What Real Estate Investors Can Learn From ALDI’s Clever Business Model
Most grocers have gone bigger and bigger, with Super Targets and Walmart Supercenters that expand across the horizon as far as the eye can see. I’m sure you’re familiar with Costco, which goes big both in terms of store size and in terms of the quantities they require you to buy. Bigger, bigger, bigger is what everyone else is doing.
So when everyone else zigs, you should probably zag.
And ALDI has zagged.
Instead of going bigger, ALDI cut everything down to the bare essentials and usually offers only one brand of each type of product — their own. This allows ALDI to have some of the smallest grocery stores thinkable while still providing everything one would need at very low prices. Indeed, they’re generally about the same size as most pharmacies and not much bigger than a QuikTrip convenience store.
An Average ALDI Store is Only the Size of a Pharmacy
An average ALDI store is only 16,500 square feet. Compare that to a Walgreens pharmacy, which comes in at 14,500 square feet. On the other hand, the average Safeway is 46,000 square feet, and the average Walmart Supercenter is a mind boggling 182,000 square feet!
Instead of sifting through aisle after aisle to find what you need, ALDI cut out all the clutter and has made grocery shopping a straight forward, in and out operation.
And what has been the result? Well, rapid growth. In 2015, ALDI increased sales by 16 percent, and its market share has gone from about two percent in 2011 to just shy of six percent today!
Not only does ALDI provide inexpensive products and a niche consumer experience that has allowed it to carve out a substantial market share, its small size grants it access to markets big grocers don’t have. This is particularly true in low income neighborhoods that simply don’t have either the population density, income, or both to support a large 40,000 plus square foot grocer.
In Kansas City, there is a low-income area East of downtown that has from time to time been labeled “the grocery store desert” for its complete lack of grocery stores. Residents there had to either go a long distance (and many don’t have cars) or settle for the few offerings at convenience stores, pharmacies, and small retailers, such as The Family Dollar, which rarely have fresh produce or meat. There simply wasn’t enough wealth in that area to sustain a large grocer. But then ALDI moved in to act as an oasis. Besides the social benefit this provides, ALDI was able to capture a market segment that other grocers weren’t designed for.
And the same exact thing could be said for areas that are so dense there’s insufficient space to put a large grocer, such as many places in New York. As The New York Times notes:
“After decades spent fleeing cities for the strip malls and boulevards of the suburbs, grocers and discount retailers are doing an about-face. Target plans to open its first smaller, city-size store in Seattle next year, and Wal-Mart announced recently that it would build “hundreds” of smaller, mostly urban stores in the coming years. Meanwhile, ALDI has quietly been setting up its shops in cities around the country.”
In short, ALDI beat them to the punch.
What Real Estate Investors Can Learn from ALDI
There’s certainly something to say about doing something others aren’t, as ALDI did. Indeed, my dad got started by focusing on student rentals at a time when most real estate investors were ignoring the potential there.
But what I want to focus on is how ALDI specifically offers just what their customers want. Not too much, but not too little either.
It’s not that they never change or add new things. Right now, they are expanding their selection of organic food and gluten-free options to satisfy that segment of consumer demand. But for the most part, ALDI focuses on offering what their consumers want without any of the bells and whistles that do little more than distract.
Last week, I discussed how QuickTrip has set itself apart from other convenience stores by offering a higher quality store and experience. And while it’s extremely important to sweat the small stuff and offer a quality product in that regard, it’s also important to know who it is you are marketing to and not provide more than is necessary.
Provide EXACTLY What Your Market Wants
I’m going to focus mostly on landlording, but this can apply to flipping, too. With regard to rentals, though, a key question to ask is, “What type of properties do you want to rent out and to whom?” For us, the first question is area. We don’t want to be in an area that’s to challenging to manage, but we also don’t want to be in a high end area that’s mostly homeowners where rentals are an aberration. So we focus on the lower middle to middle market segment.
We also don’t want a home that is too small because the tenants are more likely to be transient, and we don’t want it to be too large because bad turnovers could be too costly and most people looking for houses that large are buyers. So we aim for between 800 and 1,500 square feet.
That’s not to say this is the only way to do it. Indeed, one investor I met has a very ALDI-like model. He focuses on buying only one-bedroom houses and leases them out mostly to elderly people who don’t want or need a large home. That’s very specific and niched. There also isn’t much liquidity to such homes. Then again, how many investors does this guy have to worry about competing with?
Don’t Spend Where You Don’t Have to
But furthermore, it’s important to note that while it’s critical to have quality rentals, you will quickly start spending money that won’t increase your equity or rental value if you are not careful.
Tenants in lower middle to middle income areas don’t need and don’t particularly want granite countertops, Brazilian hardwoods, an accent wall in every room, or top-of-the-line stainless steel appliances. And they’re certainly not willing to pay much extra to get them. Sure, you may get a little more in rent, but it will get more than eaten up by the extra rehab costs.
Of course, with flipping in high end areas, the story is different.
But if your customers aren’t asking for something and aren’t willing to pay for it, then don’t provide it. It’s a waste of money. Cut it down to what they want, but just make sure to provide what they want at a level of quality that will set you apart from the competition.
What ALDI has done so well is to understand what their customers want and build a niche model to take advantage of this. So make sure to ask:
- “Who are my customers?”
- “What do they want?”
- “What is the best way to provide that to them?”
But it goes further then that. Like ALDI, you should also ask, “What do my customers not want, and what would I just be wasting money on if I provided it?” This is a question that is rarely asked. And by not doing so, it has cost many real estate investors a lot of money.
What do YOU think about ALDI’s business model? How do you cater to your niche market?
Let me know with a comment!