Category: case studies

Why _______ fails

FAILURE

When thinking about your business, it is paramount to think of the downside risk: bankruptcy.

Everyone knows the basics: not enough customers, expenses are too high.  However, the devil is in the details.  That’s why a simple Google search of why businesses in your industry fail.  The “unknown unknowns” are critical.  Considerations you haven’t even thought of considering.  Whether it be, having a little extra cash on hand, or a different advertising strategy; this little bit of research will help you learn from the mistakes of others, and hopefully not repeat yourself.

 

Looks like I’m right about McDonald’s

As I mentioned in the end of my previous article about McDonald’s, one way they can improve their sales by going for a brand extension; in this case by going extending their fast food brand into fast casual dining.

fancy mcd

As predicted, McD is testing table service in 600 of its Southern California restaurants and 400 of its UK locations.

However, bringing food to your table isn’t all.  They are embracing foodie-ism.  Higher quality ingredients, an expanded menu including breakfast bowls, yogurt, premium burgers in their “signature collection” such as the Saucy Baker.

saucy

I haven’t looked into Burger King’s financials but looks like they are expanding their menu as well, by selling hot dogs.  Will it go in the way of the McPizza or all day breakfast?

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The Importance of Bootstrapping

The importance of bootstrapping cannot be emphasized. Most businesses fail because of a lack of cash and bootstrapping’s main objective is to do the most with the least amount of cash.

Bootstrap – adjective

A situation in which an entrepreneur starts a company with little capital. An individual is said to be bootstrapping when he or she attempts to find and build a company from personal finances and/or from the operating revenues of the new company.

“The business was a bootstrap operation for the first ten years.”

The importance of bootstrapping

Most startups do not have a bunch of cash lying around.  The importance of bootstrapping is all the more critical for them. Businesses have to make do with what little they have.  We often tell our clients that as the CEO/Founder, they are also the janitor. One potential client wanted to hire a marketing manager for her startup. Hiring a marketing manager was vastly beyond her revenue allowance. She should have allowed us to consult on how to manage her own marketing campaign. She then could’ve saved a fortune by being her own marketing manager.

The temptation to abandon bootstrapping is strong, especially when investors come knocking.  One of my clients attracted large investors with a business plan I had prepared for him.  Initially, I budgeted a modest salary for him in the financial projection.  He saw that there was a good amount of retained earnings (something investors want to see) and had since budgeted a larger salary for himself.  I had to tell him to reduce his salary.  I am not alone in emphasizing this sentiment:

  • A red flag goes up for Mark [Cuban] when a Shark Tank contestant says that he’d be comfortable with a six-figure salary.  Ultimately, Mark and all the other sharks walk away from the deal.
  • Serial entrepreneur Neil Patel, founder of Crazy Egg and KISSmetrics, reflects on how glad he was keeping a $5,000/mo. salary even after raising $4,000,000 in seed and series A rounds for KISSmetrics.

Your Startup Guru advised a client to pay himself less and take in dividend income instead because it is taxed at a lower rate.  In business, cash is king, and the CEO doesn’t want to be the kingdom’s worst drain.

Launch and Grow Your Business

Contact us today to learn how to bootstrap your business.

Product extension

When you think of McDonald’s food you think of burgers.  Maybe other things too but mainly burgers.  However, back in the late-80s/early-90s the Golden Arches tried to expand into pizzas.

mcdonalds_pizza
Image Credit:  Collecingcandy.com

This was ultimately an unsuccessful expansion for reasons beyond a confusing palate.  They failed because they expanded beyond their core competency:  making hamburgers.

Operations

From an operational stand point hamburgers are different than pizzas.  Making pizzas require different equipment and ingredients.  One reason for McDonald’s profitability at relatively inexpensive pricing is due to cost efficiencies from economies of scale; every inch of a McDonald’s kitchen is optimized.  Fry pans have a designated size that fit with the size of the patty, that are heat up at a certain rate.  Pizzas don’t need frying pans.  They need ovens.  Ovens that are expensive to put into existing restaurants and take up valuable kitchen space.  Pizzas also took longer to prepare than the fast food burger.  People had to wait longer; an unusual thing for a fast food company to ask of their customers.  Lastly, pizzas not fit through the drive through window as easily as a bag of burgers and fries.

Marketing

They could’ve had success with pizzas if they approached it from a different angle.  McDonald’s found success with a production expansion with the Egg McMuffin.  Originally, skeptically received, breakfast is a McDonald’s staple now.  Burgers are lunch thing, but they successfully introduced breakfast.  Pizza is a dinner thing.  Therefore, instead of pizzas, McDonald’s should have brought in pizza by the slice (a very well-known concept at pizzerias) or at least personal sized /small pizzas.  A slice of pizza for lunch is not a foreign concept.  An entire pizza for lunch is.  

The difficulty in making and selling different types of food is probably why even large chain restaurants choose to differentiate different palates under different brands as Pizza Hut is doing with WingStreet and Carl’s Jr. with Green Burrito.

pizzahutwingstreetcarlsjrgreenburrito

Now it will be harder to reintroduce pizzas because McDonald’s is busy rebranding itself to health with marginal success.  Pizzas aren’t considered to be healthy.  Nonetheless, it is not hitting their market value with a 5 year high at $118/share.

mcd stock price

McDonald’s might set up for another go at extension but instead of a product extension (i.e. new product), they might go brand extension (i.e. new company).  The popularity of fast casual dining such as Chipotle (before the e-coli debacle) and Blaze Pizza might be an attractive direction to expand McDonald’s.

Black Friday

Black_Friday_ definition

According to the National Retail Federation’s November consumer survey, 135.8 million American plan to shop this Thanksgiving weekend.

Last year, Americans spent $50.9 billion dollars on Black Friday.  This amount is down from $57.4 in 2013 and $59.1 in 2012.

You can find other interesting Black Friday statistics here.

Work 100-hour weeks to not work 40-hour weeks

Work 100-hour weeks to not work 40-hour weeks

“We work 100 hour weeks to not work 40 hour weeks,” says Nihal Mehta, a serial entrepreneur and venture capitalist. Mehta has created five start-ups and now uses the lessons from two failed companies to be a more effective investor. However, at one point in his career, Mehta found himself with $400,000 in debt. The lessons he learned through his many failures before finding success are very common in entrepreneurship.

His first startup, Philly Tonight an online city guide website for the Philadelphia, Pennsylvania, was a very doctom 1.0 company. The office was a typical well-funded startup with high ceilings, nerf basketball hoops, and a ton of energy. What they had in focus for growth, they lacked in concern for revenue. They racked up $400,000 in debt and no way to raise additional money.

The one thing that would have changed everything was if we focused on profitability [instead of growth] the business would have survived.

After learning the painful liquidity lesson. Mehta changed his outlook on business development. This resulted in his next startup being a success.

The difference in mentality was we started it as a cash flow positive business. We grew it and never hired ahead of revenue.

One cause of failure was poor cash flow management.  Good thing for our clients, a cash flow analysis comes with every business plan!  It can tell in which month/quarter you will be cash-strapped, what your break-even point is, even down to how much you can budget for rent.  It can also tell you how much to ask, in either debt/equity and what interest rates and payment duration will work for you.

Nihal has since found Eniac Ventures, a a seed-stage Venture capital firm with offices in San Francisco, California and New York City.

See his insightful interview at:  http://cnb.cx/1MyP7Kj.

Launch and Grow Your Business

Contact us today for a business plan or a financial projection for your business.

Business of Holidays

Last weekend was Halloween and business was good.

jack o lantern $

According to the National Retail Federation, American consumers will have spent $6.9 Billion USD on Halloween costumes, decorations and related items this year.  This includes haunted houses, and candy.

top-2015-halloween-trends-2-1024

So, wow did it go from a niche holiday to the 2nd most lucrative holiday behind Christmas?

Halloween used to be only popular among school aged children because they get candy.  Now, the holiday is not just for kids.  Adults are embracing it full-on.  Some 13% of Americans ages 18-44 say Halloween is their favorite holiday, reports DDB Worldwide.  There are just as many adults costumes are here are children’s costumes in the stores.  Including “Sexy Pizza Rat“.

It probably started like most trends: Organically.  A small bunch of young adults in relatively isolated enclaves throughout the nation that wanted to partake in costuming.  Then other people saw how fun it was and then the number of participants grew into a measurable amount.

Slate has a pretty interesting article theorizing about its beginnings at the Halloween parade in New York City’s Greenwich Village.  This parade for all-ages, first started in the early-70’s, began as a neighborhood event organized by a local puppeteer and mask-maker.  Its fun and popularity then spread to San Francisco and Los Angeles.

The appeal to adults is not a difficult concept to grasp.  “There are several reasons [for its adult popularity],” says Denise Delahorne of DDB Worldwide, a global marketing communications network in a recent 2012 Forbes article, “There’s no stress to it. You don’t have to travel or deal with relatives. There’s not the holiday pressure to find a date if you are single. You can wear whatever you want and not be judged. There’s the fantasy, role-play element.”

Businesses saw this trend (the power of market research!!) and seized this market opportunity.  Voila! Halloween as we currently know it came to being.

Not Just Halloween

Because of these reasons, ancillary (niche) markets have begun reaping the benefits of costuming.  Now, dressing-up has gone from beyond Oct. 31 to dates throughout the year at comic book conventions, anime expos, etc. and throughout across the United States and beyond.

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anime character at 2012 Anime Expo

The commercialization of Halloween isn’t unique though.  In fact, Christmas wasn’t always about retail.  An event that might have happened in the Spring over two millennia ago eventually became linked to a 4th-century Greek bishop known for gift giving.  This act of gifting, over centuries, became more commercialized.  In even in the 1800’s letters were written lamenting that “Christmas wasn’t the same as it used to be.”

We also did it with Valentine’s Day.  For better or for worse, the next step might be commercializing Thanksgiving.  Then we can have 5 uninterrupted months of “holiday” spending.  If I were commissioned to do a marketing/PR campaign to commercialize Thanksgiving, I would investigate the underlying psychology that differentiates Thanksgiving from the other holidays (see the Denise Delahorne quote above).  Maybe a little DIY, a little up-cycling/repurposing, gluttonous eating, etc.  Then craft an activity/event that addresses these elements.  Next craft the marketing communications that implies the psychological elements in the advertising of the product/service I’m selling.

Black_Friday_ definition

Walmart hits the slumps

sad walmart

Walmart lost $21 billion in market value after it forecasts drop in 2017 earnings resulting in the steepest decline of the company’s stock in 25 years.

In layman’s terms:  Because Walmart said it’s expecting to earn less in 2017, lots of their shareholders sold their stock and lots of potential buyers said they weren’t willing to buy unless the asking stock price is lower.

Why

  1.  Amazon.

Amazon is crushing pretty much every retailer (except some custom designers; however with Amazon Local they are partnering with may of those product/service providers).  Amazon sells practically everything you can put in a box and ship.  At extremely competitive prices.  Free overnight/2-day shipping in some cases.

Walmart offers very very competitive prices and has locations pretty much anywhere in the US.  However, they are still a brick and mortar business so there is a limitation on floor space thus a limitation on product offerings.  I say brick and mortar instead of ‘click and mortar’ because even though they have an online store, it sucks.  Last year, I purchased a product online and selected in-store pick-up.  5 days later it was available for pick-up at he Walmart that is down the street from my office.  Walmart’s supply chain management system is one of the best in the world.  However, somewhere down the road there was an implementation issue of the online business with the existing business.

Walmart’s situation has similar elements to that of Blockbuster.  They have a size and first mover advantage.  However, over time they lost their position.  I doubt Walmart will face the same fate as Blockbuster but with a $21 billion dollar loss, it is not nothing.  You can read about Netflix/Blockbuster here.

2.  Other competitors

  • Dollar stores:  Walmart is known for low prices but no one goes lower than dollar stores.  Furthermore with the long-going Great Recession and great income disparity dollar stores enjoyed great profitability.
  • Grocery stores:  Walmart has Neighborhood Market stores in some markets and super stores (all encompassing stores) in other markets.  Nonetheless, companies that are just grocery stores are a big and aggressive competitor to Walmart.

Other Factors

Walmart is also facing PR issues:  1)  It is considered low-class.  There is a search term “people of Walmart” which shows rather uncouth individuals shopping in Walmart stores.  2)  Also, Walmart is criticized for killing off small, independent stores.

Walmart is doing many things to try to turn their path around.  We’ll see how effect these efforts are.

How Quiksilver (and surf brands in general) can save it/themselves

Last week I highlighted aspects about Quiksilver’s bankruptcy.  So this is what Quiksilver and other surf brands do should to save themselves.

Sector downturn

Looks like the other big surf brand, Billabong is also hurting too with diminishing revenues and net losses from 2012 to 2014.

billabong financials

Recently Billabong also sold its other assets: DaKine, Swell.com and Surfstitch to enhance liquidity.

Billabong also thought about selling RVCA but didn’t.  I’ll get to that in a bit.

As I discussed in my previous post, Quiksilver bankruptcy is partly due to surfing not being as cool as it used to be.

So what is cool?

If extreme sports was cool in the ’90s and ’00s, extreme athletics is cool now.  MMA and CrossFit is cool.

In March 2015 WWE announced a 50/50 joint venture partnership with MMA brand, TapOut.  Founded in 1997, the brand had $200 million in revenues in 2010.   Later that year the founders sold it to Canadian company Authentic Brands Group LLC for an undisclosed sum.

CrossFit had 8,000 affiliates in October 2013.  As of January 2014 the company had 9,000.  In May 2014 it hit 10,000 affiliates.

As shown by strategyandanalytics.com’s graph featured in Fast Company’s article, CrossFit’s popularity growth is amazing.

3035118-inline-i-1-infographic-the-popularity-of-trendy-workouts-over-ten-years

Of course, most people don’t actually want to do WODs and armbars.  They only want to dress like they do, much like surfing and snowboarding.

This is why it’s no coincidence that Reebok (doing well financially with 5% growth in 2014 and seven consecutive quarters of growth) has its hand in the UFC and CrossFit.

Under Armour is so popular.  Under Armour which also makes products for MMA and CrossFit enthusiasts were named as one of the most valuable American brands by Fashionista and as one of the top 10 MMA brands by FightState.

Heck, even Adidas (Reebok’s parent company) makes judo gis!

But Reebok isn’t a surf brand!!  Quiksilver isn’t an MMA/CrossFit brand!!!

So going back to RVCA.  RVCA, is a popular surf brand that is also popular amongst the brazilian jiujitsu crowd with its sponsored athletes such as MMA star BJ Penn amongst BJJ stars.  RVCA recently did a collaboration gi with uber popular gi brand Shoyoroll.  Billabong decided to keep this brand.

As RVCA has shown, it is possible for a surf brand to do a brand extension into other lifestyle activities.

So what should Quiksilver do?

Change their marketing communications.  Surf ads right now are blondes in exotic tropical locations.  Unfortunately for Quiksilver and other surf brands is that demographics are changing:  wealth discrepancy is large also Hispanics and Asians are the fastest-growing minorities in the US.  This growing market segment might not have the money or time to travel to exotic destinations nor do they even look like a pro surfer such as Alana Blanchard.

So abandon their existing surf model?  No, look at the other elements of surf.  The aspects of the lifestyle that are more relatable to this large, young, and growing market segment:

  • Surf spots:  Urban surf spots such as old Huntington Beach (it wasn’t always the gentrified “Surf City USA” it is now), Long Beach, Rockaway Beach NY, San Pedro, etc.  Even urban Honolulu can be a little edgy.
  • Embrace their connections with the skate world.
  • Athletes:  Add famous MMA and/or CrossFit athletes that also surf.  Especially with the Reebok-UFC deal, lots of MMA fighters are looking for more sponsorship money.  UFC middleweight contender Luke Rockhold surfs in Santa Cruz.
  • Other lifestyle images:  Tattoos and asphalt instead of sunsets and palm trees, turntables instead of ukeleles.
  • Diversify:  Buy or strategic partnership with boxing/muay Thai brand Fairtex/etc. or Brazilian jiujitsu brand Gameness/etc.

We’ll see what the future brings.

Quiksilver bankruptcy

quik wipeout

In a nutshell

  1. Surfing isn’t seen as cool as it used to be
  2. Recession hurt consumer spending -> moved to fast-fashion retailers such as H&M and Forever 21
  3. Rossignol purchase drained their cash reserves
  4. Continued to expand stores even though market tastes changed

Read the rest of the article here

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