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It's All About Distribution, Baby

By Chris at www.CapitalistExploits.at

My kids are mowing lawns and washing cars in their spare time on weekends. The sort of jobs a 9 and 10-year old can get without doing too much damage. I think it's a vastly better use of their time than sitting indoors, gaping at an Xbox, playing the latest axe murdering, limb dismembering, desensitizing video games with their peers.

Doing odd jobs helps them build some sense of value. They're young enough to want things they can't possibly afford, certainly don't need, and at the same time not yet old enough to understand the disconnect between what is possible now and what is possible in the future, when they're much more skilled and knowledgeable.

Right now a new bike, for instance, is possible and a helicopter is not. They're not stupid, they get this much but they don't fully understand it.

A decent second-hand personal helicopter such as the Robinson R22 above can be had for about $150,000. Not that much actually, considering the fact it's a helicopter. Problem is, if you're mowing lawns that equates to an exhausting 15,000 lawns mowed at $10/lawn or 30,000 cars washed at $5/car.

My kids' problem, together with millions of companies scattered from sea to shining sea, is twofold. Distribution of their services is limited to how far they are prepared to walk and how much time they have which brings me to the second problem. They're selling time and time doesn't scale.

You either sell time for a much higher price which means your value offering needs to change, or you sell a product. Products scale, services don't. That's not enough though as selling product can be done many ways.

Some solutions to acquiring more clients more easily are:

  • Marketing: they can put up posters, put out flyers, take calls and book appointments.
  • Smarter yet would be to go to where their clients may be. Washing cars at local weekend sports, for instance. Hundreds of cars lined up all of which will be there for at least an hour while "Johnny" plays football or whatever. No traipsing up and down the street knocking on doors.

How to Do This Better?

A company which leases lawn mowers to those who want to do the hard yards of running lawn contracts scales far more easily. Acquired customers can be offered all manner of other products such as lawn blowers, hedge trimmers and so on. This means that you can focus on the high-margin side of the business without an equal increment in delivery of product. Do this and you're no longer selling time.

Think about Amazon. They started out as an online book seller but today they're far more than that. They have customers to whom they can sell hundreds of different products. What is even better is they are selling products that other people make. That is the power of distribution.

I have another proposition for my aspiring lawn mowing entrepreneur kids, one which they are probably a bit young to understand: many garden service companies operate seasonally where they have higher revenues in summer and lower in winter or vice versa, depending on which country you're in. Providing factoring services to lawn service contractors is way more scalable than mowing the lawns. Your average guy who is running a lawn care service is often not the sharpest tool in the shed and quite possibly lacking in ability to manage cash flows adequately. Helping them smooth out cash flows throughout the seasonal cycle is very scalable. If you're doing it with lawn mowing contractors why not move into other cyclical businesses or simply those with lumpy cashflows such as tourism-related businesses?

It's probably a bit early to get my kids to start thinking like this. It's important they work hard and have fun and develop a love for achievement. The rest will hopefully come.

What the above got me to thinking about was distribution in a business model.

We've written a lot of checks over the last decade or so and learnt a helluva lot. One thing that now scares the living crap out of me is companies with a strategy to market to the masses. We much prefer companies who market to business. The former relies heavily on advertising and the latter more heavily on building strategic relationships.

If you're in business, you're selling something. If you're selling something, it makes sense to sell to a business client rather than an individual. Why? You'll spend the same amount of time but the result can easily be a thousand or a million times greater. That is distribution.

As an example, one of our portfolio companies who, while still very early stage, began life looking to market to end users, to individuals hoping that virality would take hold. Hope is a terrible strategy. With a change of strategy, how they branded themselves and the resultant positioning they began marketing their product to large enterprises. They recently secured their first client and that client is an entire country. That right there is distribution. Of course money is not real money until it's banked so we won't count any chickens just yet though the potential does strange things to the imagination.

My point on distribution and our favouring companies which market business to business rather than business to Joe Sixpack isn't meant to scare of entrepreneurs from doing this. It's just what works for us. What we've witnessed is that companies doing direct sales have to advertise heavily and they then find themselves struggling to develop product, spend time on R&D, and market their product all at the same time. This is very taxing for a young business. It's like rubbing your head, and patting your tummy while performing eye surgery on an unsedated epileptic.

Case Study: Coca-Cola

Selling bottles of sugar and caffeine infused water has made Coca-Cola a $170 billion business juggernaut that has been around for over 120 years. The real beauty of what Coke do is they have designed their business to focus on the low capex, high margin side of selling "bottled poison" and allowing others to pick up the high capex, low margin side of the business.

This is a global business which has managed to remain at the cutting edge of innovation, much like an SME can do. Typically as companies grow in size they become bureaucratic, stodgy and inflexible. What is so exciting about young small companies is their ability to adapt rapidly to changing market conditions. Coke operates on a local scale yet they're truly global.

They do this by engaging with over 250 independent bottling partners worldwide. These partners handle bottling, labeling and distribution. Think about it: this part of the business requires logistics, and warehousing - all high capex and low margin operations.

Coke, on the other hand, concentrate on... well, concentrate. They sell the concentrate, a low capex and high margin business, and then spend heavily on branding and marketing. What is so awesome about this model is that their extended marketing team are... you guessed it, the bottling companies themselves. It's why in the remotest parts of the globe you'll still find a Coca-Cola sign. Coke is a company that can literally distribute to all parts of the globe.

They've built such a brand loyalty that they have immense pricing power. Coke drinkers, for example, won't drink 7 Up if it's 10c cheaper. The brand loyalty and pricing power have come out of an ability to distribute the product globally and every time the product is distributed it's branded. This is more beautiful than Heidi Klum in a bikini and highlights my point about distribution.

- Chris

 

"Coca-Cola is the only business in the world where no matter which country or town or village you are in, if someone asks what do you do, and you say you work for Coca-Cola, you never have to answer the question, 'What is that?'" - Muhtar Kent, Coca-Cola Chairman and CEO