The Recession-Proof Business: Chapter 3
Rule #3: Make Your Business Competition-Proof
While ensuring customer demand is necessary to create a recession-proof business, by itself it’s not enough. There is still the competition factor. When you have strong customer demand but even stronger competition it’s still possible to lose.
So the next step in the recession-proof business formula is to make your business competition-proof by marginalizing or making your competitors irrelevant to your customers.
Here’s how to do this.
Once you’ve found a problem that gets worse for customers during a recession, solve that problem in a unique way – this is the key to making a business competition-proof or at least partially insulated from the actions of competitors. This uniqueness factor is very important. When you’re able to offer a unique product or service that solves an escalating problem for customers, you are able to connect increasing demand with limited supply. In short, you create a “mini” monopoly.
This is the ideal position to be in during a recession: strong customer demand with little to no competition. Offering something unique to the marketplace is the key to marginalizing your competition.
The Blue Ocean – Beyond Market Differentiation
At first glance, this rule for recession-proofing your business seems to suggest that market differentiation is important. But, as you’ll see from the following examples, to really recession-proof your business you need to go well beyond modest market differentiation.
The best book on this topic is called Blue Ocean Strategy by INSEAD business school professors W. Chan Kim and Renée Mauborgne. In my opinion, Blue Ocean Strategy is one of the two best books ever written on the topic of strategy (the other being Competitive Strategy by Michael Porter).
I’m not often a fan of books written by ivory tower business school professors who have never had profit and loss responsibility. The ideas are usually interesting but not always practical. However, Blue Ocean Strategy is remarkably insightful and practical.
For me, this is very big praise. The two compliments that I value the most, both in giving to others and in receiving myself, are “insightful” and “practical.” An idea, concept, or tool is insightful when it is factually supported but not always obvious. In the world of ideas, it gives you an edge in leading your business in a direction that you might not otherwise have taken without this “insight.” Usually an insightful idea, once understood, is powerful in its simplicity and jibes with common sense. But often this perspective isn’t achieved until someone has explained the insight – unlocking one’s appreciation for the idea.
An idea is practical if it’s useful in the real world and can make numbers move on the profit and loss statement. Thus a great idea is one that gives you an edge, especially one that you wouldn’t have noticed on your own, and is useful in the real world. The ideas in Blue Ocean Strategy pass both these tests. They are both insightful and useful.
Let me explain the concept behind Blue Ocean Strategy so you will notice how companies like the Coors Brewing Company and Price Club (now known as Costco) used it to create new markets that dominated.
Blue Ocean Strategy argues that there are two types of markets. One market is characterized by many competitors all trying to do essentially the same thing. These companies bloody each other in trying to compete for the same customers in the same way. And by doing so, they bloody the waters, creating a “red ocean.”
While these companies do their best to differentiate their products and services, the range of differentiation is quite narrow. An example of this would be the many e-commerce websites that sell music CDs via the Internet. All these competitors offer the same selection and shipping options, essentially only competing on price – again bloodying the waters in that market.
In contrast, a blue ocean is created when a company goes off in a radically different direction. In essence, it finds a “blue ocean” that is completely absent of competition. This usually involves finding an underserved customer segment to focus on, creating a product/service combination that’s radically different from pre-existing options, or doing both.
An example of a company creating a blue ocean would be Apple’s wildly successful iPod and iTunes combination. Steve Jobs at Apple correctly realized that consumers did not want music CDs, they just wanted music, period. Apple came up with the iPod portable digital music player that allowed thousands of songs to be stored digitally so that you could take your entire music library with you on the go.
Next, they created the iTunes online music download service. Instead of being forced to buy an entire CD that may only contain one song that you really want, iTunes made it possible to buy just the one song you really wanted. They also developed a new digital rights management system that would prevent piracy – a key obstacle that had earlier prevented major music labels from selling music this way.
The combination of a cool-looking portable music player, a digital download music service, and the piracy protection assurance that attracted music labels in droves, created a radically different approach to providing music to consumers. Within months, Apple acquired 60-80 percent market share in the online music industry and has held it ever since.
While Apple pulled off its blue ocean strategy during a boom economy, the approach is equally effective in an economic recession or depression.
Recession Success Story #3: The Coors Brewing Company
In 1873, Adolph Coors, a 26-year-old immigrant from Prussia, decided to start a brewing company. This was the same year that the longest economic depression in US history began. It would last 20 years – double the length of the Great Depression.
Coors was an observant young entrepreneur. He noticed that in the midst of an economic crisis, people get depressed. And what do people do when they’re depressed? Well … they drink alcohol.
While this may not be the most productive thing to do in a depression, it is nonetheless what many people choose to do. Coors noticed this and capitalized on this demand by starting the Coors Brewing Company.
While Coors followed our earlier rule about solving a problem that gets worse in a recession – in this case the need for alcohol – he did this in a radically different way than his competitors.
At the time, most of the population in the United States was in the eastern half of the country. Not surprisingly, most of the major brewing companies were located near these population centers.
At the same time, the US population was slowly migrating westward. But the transportation infrastructure in the western settlements and towns was nowhere near as well established as in the cities back east. This made logistics, shipping, and delivery problematic for any company doing business out west. All the major breweries in the East largely ignored the beer-thirsty customers out west. The population was spread out, the terrain was rough, and the support infrastructure was not there. Operating costs and headaches were bound to be high.
But Adolph Coors had a different idea. While he had apprenticed as a brewmaster in his home country of Prussia and in numerous US breweries in the East, when it came time to leave his own mark and set up shop he decided to “zig” when everyone else “zagged.”
He set up his brewery in Golden, Colorado, in the Rocky Mountains. In his sales and marketing plan, he targeted two distinct markets: those consumers living in the settlements scattered across the western United States and the miners that were working new mining operations in the same area.
In both cases, these thirsty consumers didn’t have many choices when it came to beer. Coors was the only brewer willing to establish a far-flung transportation infrastructure to get his beer delivered to remote parts of the western United States.
While his product was good, it wasn’t necessarily that much better than the beer from other breweries. What made the Coors Brewing Company unique was its geographic focus and the sophisticated distribution infrastructure it built to serve the customers in these areas.
Adolph Coors found himself a blue ocean and found that Coors Brewing Company had a mini-monopoly for decades. Today the company, now known as the Molson Coors Brewing Company, generates $7 billion a year in sales. It all started by building a small business that was radically different in its focus – insulating itself from competitors for many years. It positioned Coors to prosper in a 20-year depression – one that was double the duration of the Great Depression.
Recession Success Story #4: Price Club
In 1976, Sol Price started Price Club and pioneered the wholesale warehouse club business. Years later, Price Club would merge with Costco (started by one of Sol Price’s protégés) and take on the Costco name. Today, it is a $70 billion a year retail business.
Price Club was started in between two back-to-back recessions. The two-year-long oil crisis and stock market crash that began in 1973 in part inspired the Price Club concept, but it was during the 1980 oil crisis and recession that Price Club’s growth began to kick in.
Sol Price noticed during the first recession that small-business owners were struggling to compete against their larger competitors that had more buying power. Customers were spending less, but owners of small businesses were not able to press their suppliers to cut their prices. Sol Price spotted a problem that he thought he could solve.
His idea was to create a wholesale business targeted toward small businesses. He would be the middleman who got small business real wholesale pricing on everything from office supplies, food, and paper products to tires and more.
But more than just buying in bulk and selling at lower prices, Price took a much more radical approach. Instead of selling the quantities his customers wanted, he forced them to buy in much larger quantities than they were accustomed to or could immediately use. He did this to get greater negotiating power among his suppliers.
In other words, in exchange for incredibly low pricing, he created a problem for customers – huge quantities of stuff they would have to find some way to store.
It turns out that this tradeoff was one that many customers were willing to make. These customers included my parents.
You see, I grew up in San Diego, and we used to shop at the first Price Club warehouse that Sol Price opened. My parents owned their own small business and used to buy everything from coffee, paper towels, and packing tape to countless things they needed for their office. We also ended up buying food and supplies for personal use.
When I say that Price Club created a problem for its customers, I know from firsthand experience. Being the oldest son, I was the one who had to load the 100 rolls of toilet paper, 100 pounds of photocopy paper, and the countless other heavy and bulky items my mom would purchase. My younger brother got off scot-free, saying, “Mom, the Price Club stuff is taller, wider, and heavier than me!” It’s tough to argue with that one.
This giving you more than you really could use was a real problem. All the stuff wouldn’t fit into the small sedan my mom drove. So when the time came to get a new car, she decided to try one of those new minivans that were just becoming popular – all so we could fit everything she wanted to buy at Price Club into the car in only one trip.
In my parents’ place of business, they carved out a special part of the office to store all these things they bought at Costco. They put in new shelves and cabinets to store all this extra stuff.
At home, I had to reorganize the garage to make room for the 100-day supply we had of everything. My toys were out, Price Club stuff was in. A very memorable experience for a kid, I can tell you.
Price Club radically redefined the value equation provided to customers. It didn’t offer exactly what you wanted at the lowest possible price. It offered you way more than you needed at prices way lower than you thought possible. It was the definition of radical differentiation.
In the nine years that followed the formation of Price Club, the warehouse store business grew to a $2 billion per year industry. Price Club generated $1.8 billion of those sales for a commanding 90 percent market share.
This growth was not lost on another well-known retailer, Sam Walton, the founder of Wal-Mart. He noticed this little San Diego company leading the fastest-growing portion of the retail industry and decided to compete.
Taking the Wal-Mart threat seriously, Sol Price, who commanded the #1 market share Price Club, decided to merge with Costco, the #3 market share player, in 1993. The merged company took on the Costco name and today generates $70 billion a year in sales. It is #29 on the list of Fortune 500 companies.
To this day, Costco dominates its industry, and remarkably its original formula of “too much” product for absurdly low prices remains largely unchanged. This is just one powerful consequence of offering something unique to your marketplace.
Uniqueness Increases Profit Margins and Sales Simultaneously
But the Price Club/Costco story gets better. Even more impressive than how Price Club’s sales accelerated during recessions is the fact that the company does virtually no advertising. Think about it. When was the last time you saw any kind of advertising for the company now known as Costco? Except for a few flyers handed out to customers on their way into or out of a Costco warehouse, the company doesn’t do any advertising.
That’s incredible: $70 billion in sales and virtually no advertising or marketing.
How is this possible?
Again, it goes back to offering something really unique (and relevant) to customers. When you astound customers with how unique your offerings are, they do your marketing for you.
When I was a kid, we would routinely have relatives come visit us from overseas. Invariably, we would take our relatives to visit Disneyland and then we’d take them to Price Club. When we told them of our plans, they thought it was bizarre. “You want to take us to some big industrial warehouse to go shopping? Huh, how does that work?”
We were so enthusiastic about Price Club, we just had to show them what it was all about. And perhaps that sounds a bit crazy, but even more crazy was that my overseas relatives loved it. They would step into Price Club and see it was just enormous. They had never seen anything like it. Then they looked at how everything was packaged. Instead of buying 1 pound of sugar at a time like they were used to, we would buy 25 pounds of sugar for the same price they paid to buy 3 pounds. It blew their minds away that such a thing was possible.
But a funny thing happened; when my relatives flew home, they told my other overseas relatives about their trip. So when my other relatives came on trips, they too wanted to go see this Price Club thing. It was as big a deal as Disneyland because it was really unique. In addition to spreading the Price Club story to our relatives, I spread the word to neighbors, friends from school, and casual acquaintances. My parents’ employees saw the 30-pound bags of coffee beans and the 200 rolls of toilet paper and quickly figured out where it came from and ultimately became Price Club customers too.
When you offer something radically different to your customers (and assuming it’s incredibly relevant to their needs in a recession), they can’t help but tell their friends about it.
I’ve been talking about Price Club for nearly 30 years to anyone who will listen. I’m even writing about it in this book! Needless to say, if it wasn’t unique, none of that would ever have happened.
Now let me translate what all this means in financial terms. When you offer something unique to your market, the “cost of sales and marketing” portion of your profit and loss statement drops like a rock. This improves your profit margin percentages (the profit made per every $100 in sales), which is especially nice in a recession. Next, because your customers are talking about your business to their friends and acquaintances, they are driving new customer acquisition and top line sales. So it’s like getting a bigger slice of the pie as profit and getting more pies at the same time. It’s a double benefit.
From an accountant or chief financial officer’s perspective, this is the best of both worlds – increasing unit sales and profit margins during a recession. Again, being unique – while still being relevant – is what makes the difference.
In a subsequent chapter I’ll walk you through a systematic process for figuring out how to be unique in your marketplace. For now, just recognize the importance this plays in recession-proofing your business.