{"id":7204,"date":"2015-12-09T23:08:40","date_gmt":"2015-12-10T04:08:40","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/bim-pioneer-of-discount-retail-in-turkey\/"},"modified":"2015-12-09T23:08:40","modified_gmt":"2015-12-10T04:08:40","slug":"bim-pioneer-of-discount-retail-in-turkey","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/bim-pioneer-of-discount-retail-in-turkey\/","title":{"rendered":"Bim \u2013 pioneer of discount retail in Turkey"},"content":{"rendered":"

Established in 1995, BIM Birlesik Magazalar (known as \u201cBim\u201d) was the pioneer of the \u201chard discount\u201d retail model in Turkey.\u00a0 Established in 1995 by former managers of the German discounter Aldi, Bim embodies the perfect alignment between a firm\u2019s business model and its operating model.\u00a0 Its business model\u2014offering staple groceries at the lowest possible price\u2014is enabled by its diligent execution of its operating model, which is based on judicious cost management and a superior procurement strategy.<\/p>\n

Low cost operating model<\/strong><\/p>\n

At the heart of Bim\u2019s discount supermarket model is its low operating cost base.\u00a0 The typical store is small and located on secondary or tertiary streets in crowded residential neighborhoods with heavy foot traffic.\u00a0 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.\u00a0 In fact, Bim has spent virtually zero advertising dollars since inception thanks to its strategic placement in crowded neighborhoods.<\/p>\n

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.\u00a0 The no-frills atmosphere inside these warehouse-like stores, which are lacking in even the most basic of decoration, further helps to reduce costs.<\/p>\n

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)<\/p>\n

Superior procurement and constant price reductions<\/strong><\/p>\n

Low prices are at the crux of Bim\u2019s (and other hard discounters\u2019) value proposition to customers.\u00a0 This is enabled not only by the shrewd cost management discussed above but also a procurement strategy focused on few SKUs.\u00a0 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.\u00a0 This means only one kind of orange juice, one kind of eggs, one kind of bottled water, and so on.\u00a0 By concentrating its supply, Bim is able to consolidate its bargaining power against fewer suppliers and demand constant price reductions.\u00a0 The bigger it gets, the stronger it becomes in such negotiations.\u00a0 And as it has become large enough, Bim has gradually shifted production to private label goods \u2013 i.e., manufactured exclusively for a retailer, often by the same suppliers from which the retailer had originally procured its goods \u2013 thereby further reducing cost, strengthening Bim\u2019s brand name, and improving profitability while enabling Bim to reduce the end price to consumers.\u00a0 This operating model is perfectly aligned with its business model of low prices.\u00a0 As we can see from its financials, Bim has maintained a remarkably stable 5% EBITDA margin while reducing prices each year.\u00a0 Reduced prices, in turn, attract more consumers in what is the ultimate virtuous cycle.<\/p>\n

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\u2014typically a few months\u2014while customers mostly pay by cash and sometimes 30-day credit.\u00a0 This had resulted in large negative working capital which has essentially been the key enabler of Bim\u2019s 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).<\/p>\n

Superior results and international expansion<\/strong><\/p>\n

As we see in Figure 2 below, Bim\u2019s 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!<\/p>\n

The success of Bim in Turkey is not a one off instance.\u00a0 They\u2019ve proven that it can work elsewhere and recently expanded into Egypt and Morocco with hundreds of stores.\u00a0 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.<\/p>\n

Ultimately, we can attribute the success of Bim to management\u2019s brilliant operating model that is superbly suited to satisfy its business model.\u00a0 Its operating model\u2014focused on judiciously low cost and superior supply chain management\u2014enables 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\u2019s shareholders and employees.<\/p>\n

Figure 1: Bim\u2019s \u201cno frills\u201d approach to store layout, with portable fixtures and minimal design<\/p>\n

\"bim<\/a><\/p>\n

Source: Bim<\/em><\/p>\n

Figure 2: BIM\u2019s superior returns and growth since its 2005 IPO<\/p>\n

\"growth<\/a><\/p>\n

Source: Capital IQ<\/em><\/p>\n

\u00a0<\/em><\/p>\n

Sources:<\/p>\n