September 09, 2010

Case Study: A Recession-Proof Business

In case you didn't know, my family currently resides in Bulgaria. My wife is originally from here and has been doing some teaching. That's given me a unique opportunity to see how business is conducted in this part of the world. I've talked to a number of entrepreneurs to get their take on the situation in the EU's newest member state.

One of them, Vlado, is a former classmate of my wife who owns a convenience store business. He started from scratch and now has six different locations around town. I asked him how his business is holding up during the current downturn and was surprised at how upbeat his response was. Vlado's secret: The vast majority of his sales come from high-margin, recession-proof items like coffee, cigarettes, and alcohol. For most Bulgarians, these are not discretionary purchases. He's noticed customers trading down to cheaper brands during the crisis, but they still buy with the same frequency.

Of course, his success hasn't gone unnoticed. In a town of 75,000, he's seen about thirty new stores pop up in the last year alone. Several are owned by people that he once trained, but many of them are struggling and probably won't make it in the long run. The main reason is that Vlado has taken care to secure the best locations for himself. That's a part of the business model that's hard to imitate. Also, many copycats don't have Vlado's business skills and lack the financial resources to hold on until they build a solid customer base. Most of them poured their life savings into the build-out of the store and the purchase of initial inventory, on the assumption that customers would immediately flock to them. They had little cash on hand to absorb startup losses.

This is what I refer to as good competition. The existence of so many corner stores may deter a more dangerous competitor from entering the market. Meanwhile, Vlado's stores continue to beat the pants off everyone else. When a competing store goes out of business, he can pick up the fixtures and inventory for almost nothing and has the option to expand if the location is favorable.

For me, Vlado's story has a number of interesting lessons. First, his product mix reflects careful thought about what customers are really willing to pay for. Customers spend a lot on "nice to haves" when the economy is expanding (think luxury brands, personal trainers, dog sitters, etc.). This entices many entrepreneurs to focus on serving the growing market for discretionary purchases, but they overlook the fact that such demand can be highly cyclical. A rising tide lifts all boats, but a sinking one may take your business down with it. Are you selling aspirin or vitamins?

Second, Vlado was vigilant about preparing the competitive terrain and defining the battle. Although imitators might copy his retail concept, they lack the competitive advantages that make his stores so successful (superior location, experience, and financial resources). Not only did the copycats fail to drive him out of business, he ended up increasing his market share in the process. Weak competitors are the gift that keeps on giving.

Finally, Vlado's experience got me thinking about a recurring problem entrepreneur's face: How do you avoid training the competition and turning your key employees into your fiercest business rivals? I don't have a good answer to that one yet, but it's a subject I intend to explore more thoroughly in a future post.

1 comment:

Невена Бенц said...

Terrific, well-written article. Bravo!

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