Diving Into the Red Ocean. How to Break the Rules of Retail and Come Out on Top. Евгений Щепин
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needed in the field. Outlets selling unpasteurized "live" beer – which in Moscow were springing up like mushrooms – appealed to him, with their promise of minimal outlay and a quick return on investment, but they failed to inspire him with their ideology. An auto repair shop required too much start-up capital, and that industry was not creating a fire in his belly.
The idea of selling natural dairy products came to him as he looked at a shop window full of milk and yogurt, which was due to expire in a month's time. He could not bring himself to buy such rubbish for his young children. Farmers' markets provided an alternative source where it was possible to purchase food that did not feature an entire periodic table in their ingredient lists from private producers of the market, but they failed to inspire complete trust.
Andrey recalls: "One day, I was coming back from the market and realized that I really liked the taste of the dairy products I bought from farmers, but every time I bought them with apprehension: I did not understand how and who made it, and where and how long they stored it. The hygiene question stressed me out more than anything: a merchant would cut off a piece of cheese, then count his money without even washing his hands, over and over, all day long. That thought kept turning over in my mind as I walked home from the market."
And as Andrey reflected on it, a vision of his dream store became clearer. On the one hand, natural products with short shelf lives; on the other hand, producers with organized systems of quality control and certificates of compliance, rather than farmers simply with notes from their veterinarians. And there would be no contact between the vendor and the final product.
THE NICHE THAT ANDREY DISCOVERED WAS OF NO INTEREST TO THE BIG CHAINS. FOR THOSE CLUMSY GIANTS, THE SECTOR WAS FAR TOO COMPLEX AND WAY TOO SMALL TO WORRY ABOUT.
Right on cue, Andrey was reading W. Chan Kim and Renée Mauborgne's book, Blue Ocean Shift[1], which became the lodestar for the company that would become Izbyonka. Andrey embraced the concept that the best way to win in a competitive fight is not to get involved in the first place. The company's strategy should be oriented on the client rather than the competition. This would allow the company to focus on innovation and do anything it cared to without looking over its shoulder.
At first glance, the retail grocery business is a classic "red ocean," where big chains can easily crush any retail start-up. But the niche that Andrey discovered was of no interest to the big chains. For those clumsy giants, it was far too complex and way too small to worry about.
Andrey summarizes: "After looking at these facts, I understood that there was an idea to work on. And after that, there was only one thing left to do: get stuck in."
RULE 2
Doing and analyzing is more important than analyzing and not doing anything.
First, Andrey began by recruiting employees who shared his approach to business. At the outset, it was essential to find someone with an excellent grasp of the dairy production process who was also a seasoned retail specialist. Andrey, the financier, confesses he was ill-informed about these aspects of the business.
"People often ask me what they need to start a business," Andrey explains with a helpless shrug, "… and I think that the key thing is to find people who understand at least something about that specific business. I did not have any clue about the inner workings of the dairy industry. All I knew was that the milk from the market was much better than from the store. But as for a cash register, or how to work with one? I had no idea."
Andrey searched for employees on a free job vacancy site; that is how he found Dmitry (Dima) Kozyrev, a dairy production technician, and Evgeny Semery, a retail manager. Though Andrey could pay only a minimal salary of about 20,000 rubles, he convinced the two men that the venture would become prosperous and would soon see a sharp rise in turnover. Semery did not last long – later, in an interview, Andrey explained that they "just did not get on in ideological grounds." But Dmitry remained, and today he is one of VkusVill's most successful and productive technicians.
From the start, Dmitry played a key role in the company, thanks to his expertise in the production process. He could speak in the language of the production line rather than using layman's terms, such as "salty," "tasty," "hot," or "sweet". He knew how to treat the product, what to add, and how to improve it, for example, by removing excess moisture or replacing one starter culture with another.
"In 2009, I ran across an ad online for a dairy production technician and rang the number," recalls Dmitry. "A young man answered and introduced himself as Andrey. We met at the food court of the Molodyozhnaya mall. He said he wanted to start an unusual venture, creating a small retail chain to sell natural dairy products. I found that a very appealing idea, though now I cannot recall why exactly. I suppose that was because this was not going to be a typical Monday to Friday, 9:00 a. m. to 5:00 p. m. routine. It was interesting. The idea of working with natural products did not embarrass me at all: I understood that if we did everything right, it was real. Andrey has an excellent capacity for sincerely engaging people if he believes in something himself. He could do it then, and he's continued to do so throughout the history of our company."
With Dmitry at his side, Andrey went in search of suppliers. They visited almost fifty producers in a radius of 200–300 kilometers from Moscow before they found someone willing to produce milk products for the Izbyonka brand without the general powdered milk, starch, and preservatives.
"They looked at us like we were idiots," Andrey recalls. "We did not have a single store, but we were making as many demands as if we were a large retail chain such as 'Auchan'."
They found their first supplier – SAPK-Moloko – in the tiny village of Zherdevo in the Kaluga Region. It was a small plant that had just opened a new production line and was looking for any possible sales distribution channels. Their products were already available in local stores, but that demand was insufficient.
Andrey and Dmitry convinced the director to accept a delayed payment, thus, clinching their first supplier. On 12 May 2009, the first Izbyonka location opened.
They started with minimal expenses. Renting 5 square meters at the Troitsky mall in Strogino cost only 16,000 rubles a month, and a commercial refrigerator cost them 20,000 rubles. They made the sign themselves in the back lot of the Tushinsky market. They shelved any thoughts about proper marketing: the primary goal was to get started. Andrey and Dmitry traded shifts transporting the product from the plant to the mall.
"You wake up at three in the morning, drive to the plant in Kaluga, stuff the car with a product, then unload it at nine in Moscow," recalls Dmitry, reminiscing about those early days. "Andrey took two shifts delivering the product, and I took two shifts. Of course, we were not following the established rules: we were not adhering to storage regulations; we wrapped the product up in blankets to make something that looked like a refrigerator. After a month and a half of this, we realized it was time to look for someone with a proper vehicle."
The initial stage of a business is an ideal time to go slightly off-piste (within reasonable limits) and bend the rules a little, while avoiding any penalties or fines. As far as the authorities and regulators are concerned, your company does not exist yet; the few clients you have are not highly active. For a start-up, each day can easily be its last. Bending the rules at this stage is a necessary evil, but only insofar as this "illegal" period enables you to finetune your business processes and hone them until they are functional, efficient, and legal.
Over three months, Andrey opened two more Izbyonka locations, and created an intuitive software program to automate product ordering, oriented to the volume of sales from the previous period, so that each day the program became "smarter."
But success still eluded them. For nearly four months, each of the three locations had been losing money, and none of them enjoyed heavy customer traffic. The initial start-up capital of a million rubles was running out.
It was time to start Plan B.
"At first," recalls Andrey, "I opened four locations. However,
W. Chan Kim and Renée Mauborgne.