Growing a business is tough, exceptionally tough. It is one thing to control and manage a business when your operation is small and close, with a limited number of outlets, but it is completely different when you expand and feel further and further removed from the day-to-day operations. Some businesses are easier to grow than others; online and financial services businesses often have highly scalable business models whereas location based businesses or consulting services are a lot more difficult to expand and grow. This is why the story of Starbucks is such an intriguing phenomenon. In 1984, the concept of a retail coffee shop barely existed and where it did exist, retail coffee stores were seen as small owner operated enterprises with very low growth potential. Yet, Howard Schultz, the then CEO of Starbucks, revolutionised the coffee industry by laying the foundation for a 13 000 store global coffee shop empire. How did he establish a foundation for such phenomenal growth? In this feature we will take a close look at some of the specific things that Howard Schultz and his Starbucks team did to create a revolutionary growth business in a stagnant industry segment. We will also examine how and why, after such a long period of profitable growth, the company is now struggling to keep that trend going.
Starbucks began in 1971 when three academics opened a store called Starbucks Coffee, Tea, and Spice in the touristy Pikes Place Market in Seattle. The original Pikes Place store featured modest, hand-built nautical fixtures, sold whole-bean coffees and coffee products and did not offer freshly-brewed coffee by the cup. The store was an immediate success, with sales exceeding expectations. By the early 1980s, the company had four Starbucks stores in the Seattle area and could boast of having been profitable every year since opening its doors. In 1981, Howard Schultz, vice president and general manager of US operations for Hammarplast – a Swedish maker of stylish kitchen equipment and housewares – noticed that Starbucks was placing very large orders for a certain type of drip coffeemaker. Curious to learn what was going on, he decided to pay the company a visit. On his visit to Seattle from New York, the combination of aroma, taste, authenticity and vibe within the Starbucks store had him hooked.
Schultz loved the Starbucks owners’ deep knowledge of coffee and their commitment to providing quality products and educating customers about the merits of dark roasted coffees. On his trip back to New York, Schultz could not stop thinking about Starbucks and what it would be like to be a part of the Starbucks enterprise. “There was something magic about it, a passion and authenticity I had never experienced in business,” he recalled. By the time Schultz landed at Kennedy Airport, he knew he wanted to go to work for Starbucks and after a year of persuasion, he talked the owners into giving him a job as head of marketing for the company.
Key learning let passion drive you –
From the outset, Starbucks was driven by people who had a deep passion for what they were doing. Howard Schultz was so passionate about the Starbucks product, the brand and the experience that he spent a year trying to convince the original owners of Starbucks to give him a lower paying, less secure, less prestigious job in a city on the other side of the United States from where he currently resided. If you are not driven by this level of passion in your business then you will probably be superceded by someone who is. Passion is the bedrock for an effective growth effort.
Schultz spent the first few months at Starbucks learning about the intricacies of coffee – from roasting and brewing to taste and smell. In his first few months he was also overflowing with ideas but his biggest idea for the future of Starbucks came during the spring of 1983 when the company sent him to Milan to attend an international housewares show. There, he discovered the concept of an espresso bar. A small shop in which a lively, friendly barista (counter worker) served hand crafted espresso-based drinks. Schultz judged the barista’s performance as “great theatre.” What struck Schultz was how popular and vibrant the Italian coffee bars were. Energy levels were high and the bars seemed to function as a community gathering place. Schultz was particularly struck by the fact that there were 1 500 coffee bars in Milan and a total of 200 000 in all of Italy. His mind started churning.
Schultz’s first few days in Milan produced a revelation: The Starbucks stores in Seattle completely missed the point. Starbucks, he decided, needed to serve freshly brewed coffee, espresso, and cappuccino in its stores (in addition to beans and coffee equipment). Going to Starbucks should be an experience, a special treat; the stores should be a place to meet friends and visit. Recreating the Italian coffee bar culture in the United States could be Starbucks’ differentiating factor.
On returning to the US, Schultz shared his revelation with the Starbucks owners but they disapproved. They feared that serving drinks would put them in the beverage business and dilute the integrity of Starbucks’ mission as a coffee store. It took Schultz nearly a year to convince the owners to let him test the espresso bar concept. In April 1984, in Starbucks’ sixth store in downtown Seattle, Schultz set up a small espresso bar in a corner of the new store. There was no pre-opening marketing blitz and no sign announcing: Now Serving Espresso. The lack of fanfare was part of a deliberate experiment to see what would happen. By closing time on the first day, some 400 customers had been served, well above the 250 customer average of Starbucks’ best-performing stores. Within two months the store was serving 800 customers per day. The two baristas could not keep up with orders during the early morning hours, resulting in lines outside the door onto the sidewalk. Most of the business was at the espresso counter; sales at the regular retail counter were only adequate.
Key learning experiment and adapt –
Throughout the growth years of Starbucks, the people within the company engaged in deliberate experiments. One of the defining contributors to growth and innovation has been their willingness to experiment. Howard Schultz tested his initial idea of selling brewed coffee by experimenting in a store. He continued to experiment with ideas throughout his time at the helm of the company. He experimented with new products, different store formats, alternative partnership arrangements and various in-store music mixes. From each of these experiments, he learned and adapted. When an experiment seemed to work, he would roll it out to all the Starbucks stores; when it did not work he tried something else until he stumbled upon a winning solution.
In spite of the success of the experiment, the original owners still did not want to sell beverages inside the stores, prompting Schultz to leave Starbucks and start his own company. His plan was to open espresso bars in high traffic downtown locations that would emulate the friendly, energetic atmosphere he had encountered in Italian espresso bars. By 1986 he had opened his first Il Giornale coffee bar in downtown Seattle. By closing time on the first day, 300 customers had been served and after making some small changes to the store format, within six months, Il Giornale was serving more than 1 000 customers a day. Then Il Giornale opened a second store in another downtown building and a third store was opened in Vancouver, British Columbia, in April 1987. Vancouver was chosen to test the transferability of the company’s business concept outside Seattle. To reach his goal of opening 50 stores in five years, Schultz needed to dispel doubts about geographic expansion.
In March 1987 the original Starbucks owners decided to sell the whole Starbucks operation. Schultz knew immediately that he had to buy it. Within weeks he had raised the $3,8 million (around $31 million in today’s terms at a 10% annual escalation) needed to buy Starbucks. The acquisition was completed in August 1987. The new name of the combined companies was Starbucks Corporation.
Schultz told the Starbucks employees that his vision was for Starbucks to become a national company with values and guiding principles that employees could be proud of. The new Starbucks had a total of nine stores. The business plan Schultz had presented to investors called for the new company to open 125 stores in the next five years – 15 in the first year, 20 in the second, 25 in the third, 30 in the fourth and 35 in the fifth. Revenues were projected to reach $60 million in 1992.
In the following several months, a number of changes were instituted. To symbolise the merging of the two companies and their cultures, a new logo was created that melded the Starbucks and Il Giornale logos. The Starbucks stores were equipped with espresso machines and remodeled to look more Italian than Old World nautical. The traditional Starbucks brown was replaced by Il Giornale green. The result was a new type of store – a cross between a retail coffee bean store and an espresso bar/café – that became the signature format of Starbucks in the 1990s.
The arrival of Starbucks in Chicago proved far more troublesome than management had anticipated. The first Chicago store opened on 27 October 1987, the day the stock market crashed. Three more stores were opened in Chicago over the next six months, but customer counts were substantially below expectations – Chicagoans didn’t take to dark roasted coffee as fast as Schultz had anticipated. Store margins were squeezed for a number of reasons: It was expensive to supply fresh coffee to the Chicago stores out of the Seattle warehouse, and both rents and wage rates were higher in Chicago than in Seattle. Gradually, customer counts improved, but Starbucks lost money on its Chicago stores until 1990, when prices were raised to reflect higher rents and labour costs. More experienced store managers were hired and a critical mass of customers caught on to the taste of Starbucks products.
Portland, Oregon, was the next market entered, and Portland coffee drinkers took to Starbucks products quickly. By 1991, the Chicago stores had become profitable and the company was ready for its next big market entry. Management decided on California because of its host of neighbourhood centres and the receptiveness of Californians to innovative, good quality food. Los Angeles was chosen as the first Californian market to enter, principally because of its status as a trendsetter and its cultural ties to the rest of the country. LA consumers embraced Starbucks quickly.When store expansion targets proved easier to meet than Schultz had originally anticipated, he upped the numbers to keep challenging the organisation. Starting from a base of 11 stores, Starbucks opened 15 new stores in fiscal 1988, 20 in 1989, 30 in 1990, 32 in 1991, and 53 in 1992 – producing a total of 161 stores. The opening of 150 new stores in five years significantly exceeded the 1987 business plan objective of 125.
From the outset, the strategy was to open only company-owned stores; franchising was avoided to retain full control of the quality of Starbucks’ products and the character and location of its stores. But company ownership of all stores required Starbucks to raise new venture capital, principally by selling shares to new or existing investors, to cover the cost of expansion. Starbucks was able to raise the needed funds despite posting losses of $330 000 in 1987, $764 000 in 1988, and $1,2 million in 1989. While the losses troubled Starbucks directors and investors, Schultz’s business plan had forecast losses during the early years of expansion. At a particularly tense board meeting where directors sharply questioned him about the lack of profitability, Schultz said: “Look, we’re going to keep losing money until we can do three things. We have to attract a management team well beyond our expansion needs. We have to build a world class roasting facility. And we need a computer information system sophisticated enough to keep track of sales in hundreds and hundreds of stores.” Schultz argued for patience as the company invested in the infrastructure to support continued growth well into the 1990s. He contended that hiring experienced executives ahead of the growth curve, building facilities far beyond current needs, and installing support systems laid a strong foundation for rapid, profitable future growth. His arguments carried the day with the board and with investors, especially since revenues were growing approximately 80% annually and customer traffic at the stores was meeting or exceeding expectations. Starbucks became profitable in 1990 and profits increased every year thereafter until 2007.
Howard Schultz strongly believed that the success of Starbucks was heavily dependent on customers having a very positive experience in its stores. This meant having store employees who were knowledgeable about the company’s products and paid attention to detail, who eagerly communicated the company’s passion for coffee and had the skills and personality to deliver consistently pleasing customer service. Many of the baristas were in their 20s and worked part-time, going to college or pursuing other career activities on the side. The challenge to Starbucks, in Schultz’s view, was how to attract, motivate, and reward store employees in a manner that would make Starbucks a company that people would want to work for and that would result in higher levels of performance. Moreover, Schultz wanted to cement the trust that had been building between management and the company’s workforce. As part of this strategy, he invested heavily in staff training programmes, making the training fun and innovative. He also began providing part-timers working 20 or more hours per week with the same health coverage as full-time employees. This laid the foundation for a strong bond between the company and all its employees. This relationship was strengthened in 1991, when a plan, dubbed Bean Stock, granted each employee stock options in the company, effectively giving them an ownership share in the company in which they worked. At this time, Starbucks dropped the term employee and began referring to its entire workforce as partners. Starbucks was able to attract motivated people with above average skills and good work habits not only because of its fringe benefit programme but also because of its pay scale. Store employees were paid $6 to $8 per hour, well above the minimum wage.
Accommodating fast growth also meant putting in systems to recruit, hire, and train baristas and store managers. Every partner/barista hired for a retail job in a Starbucks store received at least 24 hours of training in the first two to four weeks. The training included classes on coffee history, drink preparation, coffee knowledge, customer service, and retail skills, plus a workshop called “Brewing the Perfect Cup.” Management trainees attended classes for 8 to 12 weeks. Their training went much deeper, covering not only the information imparted to baristas but also the details of store operations, practices and procedures as set forth in the company’s operating manual, information systems, and the basics of managing people. Starbucks’ trainers were all store managers and district managers with on-site experience. One of their major objectives was to ingrain the company’s values, principles, and culture and to impart their knowledge about coffee and their passion for Starbucks.
Key Learning Export the Culture –
One of the primary challenges in growing a business is trying to keep a culture and a company ideology alive as operations become more and more dispersed. Culture tends to develop naturally within a small business when most people work closely with the leader. As a company grows, the leader needs to be more deliberate and purposeful in ensuring that people buy into and live out a core set of values and principles that represent the culture of the organisation. Schultz ensured that the Starbucks culture was instilled in new employees in stores across a wide geographic region by investing heavily in training, giving people a reason to feel connected and loyal to the company and establishing regional management teams that would be accountable for the culture in stores in a particular area.
Starbucks’ initial public offering (IPO) of common stock in June 1992 turned into one of the most successful IPOs of the year. With the capital afforded it by being a public company, Starbucks accelerated the expansion of its store network. But, its success spurred the development of other specialty coffee products across the US and competitors – some imitating the Starbucks model – began to spring up in many locations.
In 1992 and 1993 Starbucks developed a three-year geographic expansion strategy that targeted areas which not only had favourable demographic profiles but could also be serviced and supported by the company’s operations infrastructure. For each targeted region, Starbucks selected a large city to serve as a “hub”; teams of professionals were located in hub cities to support the goal of opening 20 or more stores in the hub in the first two years. Once stores blanketed the hub, additional stores were opened in smaller, surrounding “spoke” areas in the region. To oversee the expansion process, Starbucks created zone vice presidents to direct the development of each region and implant the Starbucks culture in the newly opened stores. The Starbucks store launches grew steadily more successful and in 1995, new stores generated an average of $700 000 in revenue in their first year, far more than the average of $427 000 in 1990. This was partly due to the growing reputation of the Starbucks brand but it was also attributable to the company’s ability to select excellent sites. Starbucks had the best real estate team in the coffee bar industry and a sophisticated system that enabled it to identify not only the most attractive individual city blocks but also the exact store location that was best. The company’s site location track record was so good that by 1997 it had closed only two of the 1 500 sites it had opened.
Key learning location, location, location –
Location is a critical part of the growth recipe for certain businesses. For any store-based retail business and a myriad of different services businesses, location can be critical. Getting the location right for a single store can be tough but finding quality locations on an ongoing basis as you try growing an enterprise to multiple locations is a whole new challenge. It has been shown time and time again that location can have a major impact on the success or failure of a new store; therefore it is essential that if your business is location dependent, you should develop a strategy and system for finding quality locations before you embark on a massive growth effort.
Key learning details matter –
When you are trying to grow a business, details count. Growth equals new customers and new customers often engage with a business on a test basis. Because new customers have no loyalty to the company, if a small detail is not taken care of, they are likely to go elsewhere. When one is trying to grow a business it is easy to let the details slide or assume that someone else, further down the chain of command, will take care of the details. But they won’t. Schultz and his team were sticklers for detail and this created a consistent image and quality experience for customers as they rolled out more and more stores.
Schultz continued to strengthen the top management team of Starbucks, hiring people with extensive experience in managing and expanding retail chains. Orin Smith, who had an MBA from Harvard and 13 years of experience at Deloitte, was brought in as chief financial officer in 1990 and then promoted to president and chief operating officer in 1994. The three key executives during the company’s growth years – Howard Schultz, Howard Behar and Orin Smith – contributed the most to defining and shaping its values, principles, and culture. As the company grew, additional executives were added in marketing, store supervision, specialty sales, human resources, finance, and information systems. Schultz also took care to add people to the Starbucks board of directors who had experience growing a retail chain and could add valuable perspectives.
Key Learning Build a Balanced Management Team – People enable business growth and managers, in particular, make the difference between a successful and an unsuccessful growth effort. One of the critical things that Howard Schulz did that enabled him to grow Starbucks so quickly and effectively was to put a balanced management team in place. Each of the three key executives played a very particular role in the business – Schultz was the visionary and the innovator, primarily concerned with strategy; Behar focused intensely on the people in the business, making sure that the human side of the business was nurtured and Smith was the detailed operator, he oversaw the company’s finances and operations. These three, working synergistically together had the right combination of trust, diverse skills and alternate viewpoints to be a catalyst and enabler of massive growth. If you don’t have the right management team in place you won’t grow effectively.
In markets outside the continental United States, the strategy of Starbucks was to license a reputable and capable local company with retailing know-how in the target host country to develop and operate new Starbucks stores. In some cases, Starbucks was a joint venture partner in the stores outside the continental Untied States. Starbucks created a new subsidiary, Starbucks Coffee International (SCI), to orchestrate overseas expansion and begin to build the Starbucks brand name globally via licensees.
Success Leads to Struggles
Starbucks’ performance record since its 1992 IPO made it, for many years, a darling of the investment community. Between 1995 and 2005, the company’s stock rose from about $2 to more than $30. The company’s revenues had grown to over $9 billion and it had 13 000 stores across the globe. But in late 2006, Starbucks’ stock began a seemingly relentless descent, losing more than half its value in 15 months. From a value near $39 in November, 2006, it dropped to less than $19 in early 2008. In February 2007, Schultz, then the company chairman, sent a memo to senior management suggesting that recent decisions at the firm had led to the “watering down of the Starbucks experience” and “commoditisation of the [Starbucks] brand”. Later that year, Starbucks reported a first ever decline in same-store sales. In January 2008, Schultz decided to replace CEO Jim Donald and return as the company’s chief executive, a position he had last held in 2000.
By 2007, Starbucks Coffee Company had become the largest specialty coffee retailer in the world, with more than 13 000 stores globally and revenues in excess of $9 billion. To reach this store count, the company had opened units at a remarkably rapid rate. “Over the past ten years, in order to achieve the growth, development, and scale necessary to go from less than 1 000 stores to 13 000 stores and beyond, we have had to make a series of decisions that, in retrospect, have led to the watering down of the Starbucks experience, and, what some might call the commoditisation of our brand… We desperately need to look into the mirror and realise it’s time to get back to the core and make the changes necessary to evoke the heritage, the tradition, and the passion that we all have for the true Starbucks experience… We have built the most trusted brand in coffee in the world, and we have an enormous responsibility to both the people who have come before us and the 150 000 partners and their families who are relying on our stewardship.
Key Learning Growth is Not Never-Ending –
The reality is that a recipe for growth will never last for ever. Some companies may be able to grow effectively for a few months, others such as Starbucks may manufacture years of profitable growth. But any growth strategy that is pushed too far will lead to decline. The challenge for business owners is to foresee how long a growth phase will last and then to revise, reinvent and reinvigorate the company before the initial strategy stagnates.
The success of Starbucks has attracted many competitors into most markets in which they operate. Almost every town or region has a local chain of coffee shops modelled along the lines of Starbucks, and large multinational chains such as MacDonald’s and Dunkin Doughnuts were lured into the coffee market, competing on price for Starbucks customers. These competitors all had the potential to erode the Starbucks customer base and cause a decline in revenues and profits. In addition to that, the more a business grows, the more challenging it becomes to find good quality retail locations. There is only a finite number of really good retail locations in any one area and, to keep growth going, companies are often tempted to settle for second-rate locations. A second-rate location can be the difference between profit and loss in a store and the lower the quality of locations that a company is tempted to accept (to fuel growth) the greater the losses can become.
Real life stories create an excellent context to learn about the complexity and realities of business. The story of Starbucks, as described here, provides insight into what it really takes to grow a business, how one can increase success when growing a business and how business growth cannot be expected to continue into perpetuity.
Whether you want to expand your current operation from R100 000 in annual revenue to R1 million or whether you are looking to go from R50 million to R500 million, the lessons from Starbucks over many years of profitable growth provide definitive actions that you can implement to increase your chances of success.
Every business’s growth path will be different, with different obstacles to overcome and different breakthroughs along the way, but for everyone choosing to embrace the challenge of growing a business, the following items should serve as an effective guide.
The (Starbucks) Recipe for Growth
1. Let passion drive you
2. Experiment and adapt
3. Export the culture
4. Location, location, location
5. Build a balanced management team
6. BUT BEWARE: Growth is not never-ending
In Touch Media’s Margie Carr Shares How She Made An Out-Of-Home Media Agency A Solid Competitor
Out-of-home media agencies are growing and In Touch Media’s Margie Carr is leading the way with an approach that embraces trust, simplicity and the power of networks.
- Player: Margie Carr
- Company: In Touch Media
- Est: 2008
- Visit: intouchmedia.co.za
With content playing an increasingly central role, out-of-home media agencies can no longer just be real estate companies. They must evolve to become publishers. That’s according to a recent article in US advertising trade publication Adweek.
It’s an approach that has worked for Margie Carr, owner and MD of In Touch Media, a business she has built over 20 years in a cutthroat industry. Having gone through several key growth phases, today the company has a level 2 B-BBEE rating, and is accredited with the Association for Communication and Advertising (ACA).
Margie is positive about the future of out-of-home, thanks to the increasing digitisation of the media, consumer demands for responsive experiences, and an explosion of location data.
“Advertisers are fundamentally changing their perception of out-of-home advertising,” says Margie. “Where we have differentiated our services is that we simplify the entire process, from idea to execution, so that our clients can focus on managing their brands.”
When Margie started the business, she had experience as an account manager and copywriter. Initially she was ‘selling out-of-home stock’, but her passion for strategic campaign management got in the way, and the business evolved into a full-service out-of-home media agency. That shift required a change in mindset.
“To book, plan and execute an out-of-home campaign is a much more complex process than selling space,” says Margie. “It was a major adjustment. A tangible product is easier to sell than an intangible service.”
That’s because a tangible product can more easily demonstrate value, whereas with a service, you create a vision and sell the vision to the customer.
“Our promise to the client is that once they brief us, we do the rest. We handle the communication across all the teams contracted into campaigns, keeping clients updated on progress every step of the way. Out-of-home is an extremely complex medium, and knowledge of both buyers and sellers is critical. We have differentiated the business on our depth of knowledge and extensive experience in the market.”
Believe in your employees
Margie admits that one of her biggest challenges was learning to trust employees. It’s a common one for entrepreneurs. One of the key requirements of ‘learning to let go’ is showing your people what it means to walk in your shoes, and to avoid the temptation of trying to protect them from reality.
“Giving employees the ability to see things from your perspective helps to make them feel more like partners, rather than staff who are in it for the salary at the end of the month. This makes it easier to establish trust, and a mutual commitment to the business and its long-term goals.”
Become part of a network
Margie also acknowledges that it’s important to have a professional network. For her, membership of the local chapter of Women Presidents’ Organisation (WPO), of which she is also a founder member, has been beneficial. It’s an organisation for female CEOs and managing directors, and the South African chapter, launched in 2008 by Anni Hoare, is the first to be established beyond North America. Margie credits the organisation with empowering her to grow her company.
“The WPO aims to accelerate business growth, enhance competitiveness, and promote economic security through confidential and collaborative peer-learning groups,” she says. “For me it has been a platform to learn from, and to be inspired by and work with incredible people who are determined to succeed.”
As an entrepreneur, she points out that you do not have a board that meets regularly. Instead you are expected to have all the answers. With a dedicated board, you have people who are focused on what you need to be successful, guide you on the risks you should take or avoid, and can help you to achieve your long-term goals and strategic objectives. Boards expand networks, promote accountability, and give a company a level of credibility that is reassuring for customers and employees.
“In the absence of that, membership of a powerful network can make all the difference. Having the ability to meet with fellow entrepreneurs once a month, to work through different sets of challenges together and come up with creative solutions, is a proactive learning experience that really helps you to grow as a business owner and leader. It’s an opportunity to come to grips with your own strengths and weaknesses, and to understand the value of high-level advice.”
Simplicity is the key to success
Ken Seagall, author and former Apple creative director, said ‘The most important thing we do is give people a simple solution, so they can do amazing things.’ The connection between simplicity and success has contributed to the success of In Touch Media. Keeping it simple has been a guiding principle for the business.
“We had to make changes to our systems to make them more client friendly as the out-of-home environment evolved. In some instances, clients are required to sign more than a dozen different contracts with diverse providers — we have streamlined our processes so that clients sign one agreement with us and we manage all the suppliers.”
The future is digital
Looking ahead, Margie expects ongoing change with the growth of digital out-of-home. PricewaterhouseCoopers (PwC) valued South Africa’s out-of-home market — the biggest in Africa — at R4,4 billion in 2016, with growth of 2,7% forecast over the next five years. More than a quarter of the country’s out-of-home revenue is now sourced via digital screens. UK research has shown that digital out-of-home reaches 92% of Londoners.
“There are exciting times ahead. On average, out-of-home super-users increase profits by 26%. Consumer trust is a key element, and familiarity nurtures trust. A consumer passing your ad every time they go shopping will develop confidence in the brand. They see you are here for the long haul, and that you have confidence in your brand.”
The House That Moladi Built – How Challenging Traditional Building Empowers Local Entrepreneurs
Hennie Botes is a true entrepreneur — through a combination of passion and resilience, he has pressed on despite challenges, developing an unrelenting ability to sell his vision, and execute it. His goal has always been to use the technology he created — which challenges traditional building techniques — to empower other entrepreneurs.
- Player: Hennie Botes
- Company: Moladi
- Est: 1986
- Visit: moladi.co.za
South Africa has a housing backlog of between 2,5 million to three million and it’s continuing to grow. The country also has a persistently high number of unemployed people at 5,98 million, according to the latest numbers from Stats SA.
One entrepreneur who is committed to helping address both crises is Hennie Botes. A toolmaker by trade, the Port Elizabeth-based founder and designer of construction system Moladi developed this innovative building technology as a means to address many of the cumbersome and costly aspects of conventional construction methods, without compromising on the quality or integrity of the structure. The system replaces the bricklaying process with an approach similar to plastic injection moulding.
Founded back in 1986, when Hennie first realised how difficult it was for the poor to get good quality housing, his solution was the development of a whole new building system, which he named Moladi. The company has been in existence for more than three decades, and exports to 22 countries around the world.
“I built the first house based on the Moladi system in Benoni, in 1987,” Hennie says. “Substandard craftsmanship has resulted in South Africa’s poor living in inferior housing structures. I wanted to fix this problem, and I wanted to show people that the concept I had developed actually worked in real life.”
Like many truly innovative entrepreneurs, however, he discovered that a brilliant business idea is no guarantee of success. Converting an idea into a reality (regardless of the required investment of time and money) is never an easy task. In fact, it can be extremely difficult.
“I was naïve to think that a phenomenal breakthrough in the way we build houses would have people beating a path to my door, but academics and politicians speak different languages from entrepreneurs. I discovered that the saying, ‘Eat the elephant one bite at a time’ really does apply to entrepreneurship.”
Related: Construction Business Plan
Hennie learnt that you have to believe in yourself enough to handle the consequences of your decisions. “When you take on the responsibility of developing something that had not existed before, you become accountable. To turn that opportunity into a reality, you have to believe in yourself 100%. Great ideas fail because the unexpected challenges become more than you think you can handle, and the risk is that you lose the belief in yourself to see things through all the way to the end. In many ways, it’s like competing in a triathlon — you achieve one goal, and you have to move on straight to the next one.”
Hennie says his goal is not to enrich himself, but to use his technology to help empower other entrepreneurs. His methodology has been used to build thousands of houses all around the world — from Mexico to Sri Lanka. Today, Moladi exports to multiple countries, including Mexico, Trinidad and Tobago, Panama, Nigeria, Ghana, Tanzania, and Kenya. Moladi recently built a showhouse for a low-cost housing development in Trinidad and Tobago — the structure went up in 12 days. Another big win has been the construction of the 1 600m2 Kibaha District Courthouse in Tanzania. It was built in six months, at a cost of 4 250 per m2, which is less than half the cost of a conventional building. In Mauritius. the technology is being used to build 2 000 low-cost homes on 250 acres of coastline.
“Despite the housing backlog in this country, what has sustained my business over 32 years is the work we have done beyond our borders,” he says. “But that is changing. Earlier this year we were contracted by the Western Cape Department of Education to build four classrooms in Philippi, as well as a double-storey building with eight classrooms in Robertson. We completed these projects in a record four months, at a third of the price. Usually, the construction of just one classroom can take between four to six months. This kind of government project is exactly the foot-in-the door that Moladi is after. The Western Cape has to build 20 schools a year to provide for its growing population.”
Moladi provides training in the construction of its houses and licences people who finish the course to build Moladi houses. Training is free, but trainees need to pay for the moulds and admixture. Licensees are supplied with viable business plans to help them secure loans for their start-ups. Hennie has a vested interest in the success of the licensees, since poor outcomes reflect badly on the business. He also prefers working with cooperatives rather than individuals, as it means that people will check up on each other. This is especially important when it comes to cash flow. Many new entrepreneurs fail, he says, because they splurge on cars and cell phones instead of the must-haves required to make a business grow.
Hennie has kept his team small. Low overhead costs have enabled Moladi to remain profitable in the low cost housing market. Companies with high overheads simply cannot compete in this small-margin, big-volume space.
“The real market requires a vast amount of homes below the R500 000 range, and that’s where our focus lies. Also, I did most of the work alone for many years after I started the company. These days my daughters, Shevaughn and Camalynne, are key to the successful running of Moladi and they fulfil vital roles. We outsource work to keep overheads down and have very good relationships with various suppliers, building experts, engineers, town planners, architects, and funding institutions. Our biggest differentiator is the pride we take in our ‘land to stand’ approach’ — we are a one-stop-shop for home building.”
His goal now is to find ways to work together with organisations like the National Development Plan (NDP) and the National Youth Development Agency (NYDA). Hennie refers to his customers as partners, which forms part of his holistic approach to construction. Typical clients include private construction firms and property developers. Governments can often play indirect roles, as they would usually contract state-funded housing programmes through the tender process.
“I believe we need entrepreneurship that looks beyond spaza shops, hairdressers and car washes,” he says. “There is an enormous and pressing need to provide dignified housing for South Africans, and to address our appalling unemployment levels. What better way to begin to do that than by using accredited, affordable technology that can achieve both goals at an accelerated rate? Moreover, to fulfil the supply chain, work would be provided for painters, plumbers, electricians and roofers.”
The Moladi building system uses a removable, reusable, recyclable and lightweight plastic formwork mould, which is filled with mortar to form the wall structure of a house in only one day.
Hennie describes it as the ‘Henry Ford’ of mass housing. “We produce components and products that reduce the cost of building, and we work on a production-line basis, from production to homeowner, bypassing the middleman in the supply chain.”
The process involves the assembly of a temporary plastic formwork mould, the size of the designed house, with all the electrical services plumbing and steel reinforcing located within the wall structure, which is then filled with a specially formulated mortar mix to form all the walls of the house simultaneously.
All the steel reinforcing, window and door block-outs, conduits, pipes and other fittings are positioned within the wall cavity to be cast in-place when filled with the Moladi mortar mix. The mix is a fast curing aerated mortar that flows easily, is waterproof and possesses good thermal and sound insulating properties.
Swipe Successful – How Sureswipe Scaled To A R250 Million Turnover
Here’s how Sureswipe cornered a niche market with limited funding and continues to enjoy double-digit year-on-year growth.
- Player: Paul Kent
- Company: Sureswipe
- What they do: Sureswipe is one of South Africa’s first card Payment Service Providers (PSPs), established to make card payment acceptance easy and accessible to all independent retailers and service providers.
- Est: 2008
- Turnover: R251 million
- Visit: sureswipe.co.za
Four years ago, Paul Kent received a Request for Proposal (RFP) from a tier one retailer. He ran around the office high-fiving everyone. Sureswipe had made it. They were officially on the map.
Two days later, Paul and his COO, Richard Flack, turned the RFP down, choosing not to pitch for the business, even though it would have been a huge deal if they’d secured it. It took two brutal days to make the decision, but ultimately, Paul and Richard understood that sometimes you have to say no to business, particularly if it doesn’t align with your vision.
“I was so excited, but Richard immediately said, ‘let’s think carefully about this before making any decisions,’ and so we did. We went back to our vision to make card acceptance easy and accessible for all independent retailers. The more we thought about the RFP, the more we realised that we’re not geared to service tier one retailers. Our team has a deep connection with independents. That’s who we want to support and where our expertise lies. Our business model is geared to support that market sector. Extending our focus to tier one retailers would require a change in our business and a new division to service them. It wasn’t the right move for us.”
Paul learnt what many successful entrepreneurs before him have discovered: In business, what you say no to is as important as what you take on. The more focused you are and the better you understand your core customers, the more successfully you will service them. That’s the foundation of a sustainable, high-growth company.
It took Paul and his team five years to get 3 000 Sureswipe card payment machines into the market. They were growing rapidly by the time they received the RFP. Today they have 10 000 devices in the market, and expect to hit 30 000 within three years. The business has grown 30% in the last year alone.
Here are the lessons Paul has learnt since launching Sureswipe in 2008, from the leanest way to start (and run) a business, to minimising customer churn and maximising market loyalty.
1. Launch a solution, not just a company
The idea for Sureswipe was born inside Healthbridge, a company that processed claims between doctors and medical insurers. It was the mid-2000s and medical aids were changing. Where previously doctors submitted directly to medical aids, co-payments and limited annual benefits compelled medical practices to start accepting cash and card payments.
Sureswipe was launched as a division that supplied card payment machines to support this shift. Paul, who was heading up the business development key account team at Healthbridge, realised that there was a much bigger market that needed a value-for-money, high service level card payment solution, and that was independent retailers.
“Growing up in the UK, I spent a lot of time in my grandfather’s fruit and florist store and in high school I worked weekends at a local clothing retailer. As a result I understood the challenges of retail, particularly the time-bound administrative burdens,” he says.
Paul researched the market and developed a value proposition based on two key factors. First, although paying for payments is a grudge purchase, particularly for small, independent retailers, cash-based businesses that adopt card payments typically experience a 50% increase in monthly turnover. Second, independent retailers with point of sale (POS) machines were paying a 5% transaction fee, while those that hadn’t adopted POS systems weren’t the core focus of banks. Paul found a frustrated customer base eager for an alternative service provider.
“Most retailers either thought that card payments were too expensive, or that they could only access POS machines through their banks. They’d often wait up to 30 days for a machine, and if it broke, it would be another week before a technician came to fix it. At that time, the large banks weren’t geared to service that market.”
With a clear value proposition in mind, Paul convinced Healthbridge to ring-fence Sureswipe and launch it as a separate business. In October 2008, Sureswipe opened its doors with Heathbridge as the majority shareholder. The business model had two core focuses: Converting cash-based businesses and switching independent retailers who already had POS systems but were dissatisfied with their current service providers.
“We were strategic in picking the right market, but luck also played a part,” says Paul. “When we entered this space, a similar company was launched to focus on tier one and two retailers. But, the banks were highly competitive in that market segment and new entrants found it difficult to compete. We targeted a market that was largely ignored and today, 70% of our business is from single-store owners.”
While they were fine-tuning their offering, Paul and his team found that their customers were so grateful for an alternative solution that they tended to forgive start-up wobbles as Sureswipe found its groove.
Stress-testing your business
In the early days, the Sureswipe team leveraged its relationship with Capitec Bank to secure meetings and make sales. “We’re not a bank, so we need a banking sponsor to help us meet regulations and operate within this market,” explains Paul. “When Capitec secured its licence to do merchant acquiring, they had no customers and were developing their product in-house. They were also looking for a distribution partner. We aligned Sureswipe with Capitec as our sponsor and provided them with a distribution partner and a solid footprint in the medical market — it was a perfect solution.”
When you’re dealing with people’s money, you need a strong level of trust, so the relationship with Capitec was essential while Sureswipe built its own brand. “It wasn’t always easy,” says Paul. “We had six people who went from retailer to retailer explaining who we were and what we did. At one restaurant, two off-duty cops heard one of our reps and decided it was a con. They arrested him and he called me from the back of the police van. I had to convince them that we were a legitimate business before they’d let him go.”
After five years, Sureswipe and Capitec found that they were competing with each other. When the contract came to an end, both parties decided not to renew it. But Sureswipe had 3 000 devices in the market, all of which were on Capitec’s technology platform. By not renewing the agreement with Capitec, Sureswipe needed to recontract all 3 000 of their customers. It was a massive project.
“It was also a huge lesson for us, and I’m glad it happened when we only had 3 000 machines in the market. We realised the risk in working with one bank, particularly because the technology that processed our customers’ payments wasn’t our own. We needed to licence our own technology and develop a dual sponsor system to mitigate this risk.”
The entire project took more than six months to complete. “People in the industry were sceptical — a project of this scope had never been done before,” says Paul. “We started with a small, ring-fenced team. By the end of the six months every employee was working on the migration of customers onto the new platform.”
The lesson: There will always be challenges, particularly during growth phases. Stress-test your business as much as possible. The earlier you spot a potential risk or problem, the sooner you can address it and implement a solution, even if it means adjusting your business model.
To stress-test your business, ask yourself these four questions regularly: What happens if everything goes right (ie, we grow too fast)? If I remove one piece that’s central to the functionality of my business (this is what Sureswipe faced), what happens? Is my business valued (ie, do you know if your buyers love you and why)? What’s the worst that could happen?
2.Variable cost models keep businesses lean
One of Sureswipe’s success factors is that its product isn’t cutting edge — what the business does is not unique, and the technology is available to be licensed. Nothing had to be built from scratch.
This allowed Paul and his team to launch the business with a variable cost model, outsourcing sales, the call centre and even their technology.
“The biggest outlay was the initial investment into the product, funded by Healthbridge, but within a year we were cashflow positive,” says Paul. “We’ve been funding ourselves organically ever since.”
At the time, launching the business wasn’t a big risk because it didn’t involve a huge upfront investment. Healthbridge was happy to see where it went. Paul and his team of eight kept costs down and slowly built up the business to the point where it became bigger than its initial shareholder.
“It was the ideal business model to start with. Don’t try to build the biggest — do the minimum required and don’t use a lot of capital. If you use a lot of capital upfront shareholders will put you under immense pressure. We were under no pressure. We weren’t drawing anything; we were just a little side thing that may or may not work.
“We were the first mover in this space in South Africa, but everything we do has been done somewhere else. The machines are sourced from a few companies in the world that manufacture them. The mPOS machine is licensed from a company in Iceland. Software is licensed. Everything Sureswipe needs exists — it’s just a case of sourcing it and building a solid service-delivery business around the tech.”
Without the burden of heavy research and development and other start-up costs, Sureswipe channels all internally-generated cash into finding ways to do things better and faster for their customers.
“Today fintech is a buzzword. Disruption within the financial services sector is expected. Ten years ago, fintech wasn’t even a word. Everyone thought you could only deal with banks.
“What we had going for us when we launched was our card machines. People understood them so we didn’t need to educate our market on what we did. We just needed to make them aware that there was an alternative to banks, and because we focused on an untapped market, there weren’t really competitors in the space. We weren’t trying to bring in new technology like mobile payments. The market wasn’t ready for that in 2008.”
Sureswipe launched with traditional stand-alone card machines, followed by Integrated payments for larger retail franchise stores, mobile MOVE card readers for businesses on the go, and Sureswipe POS LITE, an app-based point-of-sale software for start-ups and smaller retailers.
“When it came to mPOS, we were happy to be followers. We had a product ready to launch, but we made the decision to wait for the banks to launch their offerings and educate the market first. We were then in a perfect position to be fast followers — without needing to educate the market ourselves.
“It was a strategic play and it worked for us. We’ve also had good growth in our MOVE product and we’re doing the same with QR code payments. There have been trailblazers in the market who have done phenomenally well, but they operate on separate platforms. We can now offer a QR code that accepts almost any QR Wallet.
“On the other hand, a peer-to-peer mobile wallet was developed within Healthbridge that never gained the traction needed for success. It was too early for the market and deep pockets were needed to fund the business. The business had a great team that worked on the project and Sureswipe benefited from accessing them.”
Today, Sureswipe has integrated many functions that were previously outsourced. “Our variable cost-model allowed us to enter the market without huge financial backing, but where it’s made financial sense, or it offers us a strong competitive advantage, we have brought services or products in-house.”
3. Understand — and leverage — your competitive advantage
Since entering the market ten years ago, transaction fees have more than halved. This is good for retailers, but it makes the space more competitive for service providers who must maintain quality products and service as profit margins narrow.
Sureswipe’s value proposition is captured in one sentence: They come for price, they stay for service. “Everything we do needs to adhere to that,” says Paul. “We need to bring technology to market at a lower price point than incumbents are offering, and then secure customer loyalty with our superior service offering.”
Within an increasingly competitive space, Sureswipe is not always the most cost-effective solution in the market, but a focus on service and convenience means that retailers are willing to pay a premium if the offering is good for their business.
“Our focus is value for money, not price. Retailers want to be able to accept any legal currency from their customers. As a service provider, we needed to figure out a way to do that in the most cost-effective way possible, without increasing our administrative burden as the business grew. With its low margins, this business only works at scale. If our internal costs escalate with each new user, that’s not a scalable business.”
So, what is Sureswipe’s competitive edge? “We’ve always understood retailers,” says Paul. “Their biggest burden is time — they never have enough of it. If you have an unreliable product, or an administrative burden, you’re essentially losing time and revenue.”
This was the business’s entry into the market, but growth has been the result of continuously fine-tuning Sureswipe’s offering based on its knowledge of customer needs. “The more time we spend understanding our target market, the more we’re able to recognise their pain points. Everything we do is focused on simplifying the lives of retailers and helping them to grow their businesses.”
In a highly competitive space, you need to create an edge for yourself. Some businesses create a moat around the business with tech, but often there is a competitor who can do things faster and cheaper.
Successful companies find a different competitive edge, one that focuses on delivering value to the customer beyond the product.
Sureswipe has a two-pronged approach. First, convenience and simplicity are a must — if Sureswipe isn’t making the lives of its clients easier (and more convenient for their customers in turn), then the business isn’t living up to its core values. The second is keeping costs as low as possible. Sureswipe needs to be able to offer its products and services to the market at highly competitive prices. This is only possible if the business has lean operations and is scalable.
So, how have Paul and his team managed to offer exceptional service while keeping costs low? “You need to sweat the details,” he says. “This landscape has become increasingly competitive. Banks have caught up to us. An independent retailer can pick up the phone and the bank will send someone the following day to chat to them.”
To counter competition, Sureswipe focuses on service and cost to serve. It’s one thing acquiring a customer, it’s another keeping them, and this has been where Sureswipe’s team focuses their passion and energy.
“We’ve found that complex structures hinder service levels and so we’ve kept our structure flat. Our internal culture is extremely important for customer service. Hiring the right people who are passionate about retail and business means we are able to service our clients better. We care about their businesses. 86% of calls get resolved by our call centres. If they can’t solve the problem, a technician is sent to the store to fix or swap a faulty machine.”
From a cost perspective, Sureswipe needs to continuously get to market cheaper than before, while simultaneously offering products that are better, more seamless and more integrated into the business.
“There is always an initial cost when introducing a new product, whether it’s a device or an app. However, each new offering increases our clients’ revenue, which in turn increases our revenue. Scale is critical — we’re in the red until we achieve scale.
“We’ve had to be ruthless about achieving great service levels at low costs. We don’t believe in either low cost or good service — we need to deliver both. If something is too expensive for us or our clients, we either don’t do it, or we find a more cost-effective way to bring it to market.”
4. Ensure you have a ‘stickiness’ factor
One of the dangers of a highly competitive market is that it’s simple for customers to switch service providers if they are only looking at price. If a retailer only has a POS machine with Sureswipe for example, it can be swopped out for another device. With this in mind, Paul started looking at value-added services that increase brand loyalty and reduce churn.
“We call it preventable churn,” says Paul. “If business owners have a POS device and take just one more product from us, the stickiness factor is exponential. This can include a cash advance product, or creating a gift and loyalty programme through our platform, or both. As a business owner you can still switch to another service provider, but it’s more complicated and you’re receiving a bundle of services that all add value to your business.”
To achieve this, Sureswipe has partnered with Retail Capital to offer its customers cash advance products, while a loyalty programme allows consumers to swipe their loyalty cards and gift cards at all Sureswipe terminals, accumulating points.
“We’ve seen a small increase in revenue since we added these offerings, but more importantly, our customers’ revenues have increased. For example, if someone has a gift card, they will generally spend a bit extra in-store as well. Our merchant discount fee means we offer these products to our customers at a low cost, but our churn rate has lowered by 70%.”
Everything Sureswipe introduces to the market is based on a long-term view. “We offer a commoditised product and so our success relies on scale and volume. As long as you can do that at the right cost, with the right returns, you have a sustainable business. These extra products reduce churn, solve pain points for our customers and in the long term will increase our revenue.”
Paul’s long-term focus is consolidation. “We’ve been in this space for ten years, we have a great customer base, and we believe that we can consolidate our market. Our long-term view informs any decision we make about acquisitions or mergers.”
In 2016, Sureswipe acquired Concord, a company running software that integrated banks with retailers’ till systems.
The acquisition enabled Sureswipe to reduce costs by offering customers one point of contact for their POS system, tills and the processing between the two. “It removes complexities from the value chain, reduces costs and reduces retailer admin.”
With new generation mPOS offerings encroaching on Sureswipe’s standalone devices on the one side, and Integrated payments on the other, Sureswipe is effectively cannibalising its own market, but as Paul is quick to point out — that’s the idea.
5. Always look to the future
Sureswipe’s potential is huge. With 10 000 devices in the market, the business will facilitate R10 billion in transactions this year alone, which accounts for only 6% of its target sector, 2% overall, and 1% if you consider that the biggest competitor to electronic payments isn’t other service providers or banks, but cash.
“Markets change and adapt, particularly in this space where there has been incredible innovation and growth over the past few years. We know that in the long run, if we want to sustain growth, we will need to cannibalise the stand-alone devices, which we’re already doing. Ultimately though, what we really want to bring to market are products that can compete with cash.”
According to Paul, everything comes down to two things: Convenience and cost. mPOS is a lower cost option; contactless payments are all about convenience. Sureswipe needs both — and to keep looking ahead to see what’s next for their market.
“In the UK this year, for the first time, there were more electronic payments than cash, thanks to the convenience of contactless purchases for small ticket items. This is a big driver for us.”
To stay ahead of the game, Paul focuses on the business’s capabilities, and his own. “I need to pay attention to what’s happening internationally and how we can adapt our product offerings based on international innovations, but I also need to continuously focus on personal growth.
“One of my biggest fears is that the business will outgrow me. It’s a common founder’s fear, and for good reason. Many founders are great at launching businesses, but they don’t possess the skills the business needs to grow.”
To avoid this pitfall, Paul has consciously developed his business acumen over the past 15 years, beginning with Wits Business School’s Management Advancement Programme in 2003, and completing his MBA in 2015 through IE Business School in Madrid.
“I think it’s essential for all entrepreneurs and business owners to keep the pencil sharp and learn as much as possible. If I reached a stage where I didn’t think I was the right person for this position, I’d step back. We’ve built a team to complement each other; I’m not a details guy, but someone who is can fill that role. Part of my journey has been working my way out of a job by bringing in someone who can do what I’m doing, and often they do it better than me.
Become an expert in a niche
Our focus on the independent retailer space has given us a deep understanding of our customers and their needs. We’ve had international companies that are interested in acquiring us state that companies in other markets don’t have our level of understanding for each element of the business.
Look at problems with fresh eyes
We were naive about banking and financial businesses; we’re more retailers than bankers. This meant we didn’t have legacy systems when we launched, which allowed us to look at the independent retail sector without preconceived ideas and ask: What does this market need and how can we service it?
Always seek to remove pain points from your customers, no matter how small
In our sector, as businesses grow, their owners go back to the bank each year to renegotiate their fees. We removed this administrative burden by signing them up on a sliding scale, and as they grow, they automatically move into new segments and their fees drop — both new entrants and incumbent banks have copied this pricing model.
Understand where you’re innovating and why
We knew we didn’t need to innovate on the tech side. Everything we needed existed, and it was far more cost-effective to licence products than build from scratch. Instead, we innovated around our business model and service offering.
Everything starts with your people
Our employees are friendly and helpful, even though we now have a staff complement of 139 people. We foster a passion for learning, promote from within, where possible, and champion a can-do attitude. We’re a service-based organisation, which means everyone’s visions need to align with our service goal.
Pay attention locally and internationally
Read a lot, find out what’s trending, be well networked and have associations overseas. For example, Mastercard and Visa let us know what’s happening in other markets. We’re not at the forefront of technology, but we need to know what’s happening with technology to be able to follow it.
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