer that simply goes out there and makes money in one of the toughest businesses on earth.  Selling groceries.  And that’s what staying in the Rapids is all about.

(Read more about Aldi’s business in Chicago area here [Aldi North America is headquartered in suburban Chicago].  Read about the company history here.)

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