Goodwill is the one and only asset that competition cannot undersell or destroy – Marshall Field
How often do you look around you and wonder if you’ll ever make it in business?
Take business shows, for example. If you attend one you’ll see a plethora of small businesses, from florists to gyms. And lots of marketing and IT firms.
What’s going to make one succeed and another fail? And how will any of them compete with local and global competitors?
The first thing to see is that at least all of them have started something. You can’t succeed unless you start. That’s a basic rule.
Once you get past that, however, you start to see some basic truths.
Many businesses have a natural ceiling. A restaurant, for example, can only serve a certain number of meals every day. They can raise their income by maximising the flow through their restaurant and by raising prices.
At some point, they’ll reach a peak and they can’t go past that without raising their ceiling somehow. That probably means starting more restaurants or serving faster food.
Now, whatever they do, they are still anchored by the economic structure of their businesses. The question to ask yourself is what that means for you.
And there is no better place to start than Warren Buffett, and what he had to say in his 1983 letter to shareholders about goodwill.
Goodwill in this sense has nothing to do with emotions – to how someone feels about you – and in a sense it has.
Let’s say you’re starting a restaurant. I looked at one a number of years ago – a family business came up for sale for around 30,000 pounds.
We’d eaten at this place a number of times. It served good home-cooked food and we probably spent around 40 pounds for a meal for four, or 10 pounds each.
They probably served around 20 people for a sitting. Maybe they had two sittings a day and were full mostly on Friday, Saturday and Sunday.
So let’s say they made around 20x2x10x3x48 = 57,600 a year. After salary costs, perhaps they had a profit of nearly 10k.
So, if I invested 30k I’d make my money back in three years. A good rate of return?
Now, this place got taken over a few years ago, and the food went from simple home-cooked to a gourmet experience with a well known chef. The price for a table of four ended up being more like 160 pounds. On the same math, this results in a turnover of 230,400. The profit, rockets from 10k to more like 180,000.
My payback can be counted in months.
That gap – that’s what shows there is goodwill.
And what creates that gap?
One word. Reputation.
I was watching a documentary about Sheffield and its steel-making history. Why is Sheffield Steel so well known? Was it because the city made shoddy stuff? Or because it made some of the best quality steel in the world from the start?
No one can compete with factories staffed with cheap labour that make commodities. In the early part of the century British factories dominated global markets for textiles, helped by laws that undermined local competition.
In India, Gandhi took a stand and asked people to use locally made goods. He started by weaving his own garments.
What he made wasn’t better quality than machine made stuff. But his voice made a difference – his reputation led a country to boycott foreign goods and buy local instead.
These days it’s the West that looks anxiously at the great factories of China and wonders how it can compete with a tidal wave of cheap product.
And the answer is that you don’t. You don’t compete on price. You don’t even compete on quality.
There is space for cheap products. And there is also space for the products you make.
The question is, what kind of reputation do you have?
That’s what you compete on.