Looking Out For Number One
Being an industry leader is the best marketing edge.
Published April 1989
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COMMENT ON THIS ARTICLEBeing the industry leader is the best marketing edge you can get, as long as it doesn't cost too much
The way the folks at Booz-Allen & Hamilton told it, Jim Hindman had three choices -- and he wasn't crazy about any of them.
In just seven years Hindman had turned a 7-store operation called Jiffy Lube into a 350-store franchise chain, but now, in 1986, the consultants at Booz-Allen were telling him that his success -- ironically -- was the very source of his problem.
By proving he could build a company around the pledge of providing an oil change and other basic car maintenance in less than 10 minutes, W. James Hindman -- a former nursing-home owner cum football coach cum entrepreneur -- had attracted the attention of the big boys. Starting in the early 1980s, some of the rental-car companies began making noises about how the oil-change-and-lube business looked like a fun place to be. Then a couple of oil companies -- which were obviously being hurt by companies like Hindman's -- got interested as well.
So in 1986 Hindman hired Booz-Allen to tell him what his options were, and the longer they talked in his football trophy-filled office in Baltimore, the less he liked what he heard.
He could sell out, of course. No problem there -- his would-be competitors would be happy to write a check.
He could pursue option two, which was to keep on opening 30 to 50 stores a year. One problem: if a company with deeper pockets entered the field, it could blow past Jiffy Lube overnight. And if that happened, Hindman's baby would be either limited to regional status forever -- Jiffy Lube International Inc. was strongest on the East and West Coasts -- or consigned to death by nibbling.
Or he could pick the third, and riskiest, alternative. He could raise as much money as possible and preempt the competition. According to this plan, he would grow so fast that no one would be able to touch him.
To Hindman, the answer was clear. At Western Maryland College, he had been the kind of football coach who always went for the win instead of settling for a tie. This would be no different, figured Hindman -- who played linebacker in college and looks today, at 53, as if he still could.
"We set out to go national," he says. "We had to be the market leader."
For a company that has patterned itself on McDonald's, the move made strategic sense. Hindman had recognized what most entrepreneurs know intuitively but never stop to seriously consider: the advantages of being number one in a market are numerous, profitable, and self-perpetuating. For example:
* You get the best locations. Since you got there first, you get to pick the best spots. Whoever follows you, by definition, is doomed to the second-best location.
* You set the ground rules. People have certain expectations of the fast-food industry, for example, because of the way McDonald's has done things (see "First Rites," page 3). Competitors have to improve on what McDonald's has created, or explain why they're different.
* You get better deals. Developers would rather have the number-one player in their strip center, shopping mall, or industrial park, so they tend to give the leader better terms. Banks want to be associated with your success -- if for no other reason than to keep your business. Suddenly, you find you're getting mortgages for half a point less.
* You don't have to compete on price -- as much. You can charge a bit more when you're number one. People are willing to pay a premium to companies that are clearly better at what they do. How do they know you're better? Well, you're number one, aren't you?
Given all these advantages, Hindman knew that becoming the market leader as quickly as possible was the right thing to do strategically. But could he do it?
The answer, quite frankly, is no one knows yet. Let's start with the question of finance.
Consider the balance-sheet item labeled "Assets Leased or to be Leased to Franchisees." That number -- which includes such items as "construction advances receivable" and "net investment in direct financing leases" -- was $57.4 million at fiscal year end in March 1987. By September 30, 1988, it had more than doubled, to $136.2 million, as Jiffy Lube has helped finance its franchisees' growth. Then there are the questions raised by the investors and the Securities and Exchange Commission.
First, the SEC. Jiffy Lube, like other fast-growing franchisors, frequently sells area-development rights to franchisees. In exchange for a nonrefundable fee up front, a developer gets the exclusive right to open franchises in a specific territory, say Cleveland or San Francisco.
