In his most recent letter to shareholders, Warren Buffett described two successful small investments he made more than 20 years ago. Both illustrate one of his fundamental rules: “Keep things simple and don’t swing for the fences.” In parts one and two of this two-part column, Trish explores six powerful growth strategies that thoughtful managers in a range of industries are using to expand their businesses while minimizing risk.
Seeking Growth? Chipotle, Sephora, HP And Others Found 6 Low-Risk Paths
Here’s a smart growth strategy: Don’t shoot for the moon.
by Trish Gorman, published on Forbes.com May 15, 2014
It’s easy to praise the visionary. From Elon Musk to Mark Zuckerberg, the narrative of one person who dares to fail and changes the world is irresistible, and sometimes we seem to talk about only one formula for building a business: Create an audacious product. Wow the market. Repeat all the way to the bank.
Because so many of us focus on the leap of faith that creates huge windfalls or spectacular flameouts, most people associate growth with risk. And getting bigger — venturing into new markets or introducing new products — does provoke uncertainty. Will the technology work? Can large quantities be made reliably? How much will people be willing to pay?
There are times when businesses are called to be bold. But there hasn’t been enough credit given to those who take an established product or service and steadily expand their audience. Businesses can sidestep risk by leveraging what they already have into new, similar markets.
For example, Chipotle, by extending a proven concept into adjacent territories, has been growing its net income by 15% to 30% year over year. You could call Chipotle risk-averse: Its industrial-chic decor hasn’t changed since it debuted. When executives dared to experiment last yearwith a tofu-filled “sofritas” burrito, it was Chipotle’s first new menu item since 2005, and it took nearly a year of testing to decide to roll it out nationwide. Chipotle’s profitable growth has been so consistent that it’s almost, well, boring.
Getting bigger doesn’t just mean increasing the size of your business; it can also mean expanding your power, scope or market share. Looking across industries, there are dozens of businesses, both large and small, whose successful formulas can be boiled down to six basic strategies for low-risk, high-reward growth. Today, I’ll introduce three ideas that are good starting points for companies that are ready to expand. In the next installment, I’ll cover three more strategies that require a little more investment, in terms of time, resources, and creative thinking.
Scale. This is the most fundamental way to grow. Go get the next order, increase the average size per order and then return to your customers more frequently and keep them loyal. As your scale grows, your business becomes more efficient and your cost per unit falls. It’s a virtuous cycle.
Think here of how Sephora has become the world’s largest beauty retailer, with 1,300 stores in 27 countries, by attracting repeat customers through its Beauty Insider program. It rewards frequent shoppers with gifts, free shipping for online purchases and special services. Beauty Insider members — who now number more than 10 million — receive constant email reminders to stock up on their favorite products, and free samples entice them to try new merchandise. The program has been so popular that last year Sephora added a third tier of rewards, called VIB Rouge, for shoppers who spend more than $1,000 annually. Parent company LVMH, which owns high-end brands like Louis Vuitton and Dom Pérignon, now calls Sephora its primary growth vehicle.
I’ve seen this strategy work well for emotional purchases, but it can also be applied to more mundane products. Need to print vacation photos? Hewlett-Packard HPQ +1.1%’s Snapfish service will show your uploaded images arranged in albums or pasted onto mugs and calendars, increasing the average order size.Staples and Office Depot will suggest that you add paper and toner cartridges to go with that new color printer in your shopping cart — and they’ll keep sending you coupons, both online and in the mail, to remind you to get refills.
Product line extension. It can be tempting to reach for real innovation, hoping to score a success like Apple’s iPhone — a product launch so risky that Steve Jobs’ test model was still randomly shutting down on the last day of rehearsals, giving its engineers panic attacks. But sometimes all you need is to add — or even subtract — features from what you already sell. (My father taught me early on that if you sell ice cream sundaes with nuts, some people will pay you more to buy one without.)
One brand that has maximized this strategy is Honest Tea, now owned by Coca-Cola. It started in the late 1990s with just 15,000 bottles of its core product: an all-natural, not-too-sweet iced tea. In recent years, it’s expanded into new versions, adding popular unsweetened, zero-calorie products such as Just Green Tea. Its “Honest Ade” drinks follow trends in flavors, from pomegranate to orange-mango to goji berry. It’s got “Honest Kids” juice pouches for younger kids and “Honest Splash” lower-sugar drinks for older ones. It has even moved into carbonated drinks with its “Honest Fizz” line. No wonder the brand is now in 100,000 stores, even as it stays close to its roots.
Adjacent products/platform extension. Determining the products that fit hand in glove with what you already sell can take some creative thinking. I recommend approaching your business as if you were a customer. What else will you need to use this product to its full potential? What elements currently put this product out of your reach — but could be changed to make it accessible?
It took rental-car companies a surprisingly long time to make these connections, but now they offer add-ons like car seats and GPS to differentiate themselves by more than price alone. Hertz’s NeverLost system not only provides turn-by-turn navigation, but it allows drivers to plan their trips online at home, then simply plug a USB device with their directions into the navigation system. NeverLost also can automatically instruct a driver how to return to an airport. Hertz markets the service aggressively; it even has its own Facebook page and Twitter feed. Thanks in part to strong equipment rentals, last year Hertz’s revenue increased more than 10%.
You also can segment your market by providing similar products at different price points — so long as you maintain some differentiation. Clothing brand J.Crew is reported to be launching a lower-priced label, called J.Crew Mercantile, for customers who want the J.Crew aesthetic but can’t afford its price tags. Done carefully, this segmentation can attract new customers to your brand without cannibalizing your existing base.
For businesses looking to get bigger, the radical new idea can be seductive. But don’t underestimate the power of doing more of what you’re already doing well. As these companies demonstrate, there are many ways to grow without losing the qualities that made your business successful in the first place.
In a week or so, I’ll explore three additional low-risk growth plays: “adjacent services,” “franchising/replication” and “geographic expansion.” In the meantime, I’m curious about your thoughts on low-risk growth. If you wish to propose other low-risk growth strategies or examples of companies that have grown admirably without taking very much risk, please post your thoughts to my comments section.