"American style of business is you're supposed to grow this business as fast as you possibly can. You don't have to make a profit just show lots of growth so that you can have an IPO, sell a bunch of stock to some suckers and then you know you retire to seize your world and play golf the rest of your life. Well I don't believe that is is right. I always felt that if the farmer has this responsibility, well so do I as an owner of a company." - Yvon Chouinard
In the presentation below Yvon Chouinard, founder of Patagonia, brings up an important topic. In capitalism not growing is antithetical. Yet, some businesses can thrive at a smaller size and slower growth rate. Many intelligent fanatic led companies with a quality focus consciously control their growth rate.
It is difficult for the quality of any business to rise above the quality of its partners and customers.
Yvon Chouinard described his company’s near fatal collapse early in the 1990s. The company had been growing 40-50% per year. There were no cash reserves and their bank, and others, were about to go belly up. Patagonia had few options in getting a loan. Chouinard mentioned that his accountant even took them to the mafia to get a loan with an astronomical interest rate.
To get Patagonia to survive, Yvon had to lay off more than 20% of Patagonia’s work force and cut costs. He swore to never do it again, so the company had to change the way it was doing business.
Instead of the traditional American business philosophy of growing a business as quickly as possible, Patagonia would morph to a slower, calculated grower. The reason? High growth isn’t sustainable and quality is harder to maintain. Producing high quality products was the sole driver of Patagonia. Chouinard demonstrated the unsustainability of their growth when he gave an example in the company’s all hands meeting:
I started putting a one and a bunch of zeros on butcher paper all around the room. I said this is how big we're going to be if we continue growing at forty percent a year for the next 40 years. That would be a bazillion dollars. I mean it was so ridiculous you can't believe it.
Patagonia decided to be a natural grower. The impetus of growth wouldn’t be to get people to want their products through mass advertisements. Natural growth is to grow when the customer, who needs the product, demands them. Chouinard believed that their problem in the late 1980s and early 1990s was that Patagonia was selling to people who didn’t need their product. By selling to those individuals who don’t need your product or service growth is fleeting, and a company is at the mercy of the economy. Patagonia now only spends 1.5% of sales on marketing. They want loyal customers to spread Patagonia’s brand by word-of-mouth.
Chouinard’s analogy on business size and growth is perfect:
Imagine a little French restaurant. It spends 10 years in getting their first Michelin star. It takes another 10 years to get their second, and then 25 years they've been in business they finally get their third Michelin star. They're one of the ten best restaurants in the world, and then they say, "Okay, we made it so now let's put in 50 tables." Well there are no three-star French restaurants with 50 tables. It's impossible. The very best restaurants in Japan like in Kyoto it costs you four hundred, five hundred dollars to eat. There the size is dictated by the fact that the chef is the owner because you can't hire a chef. Only the owner has the passion to really have one of these great restaurants, and the size of the restaurant has to be so that the chef is cooking and is waiting on the customer at the same time. He has to see his customers right there, so they're tiny. They're very small.
I remember watching the documentary Jiro Dreams of Sushi. In it they highlight Jiro Ono, now 91 years old, who has run the sushi restaurant Sukiyabshi Jiro since its founding in 1965. The restaurant is now a three Michelin-starred restaurant, and Ono is considered the greatest sushi craftsman alive in the world today. Jiro has a fanatical focus on the process of making perfect sushi. Every ingredient is hand picked each day for quality and each process is performed by workers with decades of experience. Jiro has gone so deeply into the creation of a simple food that he has built an impenetrable reputation. There are only 10 seats at the tiny restaurant and a three month’s long waiting list. The cost for one 20 course meal is more than USD$400. Jiro would never think of growing his restaurant past his ten seats. He’s too focused on making the world’s best sushi.
Yvon Chouinard talked about “for what we want to do, we can’t have a large company.” Yvon said, “I could call Nordstrom tomorrow. I could probably get five million dollars or so out of them, but that would put us on a suicide course.” Ever since Patagonia has maintained slow 3-4% annual growth. They have built up an extremely high quality brand for outdoor clothing and gear. Patagonia’s been able to maintain their high prices.
I see the same theme happening with many other companies. See’s Candies has stuck to the United States west coast and very slowly have tested new markets. For See’s it is quality without compromise and growing at a higher rate would compromise that quality. Brand equity has allowed the company to increase prices every year since 1972. In-N-Out Burger has maintained dominance in the same markets as See’s, and they too are very slow to grow. Also, as described by Jim Sinegal here, Costco’s method of bringing in new customers to their warehouses is through word-of-mouth. The marketing budget for Costco is almost non-existent, and the growth rate of new stores is slow compared to other retailers.
Top quality asset managers also know when to close their funds to new investors and give back investor capital.
There is a time and place for growth. Extremely high growth, on the other hand, is not sustainable. The companies that can find a happy medium and grow at a pace that suits their values and priorities will do well. Those companies will be able to make wiser decisions that will benefit their long-term sustainability. The companies that grow just to grow have their eyes focused only a few years ahead and will eventually encounter some problems.
If you liked this article you will enjoy, Yvon Chouinard on Buying Less but Buying Better.
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