During my career as an investment analyst, I have seen countless business plans from enthusiastic wannabe entrepreneurs that are looking to start a business.
Almost invariably, the business plan includes an optimistic forecast income statement, with volumes, revenues and profits growing exponentially into the future.
If business was that easy, we would all be retired and living on some fancy place in Mauritius or wherever.
The depressing reality is that most new businesses will fail. According to some statistics from the internet, 20% of new businesses fail within the first two years, 45% of new startups don’t survive five years, 65% fail within 10 years and 75% of start ups fail within 15 years.
The question is why it so difficult to start a new successful business, and what is the solution?
The answer to the first part, generally is competition from other businesses.
The solution, according to business strategist Richard Rumelt, is to have some source of advantage over others. This advantage he writes, is often found in four areas:
- Information – knowing something that others do not.
- Know-how – having a skill, or patent, that others do not have;
- Position – having a reputation, brand, or existing market system (e.g. distribution or supply chain) that others cannot readily imitate or push aside
- Efficiency – whether based on scale, technology, experience, or other factor that others cannot easily attain
- Management of systems – whether bridging complexity or moving with speed and precision, that others do not have.
Simbisa, the well-known Zimbabwean listed quick service retailer, is an interesting case study to look at in the context of the above four factors. Established in 1987 as a fried chicken restaurant, they have dominated the quick service restaurant industry in Zimbabwe for many years, expanding to 640 counters over 9 African countries.
The company has a market capitalisation of $225m, with most recent “annualised’’ revenue, profit and operating cash flow of about $300m, $34m, and $62m respectively, and paying a dividend of $10m.
Information – making the decision to sell chicken and chips back in 1987 was predicated on the idea of rising disposable income across the Zimbabwean population. There were presumably many other operators at the time, as the idea of selling such foods is not a particularly novel idea. One of the key learnings from this, is that oftentimes, great companies are not based on new ideas. Rather, it is taking an existing product or concept, and doing it better than competitors. Simbisa presumably saw opportunities to expand their sites, knew good locations to move too, and built up a depository of suppliers that could be used to supply them with key ingredients. Over time they integrated along the value chain, by acquiring stakes in the companies that supplied them (e.g. Irvines) enabling them to have a better grasp of the supply/demand dynamics in the suppliers industry, which helps with costing, and guaranteeing a source of supply.
Know-how – frying chicken and chips, or baking pizza is not a particularly complicated task. However, Simbisa have mastered a few critical success factors to enable them to do well. They have developed the supply chains and procurement processes to make their products at the cheapest possible prices, to be able to sell the products at a price which consumers can afford, and which enables the company to make a healthy profit margin; they have internally developed or acquired franchises of brands they know will do well in their target markets, and leased or bought the top sites across the country which will provide them access to customer footfall.
Position – As well as owning the in-house brands of Chicken Inn, Pizza Inn and Creamy Inn, Simbisa holds the franchise in Zimbabwe and some other African markets for popular international brands including Nandos, Gallitos, Ocean Basket, Steers and RocoMamas. These brands give Simbisa an edge over other potential competitors. Ask any Zimbabwean their most popular meal in Zimbabwe, it is probably the “two piecer and chips” from Chicken Inn.
In addition to their brands, they have a supply chain which is difficult to compete with. The two main inputs for the company is chicken and potatoes. Their related company Innscor Africa Limited, from which Simbisa was unbundled in 2015, owns a 49% stake in Irvines, which is the biggest chicken producer in the country, and has extensive farming operations which produce potatoes, both enabling Simbisa access to the critical raw materials at a fair price. KFC, the competitor to Chicken Inn, has strict protocols of where they can procure their ingredients from, which adds layers of complexity and cost to an already challenging operating environment.
Efficiency – being the largest operator of QSR restaurants in the country gives Simbisa advantages such as bulk buying discounts, distribution advantages, and a wide revenue base over which to spread their overheads.
Management of Systems – over its +35 year (and counting) history, Simbisa has developed a culture and growth mindset that incorporate certain management philosophies that have enabled it to dominate QSR in Zimbabwe. These include “take risks but don’t gamble”, “speeding fines not parking tickets”, “you only have one chance”, “any business is a good business” and “use it or lose it”. The idea being, if you work for Simbisa, you are expected to take certain risks, and opportunities else you may lose them, and mistakes are acceptable but standing still not making any decisions is not. In addition to this, they will have developed a dashboard of health metrics enabling management to monitor their KRAs (Key Result Areas) and KPIs (Key Performance Indicators), and take interventions where necessary. In my various engagements with Simbisa management, and being a customer in their stores, I have always been impressed with their management approach, and as a result have become a shareholder, albeit small one, too.
Summary
A successful business is not often based on a completely novel idea. At the same time, starting a business which many other businesses are doing can be fraught with competition. The key message from Rumelt, is to have an edge, moat, or an important asymmetry that can be used to differentiate between you and your competitors. From an investors perspective, when you find a business such as Simbisa, which has such an advantage, it really is like stumbling across a gold mine.