Tuesday, October 13, 2009

Corporate Expansion

FLG finds tales of failure in corporate expansion fascinating. He first learned that companies can screw up royally when I Can't Believe It's Yogurt, exploded and imploded seemingly overnight. FLG learned a valuable lesson from this -- don't buy stock in a company with huge expansion plans until see proof that they can manage it well. This morning FLG has read two different stories of expansion disasters -- Krispy Kreme and The Disney Store.

FLG loves Krispy Kreme doughnuts, but when it went public he didn't buy. The expansion plans were too aggressive. Plus, like many of these things, the existing stores are packed because of the novelty. Adding stores on every corner undermines the novelty. In the end, "Krispy Kreme managed to lose money selling something that is both cheap and delicious."

There are several types of problems that these companies run into as they attempt to "Go National." But for FLG the biggest issue is that they project linearly. He has personally asked executives where they got their projected sales figures, only to hear a long-winded answer that fundamentally meant that they'd taken their current median per store sales and multiplied by the number of stores they were planning. This analysis, linear analysis, makes sense, if you are an idiot.

As anything scales up, complexity increases. Managing one person isn't at all the same as managing one hundred. Likewise, managing 1 store isn't the same as managing 10, 100, or 1,000. In fact, for many of the smaller chains linear projection might very well work. For example, if a company is adding a couple of stores in a market that they already have existing distribution and management, then linear projections probably do hold. So, FLG kinda understands why executives in regional companies think they can project linearly, but he also thinks they're fucking stupid for it.

Anyway, the expansion that most shocked FLG was The Disney Store. At first, they were in select shopping centers in large metro areas. They were something of a novelty and were very, very crowed. Disney expanded until almost every mall in the country had a Disney Store. "Buffalo alone had five." At first, FLG thought, Disney isn't some tiddlywinks little company, but then he realized that they never had experience with nationwide locations either.

FLG certainly doesn't have all the answers, but the best strategy seems to be, as far as he can tell and it varies according to product, establish a few key locations in a city. Just one or two. At most five and that would be for something like NYC. Then proceed to the next city.

What this does is expose the market to your product. It also keeps the novelty in place. It's still a somewhat special trip to get your product. Then when you've got a foothold a decision has to be made. You either begin to fill-in with more locations OR you keep the locations you have and find a way to make them more profitable. The best strategy depends on the type of product and the specific market for that product, as well as the ability and capacity of management.

A good case study in expansion, in FLG's opinion, is the Apple Store. They didn't expand into every mall overnight. They setup one or two locations, and are gradually expanding. Indeed, FLG thinks the American market is just about saturated.

FLG thinks Disney is going to benefit greatly from Steve Jobs' advice on revamping The Disney Store. Jobs realizes that they should keep the number relatively low and focus on growing the business through increasing the profitability of those stores rather than expansion. Jobs also realizes that, like Apple Stores, The Disney Store is an extension of the Disney brand. Cheapening the stores cheapens the brand. And money spent in the stores may be recouped elsewhere, in additional trips to Disneyland, for example, and won't necessarily appear on the bottomline of the stores themselves.

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