Zero to 60, How a Slight Fear of Broken Glass (Nelophobia) Led to a $60m Growth Opportunity
Nelophobia, the fear of broken glass, may have led to an idea that developed into a new business that went from zero to $60 million in just 3 years. We had a strong core business and a good idea. In 3 years we had a $60m business expansion without making an acquisition, without building a factory, with nearly zero capital investment, and a staff addition of… 3.
This series, Double-Digit Growth in a Slow Economy, discusses the methods that have successfully been used to drive growth when you aren’t able to count on a growing economy. We reference actual cases and companies that were transformed into growth engines beyond the natural buoyancy of economic growth. This installment discusses growth driven by entering new categories of goods as an extension of the overall growth strategy.
Growth through near adjacencies
Once you have strengthened your core business and can leverage those strengths, you will likely find the market is open to your expansion through near adjacencies. These are opportunities that directly leverage some or all of the elements of your core business. Leaping too far from the core business works for some, but it is more challenging, takes more resources, and most importantly it fails to leverage the strengths of the core business. Leveraging those strengths and resources is less of a distraction when the initiative is a near adjacency. Starting a.com business may be strategically important, but may not be a near adjacency. If it is strategically critical, you need to consider it a start up with its own independent resources. This may also help prevent building in too much of your current business model into what should be a truly new business. It is irresistible to use your current resources, but the differences in the business lead to distraction within your team and dilution of resources. For expansion that does not meet the definition of a near adjacency, establishing a start up is the preferred way to go. Once it is off the ground and has it’s own operational stability, you can consider strategic options to expand, integrate, spin off, etc. For this discussion it is important to define a near adjacency.
A near adjacency is an expansion opportunity that leverages a broad cross section of your core competencies. The more that can be leveraged, the easier to execute and build financial performance from your expansion initiatives. A near adjacency is often more financially accretive nah evident when looking at product margins alone. Because this expansion leverages so much of the current business’s strengths, the fall through to the EBITDA line is significant. If an expansion requires significant capital and staffing to manage it may not have the returns of an expansion that can fit within the envelope of the current business. Those that fit more neatly in the current structure are often lower risk for the same reason. Defining a near adjacency starts with defining the core competencies you can leverage. They have to be relevant competencies to your customers in order to create a value proposition for expansion.
Some potential competencies that are often leverage-able:
- Key channel strengths and relationships
- Sourcing and supply chain
- IP or patents
- Logistics and service efficiency
- Relevant brands with equity in broad categories
- Capacity – Physical space, processes, and people
A starting point is identifying strong channel relationships that can be leveraged or a strong product position that can be extended into a new geography. It is also helpful to have an objective scoring method to consider the benefits, investment, and risks associated with a category expansion.
Customer need is an important entry point
Expansion through near adjacencies may be opportunistic. It is important to listen closely to the customer’s issues. In more than one case, I have been asked to enter a new category of goods by the customer. They had a concern over their supply chain and saw our company as a strong supplier that could extend into something new. These opportunistic expansion opportunities are the most interesting since there is already an opportunity for interrupting the current supply arrangements. It is far easier to obtain an audience for your proposal when there is a need on the part of the customer. When it is not opportunistic, it is critical to create a value proposition that resonates with the customer or better yet, with the end user as well. The simplest is an advantage in the customer’s acquisition cost. Old-fashioned lower price is often too good to pass up. Do you have a cost advantage? If you do, it may work, but if you do not, it is likely all you will accomplish is reducing your competitor’s margin. They can respond to your offer of lower price. If that is the extent of your value proposition it is likely going to fail to secure new business for you or worse, end up providing a new business that has poor margins.
The expansion by near adjacency should lead to a stronger value proposition for the customer. It could be a group of benefits that individually need not be significant, but in total they are meaningful. Assuming you are selling to a channel partner like a distributor, dealer, or retailer the value proposition can be centered on driving their margins. If you are selling directly to a consumer or end user, the value proposition needs to offer an advantage to the user. In most cases we are better off not targeting acquisition cost as a means of entry unless we have a sustainable cost advantage in the goods.
Layering on improvements in the products that lead to better sales for your channel partners is an important opportunity to develop. Merchandising, packaging, simpler to install or service, a new design or features lead to a compelling case for the customer to switch. Hitting a multitude of benefits creates the most compelling position. A product that sells better than its predecessor is a great start. The customer has to believe they will have better business results taking on your new extension. If the incumbent has problems the bar is lower, but a package of clearly articulated benefits demonstrating how the customer’s business results are improved is the starting point. “New” isn’t enough. “New and improved”, you’re getting warmer.
Zero to sixty… Million
The company that had turned from a downslide to rapid growth with a 19% annual growth rate driven by gains in share, not an economic gift. We had achieved 100% of our largest customer’s shelf in our core category, 60% with our second largest, and 100% with our third. We were running out of growth runway. We had built a far more efficient organization that was designed for growth and performing so well, we were about to run out of share to gain.The Sales team was tasked to cultivate new accounts for our core products and expansion with smaller customers where we had growth opportunities. We quantified our available targets for growth with new and existing customers and it was quickly apparent we needed a new category of goods to offer. We began a project to look at categories we could expand in that would leverage our strong customer relationships, our supply chain, and facilities. I established a director of new category development to focus on developing new product categories to facilitate continued growth at a rate much greater than the growth of the economy. (Shout out to Pat Boehnen)
We needed a new category that we could leverage with our strongest “core” customers. They knew us best and we had credibility and competency in serving them. Our new category team created a solid list of opportunities and performed research around current suppliers, level of innovation, estimates of market size and used our scoring system to project which categories would offer the best opportunity. Nothing was a slam-dunk, but we initiated work on the top three areas to see if we could develop a new business. This is inherently long term compared to increasing sales of current products which are ready to ship, versus a set of goods that would take at least a year to develop if not longer. This emphasizes the point of having simultaneous effort to manage the company performance curve. We were growing at 19% and did not want to see growth slow to 5%. In the near term our sales team could fill the gap by selling our current goods more successfully to a broader customer list. We established more sales presence in our nearest international opportunity, Canada. It was the most serviceable area of geographical growth considering our presence. This continued our growth during the category development period until our new categories could start to bear fruit.
We needed a new category that offered a compelling advantage over the current suppliers, who by the way were likely years ahead in their own core category we sought to enter and beat them in. Yes, it is a tall order when you put it in those terms. You need an entry point. A stale category perhaps. A sleepy competitor. An innovation or technology you can bring to a category first. A cost advantage you can use to create a value for the customer. Better services that support your products. These are some of the forms of advantage you can bring over a competitor. As a start-up, you have to bring more benefit than just a tweak or two. If you cannot bring a significant advantage of your own, you need an invitation from the customer. They need to want a supplier change and see you as a company that has certain strengths. Perhaps the incumbent is struggling with fill rates, quality, or the most likely reason to stimulate change… they have initiated a price increase.
Our new category team was doing a nice job identifying opportunities and began to design products and programs to test with our supply chain as well as with key customers. In each of the three highest ranked opportunities there were challenges. The category you wish to enter need not be fast growing. Often times companies feel they need to chase the fast growing segment or geography in order to grow. It is nice of course, but you overlook current mature revenue that is there for the taking in larger categories. Not to mention that fast growing categories invite more new entrants. As the new entrant, we seek to grow much more by share gain, not through normal category growth rate. We would rather not duke it out as we get our bearings in the category with others entering at the same time.
US based companies with reasonably strong share positions often are lured into thinking international growth is key when they look at markets growing at faster rates than the US. We all chased BRIC countries a few years ago and found significant barriers. We look at growth rates and think that is where the growth is. US companies work in the largest economy on the planet. I think international growth is an important strategy, but if you have strength in the US, you can grow even when the market growth is at a slow rate. There is a lot more share to gain where you have assets and a solid understanding of the market than an overseas start-up. This emphasizes the opportunity offered by category expansion over other forms if you can leverage your presence. While our category development team was modest with a staff of 3 people, they were making good progress on the conceptual aspects of the initiative.
Neophobia? (I didn’t know what it was either)
We were part of a conglomerate and I was attending a meeting with our second largest customer where my peers also attended. Halfway through the meeting a senior VP from our customer looked across the room in my direction, but veered to my right to another business unit president and said, “you guys need to get into the shower door business.” That business made bath fixtures like bathtubs and shower units, so it made prefect sense. Unfortunately, they had been in it before and found it was a difficult category. Bulky, easy to damage, high return rates, too many combinations to stock which were slow moving, enough to push back almost before the words were spoken. Not to mention that business was working on a new innovation in their core bathing fixtures business that was taking up most of their resources. I quietly noted the idea rather than express an interest. After all, our business didn’t really have the right set up for shower doors. We sold decorative hardware. About 1/3 of the business was decorative bath hardware as I started to grasp for a reason to think we could meet the challenge. My first thoughts were those of a normal human being. What were all of the problems with this idea? Bulky packaging that would not work in our automated distribution facility was just the first of a long list. Managing through a manual pick and ship process was possible. Then Nelophobia set in. The possibility of shards of broken glass in our distribution centers… That we need to do something about, yes we could package the glass separately so it could be protected. Solving this problem for a purely self-serving reason led to a fantastic innovation and a $60 million dollar win for our company.
One thing leads to another
Protecting the glass was the key? Not entirely. Thinking of the product in a completely different way than the incumbent supplier was the key. Shower doors are packaged with an aluminum frame available in 4-5 colors, glass panels were available in 5-6 patterns, and hardware to install. They are not assembled, so why do the parts have to be in one package? Our customer carried 28 combinations in stock and inherently, not the right 28. Splitting the product into 2-3 selectable packages that allowed for mix-and-match merchandising would change the entire consumer experience. I quickly realized that we would have over 100 combinations in stock. It turned out to be 115. As far as manufacturing and sourcing, we could easily source the components if packaged separately by type. A glass pack sourced directly from a glass supplier and an aluminum frame pack from an aluminum extruder. Great news, I don’t need to capitalize a glass factory and an aluminum extrusion business. At the proper scale, perhaps a big capital outlay would make sense, but if available capacity exists, why not start and leverage someone else’s unused fixed overhead first? All of this was in my notes and the meeting was still going on. The concept was drafted in as little as 20 minutes after thinking about the reasons why I could not lead us into the shower door business and looking for a way around each problem. When the meeting adjourned, we had a smaller summary meeting with the group from our parent company. I said, “I think we can take on the lead on shower doors.” There was silence, initially. Oh my god, was this Jerry McGuire’s memo in real life? It made no sense and we were just getting our mojo back in our core business. Why on earth go into a business that the logical peer company wasn’t interested in?
We had an innovative idea. That’s why.
And, we had command of our core. I tried to cover it by explaining my notes on the subject. No time for PowerPoint… All I needed here was not to hear a veto. I didn’t need to hear enthusiasm, just not a barrier to develop the concept. One key influencer said, “Let them take a look at it.” Perfect, saved by one open mind that happened to be someone who had more insight to our strengths. The next day I sat with our category development team and reviewed the concept. This one had not even been on the radar. We needed to put a tad more thought into the opportunity and the challenges. One thing for sure, the category was ripe. The incumbent supplier was resting and not beloved, but neither was the category. No one was tending to this business as a part of their core. The major home centers gave it minimal space. Returns were amazingly high at 18%. Sales were flat. Inventory turns were very low. Of course, the retailer didn’t have the right combinations in stock. We had a good team for the task. They realized the value of the invitation. There was available share to gain even though the category wasn’t growing very fast. A part of the learning of this initiative is that the category need not be a growth category if it is incremental to your business and you have a good deal of share to gain. In this case we happened to make it a growth category by improving the consumer experience.
Within a matter of weeks we had become convinced this was a great opportunity and we had all of the makings of a strong entry. We had an invitation form a customer that sold maybe 30% of the industry. We had a competitor that was not investing. We had a category that needed a fresh approach, and we had a great innovation. We began formal development in multiple prongs, engineering the product, sourcing, and merchandising. We requested a formal review with the customer and a date was established. We only had a few months to prepare. Merchandising development was key. We could easily enough engineer the product and early signs in sourcing gave us confidence we could come close to our cost targets. However, if we could not present this in the retail aisle in a compelling way, it might not sell. Most of our efforts were to mock up and test the in-store presence. We set up a 24-foot display in our warehouse and began tinkering. What was the best way to get this across? Anything that differs from the norm is a risk. Consumers and channel partners can be slow to change.
Bring in the critics.
We started bringing in consumer groups to our mock store. The feedback was enormously helpful in refining the presentation and led to a 1-2-3 selection process. The consumer figured it out pretty quickly. We set our refined displays and had our first exposure with the decision makers from the customer. The feedback was good, but a little subdued. Reading the tealeaves I think it was apparent that this was more different than they expected. They weren’t prepared for a different model. Typically they were focused on a different price for goods that looked like a simple replacement of the existing. We weren’t attempting to be cheaper. We were attempting to be better. They could see merit, but… we were not a shower company. The incumbent… was part of a highly respected multi-billion dollar leader in the fashion bath industry globally. How do we reconcile this? We leveraged our peers. The branding was borrowed from our sister company, which had become the leading brand in faucets. We had a winner, but we had only played a pre-season scrimmage.
Based on the initial review of the concept, a full line review was scheduled. This would include the incumbent and would invite them to bring their best ideas to the review. Fortunately, they did not feel at risk and didn’t offer much of a challenge to our concept. What wasn’t known at the time is that the customer was mounting a strong push for value through price reduction. The fastest way to realize a price reduction is with your current suppliers. They can discount starting at 8:00 AM tomorrow or better yet, retroactively. Even if we were cheaper, it would take a year or more for us to get into all stores, which is the point you would realize a savings.
We weren’t cheaper.
We were better. Our tests indicated a strong increase in sales of 15% over the current products. That in a category offering almost no current growth. It would be a competitive advantage over other home centers. Our return rate projection was 50% lower than the current program because the parts were separately packed. The leading reason for return was miss-cutting the aluminum channel. If you do that on ours, you only try to return the “defective” aluminum channel… But, the incumbent was the only one in a position to provide better costs tomorrow morning at 8:00 AM and even if we had identical costs, the retailer would have to wait 12 months or more to realize it. It was a matter of goal alignment. We truly had a better value on the table, but we could not address the goal the customer had to achieve. We lost in the final outcome.
Now what? We are months in and we lost…
We had a great concept and it was a matter of time before something leaked and our great concept became the incumbent’s great concept. It happens. We loaded up the truck and moved to another customer. This time we had no invitation, but we did have a great concept and it was well developed through our research. The quality of the concept was evident immediately, but this was one of the least attractive categories in the fashion-bathing aisle. It was slow moving. Unlike trying to gauge the age of a tree by counting the rings, you don’t have to kill a shower door to know how long it has been there. Dust is the first indicator and there was plenty. It just wasn’t a target category for a big change, but maybe it should be. Maybe that is why the dust is there. We won a test market, 50 stores to try it out, hardly enough to get our supply chain working. We would have to subsidize it during the test. We needed about 10 times that number of stores to get leverage with suppliers. These weren’t necessarily the top 50 stores in the country mind you. It was a test that if we passed would definitely speak to the benefits of the program. The test was set and after some adjustment and work with the store associates we started to see the results we expected. We tweaked some things and added some price points. The program did exactly what it was designed to do. The consumer responded well and sales were up in the high teens as a result. Returns were far lass than half. The initial success and our lack of scale presented challenges to meet demand. You would think a small store count would make it easy, but in this case it was a challenge because we lacked scale with our supply chain. Challenges aside, we ironed out a very good program that was then installed in 200 stores, then to 1,000 stores, and then to 2,000 stores. The program went from zero to $60 million in 3 years. $60 million in new revenue for a business that was $220m in revenue at the time, quite a growth curve.
The lessons here are that to grow in adjacent categories or customers you have to find leverage-able strengths. These are much more important than a market that is growing. You grow through share gains for 3-4 years and that does not mean the market has to lift you. Of course in years 5+ growth will be slower, but you are working on the next growth program to continue fueling your engine. Going for a large, mature market with a new approach is an excellent way to grow your share.