Last week, one of my clients filed for Chapter 11 Reorganization. Now, two of my clients are in Chapter 11, working to find a path back to solvency. In April, I was engaged by a new client to help them find a way out of Chapter 11. In the case of the two former clients, I can honestly say that I wasn’t responsible for the circumstances leading to their demise. In other words, I didn’t place any executives who caused these problems, and I haven’t been involved in consulting projects that resulted in adverse consequences. To the contrary, I placed an executive to help one client navigate through Chapter 11. Regarding the other client, I placed an executive to help them avoid business failure. Regrettably, Senior Executives sometimes fail to heed sound advice. In each of these situations, failure was predictable. Management failed to adequately penetrate their home markets before moving into new territory.
I’ve witnessed the results of many crazy decisions during my career. Some noteworthy situations include an ice cream brand selling franchises beyond their distribution capabilities. Or a California-based brand that tried to move into the Southeast with a single location. I’ve seen Southeastern brands sell franchises on the West Coast, thousands of miles beyond their management reach and distribution network. A Northern barbecue chain leap-frogged into Georgia with a few restaurants placed across the state. That decision was funny, in a sad way, as barbecue has a distinct regional appeal. Another brand added drive-throughs to dogs with the hope of turning them into profitable restaurants. Sadly, they created dogs with a drive-through. From my perspective, the most egregious yet consistent mistake is the urge for start-ups to enter new markets before adequately penetrating their home base. To be sure, many of those mistakes were made by rookies, entrepreneurs lacking experience or solid advice. However, these mistakes continue to be made by experienced leaders who should know better.
The fundamental axiom for success as a traditional retail brand is market penetration. Achieving optimal market penetration, also known as market share, conveys significant leverage to the brand. Greater penetration yields more efficient deployment of supervisory personnel, purchasing and logistics, marketing expenditures, and employee recruiting and selection, among others. Developing an understanding of one’s customer profile becomes more accurate with more stores as well as an appreciation for drive time customers are willing to endure. Additionally, the development learning curve leads to a more efficient use of capital. And, greater penetration increases brand awareness on the street. This is retail 101. The leverage provided by following this strategy results in a healthy cash flow to be deployed in new markets when appropriate.
I can speak with authority on this subject as I spent most of my career working on retail expansion. I began my career as a financial analyst assigned to the new store development group. In this role, I performed analytical work on capital expenditures for new stores and other investments. I learned how to evaluate the prospects for a new store, and the penetration required to optimize the return from a larger market, i.e. city, SMSA, or region. I became a strategic analyst and planner shaping retail store development strategy for several national brands. Finally, I held general management positions where I was accountable for return on investment. In fact, one of my first assignments as a senior executive was to identify and prioritize markets for focused development. As a result, I am confident in my ability to build a retail brand, especially, food-service brands. I appreciate the value of achieving significant market share before developing new markets. Believe me, engaging in the development of a new market, before adequately developing a home market can be fatal to a business, especially so for a start-up.
So, if significant penetration of a home market is fundamental for success, why does management continue to violate this well-established rule? Over the years, I have asked this question of countless CEOs, CFOs, and Chief Development Officers. The only consistent response is “sometimes, management becomes so enamored of expansion that sound business practices are ignored.” Imagine, human emotions getting the better of Senior Executives. Who knew? The only solution is to hire accomplished retail development executives, among others, who won’t hesitate to tell the “Emperor that he has no clothes.”
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