RICH PICKINGS: Frugal to a fault?

The corporate world will be poorer following the passing of reclusive Aldi founder Theo Albrecht. But never fear, his famous frugality lives on in the business models of two other billionaire retailers.

For sale: One Mercedes S Class, 1996 model. Fully armoured, bulletproof glass and strengthened steel. Colour: Anthracite. Has 174,000 kilometres on the clock. One elderly owner, recently deceased. Will take offers over €100,000. May contain the secrets of one of the richest retailers ever to walk the earth.

Okay, so it is unlikely that last line will feature in the advertisement for the Mercedes limousine that once belonged to the late Theo Albrecht, who was the second richest man in Germany and one of the co-founders of the Aldi discount supermarket empire.

But it should.

Albrecht, whose death at the age of 88 was reported last week (about a month after he actually died), was one of the world’s great reclusive billionaires and very little is known of the secrets of his management style or wealth-building strategies. Could the glovebox of the old Mercedes contain some long-lost business manifesto?

It’s highly doubtful. After being kidnapped for seven days in 1971, Albrecht and his co-founder and brother Karl were rarely seen in public, never gave interviews and certainly never posed for photographs. Theo reportedly liked orchids, golf and collecting old typewriters, but it’s very doubtful that he bashed out any memoirs.

But never fear. A study of the few things we do know about Albrecht, who was valued at $18.2 billion by Forbes earlier this year, had led me to conclude that his basic business style and strategy is shared with two of the other richest men in the retail world: Ingvar Kamprad, the founder of Swedish discount furniture chain IKEA (worth $25 billion) and Amancio Ortega, the founder of fashion chain Zara (worth $27.3 billion).

There are a number of similarities between the trio. All three are notorious recluses. All three have changed the way retailers do business with high-volume, low-margin strategies designed to cater to the basic needs of the mass market. And all three have become fabulously wealthy by taking their concepts to the world.

Let’s take a look at the common lessons from these retail billionaires.

Be frugal

Albrecht's efforts to save a dollar are probably the thing that he is best known for. Albrecht reportedly used two-inch pencil stubs to take notes in a business meeting, and once wrote to a manager to complain that the company’s stationary was too thick and too expensive. Finally, after Theo was released by his kidnappers on the payment of a multi-million dollar ransom (which his brother Karl bargained to reduce) Albrecht famously tried to claim a tax rebate for the ransom payment. He was refused.

Amancio Ortega doesn’t have a huge reputation for penny-pinching (although the business model of Zara’s parent company Inditex, is renowned for its ability to keep inventory and marketing costs very low) but IKEA’s founder is a renowned saver. The best story concerns a statue of Kamprad that was erected in his Swedish home town. He was invited to cut the ribbon but apparently he put the scissors away, untied the ribbon and handed it to the town’s mayor, telling him he could now use it again.

Provide value

The other key element that links IKEA, Aldi and Zara is the idea of value shopping – Aldi is a proud 'discount' grocery chain, Zara paints itself as selling designer-style garments at non-boutique prices, and IKEA concentrates on affordable, mass-market furniture. All three chains sell only a 'home' label (although Aldi does offer some well-known grocery brands) which is pitched as an affordable alternative to big-brand competitors. This is something that has particularly served the companies well during the GFC.

The 'stack-‘em-high-sell-‘em-low' mantra is further underlined at IKEA and Aldi, where the no-frills, warehouse style of shopping is a key part of the model.

Keep marketing to a minimum

Under low-margin retail models used by Albrecht, Kamprad and Ortega, marketing expenses must be kept to a minimum. Even in Australia, you will rarely see IKEA and Aldi launch mainstream media branding-style campaigns. Instead the focus on a limited amount of direct mail marketing with brochures and catalogues.

Zara cleverly uses its product range – which changes every fortnight or so to ensure it is always on top of the latest fashions – as a marketing vehicle. The constantly changing product line-up encourages customers to make repeat visits to stores, and research from the UK suggests customers visit 17 times a year compared to four or five at other chains. These repeat visits coupled with prominent store placement allow Zara to rely on word-of-mouth marketing, rather than expensive brand campaigns.

Master the supply chain

Another key to the success of these companies has been supply chain management, starting with strict control of supply agreements.

IKEA, which has over 2000 suppliers in more than 50 countries, insists on strict standards on manufacturing methods and materials (with a big focus on sustainability), packaging (flat packs lower shipping costs) and of course, supply costs.

Aldi is also notoriously strict with quality control and price, but the grocery chain adds another dimension – suppliers are encouraged to keep the fact they work with Aldi a secret, so as not to reveal anything about the company’s operations.

At Zara, where the entire business is built on the idea of turning over the product range every few weeks, supply chain management is critical. Designers scour the catwalks of the world for the latest trends, cloth is then prepared and dyed in northern Spain and Asia, it’s sent back to Zara for cutting, on to contractors for sewing and then back to Zara’s warehouse and on to the stores. The whole process takes about two weeks.

Stay private

While being reclusive is not necessarily a prerequisite for billionaire-like success – Warren Buffett certainly doesn’t shy away from the media – it is worth noting that IKEA, Aldi and Inditex are privately owned. It could be argued this has allowed them to keep their business models hidden from view far more effectively than publically listed competitors.

While all three chains have their imitators, Albrecht, Kamprad and Ortega always seem to remain a few steps ahead of their rivals.