How big can it get? Discussing levers to growth.
YOUR BUSINESS IS A CAR, CONTROLS ARRAYED BEFORE YOU ON A PANEL. Capital is the machine’s fuel. Debt and equity are its gears. Operations its drivetrain. You’re at the wheel, and the idea is to make the machine go forward to growth very quickly. Without cracking it up. What are your levers to growth?
Let’s use a renowned brand as an example. What if team Gucci’s goal was to reach $60 billion in sales in five years (at present it’s about a tenth of that). Gucci may today be the best-managed brand in the world, with an excellent staff, easy access to vast resources, and excellent macro conditions in which to pursue growth. So why not? But to simply add fuel and push hard on all available growth levers in order to drive the brand into the stratosphere could damage it, perhaps even destroy it. Why?
I believe Gucci’s precisely metered scarcity is a key to its greatness. That if there were ten times as many Gucci buyers (and there are already many today) then some of the magic would get lost. Luxury brands need scarcity. Equally, if Gucci just began to take prices up in pursuit of top-line growth, then in time all but the very indiscriminate would desert the brand. No. Were I advising Gucci I would suggest their team try to expand Gucci’s margins from the deep inside the P&L, and at the same time go after smart organic revenue growth in ways that would strengthen, not weaken, Gucci’s preeminence. But how?
First, isolate what only Gucci does for a person’s body, mind, and soul. Ensure that only Gucci creates that magic and that it delights people to the point where the price becomes a nuisance, but not a barrier. Then, do this in more situations (taking a greater share of each person’s luxury spend.) Do it in more places. Do it in more product categories (including not obvious ones like travel, healthcare, death, or financial services). Best of all, invent new, uncontested categories for Gucci to define and own for years. These are all options for growth, and none need threaten Gucci’s exquisite balance of scarcity, opulence, spirit, and life-affirming joy.
The thought experiment above outlines the major levers to growth. Most of them are available only when a business reaches a certain size, usually in the brand’s adolescence. But as any parent knows, it is in adolescence where decision-making most commonly falls prey to bad outside influences and pressures. And the pressure doesn’t stop in adulthood, either.
Below, we explain how these levers work, and for very new ventures, how to build good assumptions into their plans that will make growth levers more available in the future.
The best way to grow the value of your business is via margin expansion. Grow your revenues and hold COGS and expenses constant, and margin grows. Reduce COGS and expenses while growing revenues, and even better things happen. Most managers see those things as trade-offs, but they aren’t. The objective of any effort to scale a business is to push your revenues up, up, and over the hill of your fixed costs so that you can begin to attack all your variable costs from a clear vantage point.
Some businesses have margin problems of their own making. For example, from establishing a price/value that worked for the brand online or at their own retail units, but not when sold wholesale for other retailers to mark up and merchandise – e.g., where consumer brands usually get big. New brands, don’t let this happen to you. Build a 5-year plan that can support margin growth from inception onward. A good rule of thumb is this—your wholesale margin should generate ample EBITDA. If it doesn’t, you have problems if you ever plan to sell on Amazon, or Sephora, or wherever you don’t own and control sales. Perhaps your COGS and expenses are too high for what you produce. Perhaps what you produce is too indifferent to have pricing power. Either way, fix it and build a wholesale P&L. (Many new brands are trying to avoid wholesale. Fair enough, but are you really building an online-only business? The answer is probably not.)
To take price effectively, you must be capable of generating inelastic demand. Demand is elastic when it gets pulled up and down in inverse relation to changes in price. As prices rise, demand quickly drops. As prices drop, demand rises again, markedly. The opposite—inelastic demand—means that even with significant changes in price, demand for your good changes little. One mark of an excellent brand is that it can command nearly boundless price increases. Remember Bezos in Part 2: unless your mission is to allow people to spend less, your model should probably be to get people to spend more, lest you fall into the mushy middle.
Once the brand and the P&L are perfected, expand your offering. But it only works if you create craveable products. In fast-moving goods, this generally implies introducing new SKUs to capture more trial and more share of someone’s requirements. It is vital that any new products confirm and strengthen your brand. If you launch anything but very good products, then cannibalization will be severe. Your overall business will suffer from lower stock turn rates, vexing your customers. Your lackluster innovations will vex your consumers. Finally, it will erode your margins, because complexity costs money. An investor can tell when you have too many products for the size of business you actually are. Apply portfolio strategy to ensure you don’t drift.
A better, related goal and easier metric that drives the growth objective is that of productivity gains. Retailers often measure sales density in terms of sales per square foot—the higher the better. Your job as brand is to make your customers lots of money, and thus to make your space within the retail unit as productive as possible. That means turning the most product at the highest price using the smallest possible amount of space. When pondering a product launch, you may want to take a sober appraisal of whether it will drive productivity or impair it for your customer. They will ask. “Yes,” you might argue, “but hasn’t Amazon and online retail made physical space productivity irrelevant?” Yes, but they replaced it with online measures, all of them related to how fast you turn stock. Search engine, product reviews, advertising and promotion—you still have to be very productive if you expect to survive.
Distribution gains, or selling in more places. Young brands obsessed with distribution gains may be surprised to know that obsession intensifies rather than abates as you enter maturity. Every inch of display is hotly contested, at least anywhere you would want to be. You should have an iron grip on where distribution gains are actually going to come from and when. In the majority of brand plans (and investor decks) the manager has simply inflated their sales number by a certain rate every year to get to something they think will impress. This is nonsense.
If your growth plan relies on selling in new places, you should be able to tie every basis point of revenue growth to its relevant point in space/time, account by account, door by door, SKU by SKU, week by week. That these numbers will always vary in accuracy is not the point. Plans are useless—the act of planning is indispensable. Young brands: plan with actual discipline. If you cannot on your own build a bottom-up, account-driven sales forecast, then you cannot honestly defend your numbers. It’s that simple. Find someone to help you. We can.
New segment entry. Only when you have killed it in one product area and the territory is secured should you start to look at taking new territory elsewhere. This is a cardinal rule of battle and it applies to the consumer sector. Dream big, but credible brand stretch is a matter for research, not internal debate.
In conclusion, I reiterate the importance of a strong, unifying strategy that underlies all growth pursuits. Brands succeed when they uniquely meet a real need and build a moat around their ability to do it. Brands fail when they don’t do both of these things. Everyone in your company should be able to say in two or three words what your brand strategy is. It needs to be that concise and it needs to be right. Most companies large and small have no easily communicated strategic principle that all employees live by. That’s a miss. If you lack these things, we can help.
In the next part of this series, we will discuss operations from the perspective of the investor. This will talk about your team, finances, information technology, customer service, and the like. What the investor is trying to determine is hard—it’s “Why are these guys uniquely set to kill it?”
Read the full series What Investors Ask Our Clients:
