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A business perspective

Choosing the right business model is what all creation of business is about. Before ever choosing a business model, look at some major businesses where their true revenue streams aren’t so apparent. Let’s have a lesson in innovation and creativity when talking business models. Article by Bjarke Gotfredsen

Let’s look at McDonalds:

When we look at a company’s main business model, we should look at the part of the business that make the most money. Where do they make money, hamburgers? No. Although McDonalds is listed as a restaurant chain, and they are the largest restaurant chain in the world, but they don’t make most of their money on their restaurant business. McDonalds make their real money in real estate. They buy up properties that have excellent locations, typically street corners at major intersections. And the properties are big, large enough to have plenty of parking, a drive-through, a kiddies play land and the restaurant itself. When you consider the amount of land these restaurants are located on and consider the price of a meal, the math will not make sense. McDonalds Inc. buys the land, then build the restaurant and find a franchise operator to run it for them. The operator pays very little in rent initially, which makes a loss for McDonalds, but over time as the restaurant succeeds, the rent increases and not just with 8-10% or whatever is the normal increase in the respective countries, but by a much larger margin. Many years later, when the plot is the only part of the intersection that hasn’t been built into a mall or high riser, McDonald sells the piece of land for a fortune. This is how they make their money, so much that it far exceeds profit on the restaurant business. 

Let’s look at Pick ’n Pay:

Many know PnP as a retail giant, but they don’t make most of their money on profits from selling goods in their stores. They make money on interest, and as such are more a bank than a retail store. When PnP negotiate with their suppliers of retail products, they make sure they get the absolutely best price, and why not? They sell way more of the suppliers’ products than the local convenience store. But on top of getting the product for the best price, they also collect rent from the suppliers for the shelf space they use, and the back room store space they use. The supplier have to stock the shelfs with his own product himself, or pay for having it put on the shelves. When PnP sends out their advertising news paper, the space required for placing the product in the paper has been paid for by the supplier. PnP have hardly any cost of running their stores. The supplier fills the shelves and the customer collects the products from the shelves, and staff cost in the store is mainly for the cashier personnel, which if PnP goes in the same direction as many overseas retail stores, means that the customer are going to scan and pack the goods themselves and pay without any cashier interfering.

But the way PnP makes their money, is by negotiating a 90 days payment term from the products are placed on the shelves, knowing that in average all products are sold in 21 days, which mean they will sit with 3,5 times the turnover in the bank collecting interest. They can, and they do, sell some of their products for below cost price, and still make money. So the next time you walk into a major grocery store, look at its major multimillion success as a chain of banks rather than retail in the traditional sense.

Your business:

If you consider starting your own burger joint or your own retail store, you might as well shop your products directly from McDonalds and/or PnP. You can’t get it cheaper than what they are selling their products for, simply because they don’t consider making money in selling those products. Both organisations are more interested in massive turnover, at the cost of profit, which is easier to understand for PnP, but for McDonald’s as well, its about driving consumers to the location to increase the value of the location as soon as possible. 

When you start a business, you must choose the right business model or simply be innovative and find other ways of making money if you want to survive. I have a convince store close to my home, and I use the store, even though I could find most of his products cheaper in PnP. But PnP is further away, PnP’s parking is not as good as the local guys’ parking, and while he has fewer products than PnP, he also has a 10-20% of his products imported which not available in PnP. He makes a healthy profit on all his products, and his price on bread and milk is much higher than in PnP, but he is conveniently located. For smaller shopping he wins and will continue to, as long as he stays in demand based on location. 

There are also burger joints that makes money on selling their burgers as a sit-down restaurant. They also have a liquor license, and they have a much more interesting interior. Both of these shops are not for the many and not for the high turnover. And neither McDonalds, nor PnP, could be bothered. Heck, these outlets probably buy their ingredients at PnP anyhow.

Selling:

This leads me to thoughts around selling. Many of these shops don’t have sales people, the selling happens via marketing. We prefer to go and shop without being bothered by sales people. Whatever we can afford to buy, food, fridge, TV, holiday, car, house, we have a equally proficient access to the internet and we are equally proficient in researching using the internet. Before we go out and buy fridge, TV, holiday, car, house, we have researched the product to such an extent that the sales guy can only hope for some up-selling, you know when the cashier at McDonald’s asks you after you ordered a burger and coke that for a few nickels more you can add chips and make it a meal. When I bought my laptop, I told the first guy in the shop what laptop I wanted, the full specs, and after a few seconds he realised that he should just go to the store room and get it. It was no different when I bought my last car or TV. And everything else I bought of these kind of goods, I have ordered online. People are so tired of trying to get the right product from a sales guy, when they know more about the products themselves, something that Amazon has realised. We trust other buyers more than we trust sales people, and therefore online shopping with rating (and ranting) from other buyers are the winners in retail trading. We used to have sales guys to help us buying flight tickets, but we eventually told the airline that by using their sales guy it cost us more compared to online shopping their tickets by ourselves. 

I buy lot of technology from B&H in New York, and import lots of products from China using Alibaba. I book my international travel using booking.com and in general I choose suppliers that allow me to order online. The traditional sales man is dead, self shopping is the future. If you order a pizza online vs phoning in the order, there is a bigger chance you got the right pizza after using an online ordering service. Banks are chosen for their internet banking facility, not for the amount of interest you get on your savings.

When you go to McDonald’s or PnP there are no sales people there, just cashiers – and they are not on commission, which in a normal salesman driven shop is being added to the product price.

Conclusion:

Having a great product means less these days compared to the shopping experience. It is expected you have a brilliant product, otherwise nobody even gets close to your store, but once you find the right product to sell, everything is about your chosen business model. How you price it, how you really make money, post transaction service, and the entire infrastructure and logistics giving your customer the best experience. It’s time to get creative in business, because the old customer-product model is dead. Let’s get innovative with how we can make profit.

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