Looking Out For Number One
Being 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.
Jiffy Lube, like other franchisors, recorded that fee as income as soon as the check cleared. That, ruled the SEC, is no longer allowed. Since it takes the developer time to build up his territory, said the SEC, the fee should be prorated. If it takes five years to develop Cleveland, then only 20% of the fee can be considered income for each of the next five years.
The ruling cut Jiffy Lube earnings by 93% in the first quarter of fiscal 1989.
That, said investors, was bad enough. But then they looked more closely at the balance sheet and found more things they didn't like about the way Jiffy Lube had decided to grow. For example, the company has provided 100% financing to some franchisees and guaranteed the loans or leases of others. Also, Jiffy Lube has deferred $1.3 million in franchisee fees, and has given extended credit to some franchisees on the oil and filters they buy from the company. Accounts receivable more than tripled, to $8.9 million, between 1987 and 1988, when the company earned $6.9 million on sales of $78.2 million.
Investors jumped ship faster than crewmen leaving a sinking freighter. Jiffy Lube, which traded as high as 13 in March 1988, now sells for less than half that. And don't expect a run-up soon. The company has announced that fiscal 1989 is a year of consolidation, as it works to pay down debt (interest expense alone this year will be $5.2 million, or 75% of last year's total earnings) and ensure that it can manage a 1,000-store empire.
That brings us to the matter of translating vision into reality. If you're growing quickly, things can get sloppy. A Philadelphia TV station recently did a weeklong series of reports highlighting shoddy service at local franchises, and even our visit to a local Jiffy Lube turned up problems (see "Our Reporter Gets Lubed," page 3). Hindman admits he has had to buy back some outlets that were not performing, adding, "our complaint rate is infinitesimal, but, yes, we are human."
Investors may be concerned by all this, but Hindman is not. He says this rapid growth -- and correspondingly rapid rise in debt -- was to be expected. If you are going to grow quickly, you have to make the deal now. You can always clean up the balance sheet later. The perfect site for a Jiffy Lube is available for only so long. "I took the same approach that Patton did," says Hindman. "I said we are going to take every inch of ground we can, and then battle to hang on."
And besides, he adds, you can already see the benefits of being number one. Because of the company's rapid growth, Jiffy Lube has been able to put together a meaningful customer database that has already paid off in two significant ways.
Having realized that women -- especially working women -- are key customers, Jiffy Lube is making sure they'll never again be taken for granted. You'll see more women in the company's ads now, and shop-floor cleanliness is being stressed as never before. "If the place is dirty," says Hindman, "women won't go in."
Second, the rapid growth has given Hindman enough money to provide his franchisees with a computer system that can track a big company's fleet-maintenance needs. Corporate service now accounts for 12% of revenues for some franchisees.
In Hindman's view, the strategy of being number one has paid off, whatever the financial repercussions.
But the battle is far from won. Jiffy Lube still has to reduce debt and maintain market share. That may not be as easy as Hindman thinks. Since he is now three times larger than his nearest competitor -- Quaker State Corp.'s Minit-Lube Inc. -- he can expect the battle against him to be waged on price. You can already see the effects. Last year, revenue per car serviced fell a smidgen -- from $27.78 to $27.63 -- as a result of price pressure. Indeed, there is now a permanent line marked on each customer's bill on which employees can deduct for the dollars-off coupons that price competition has forced Jiffy Lube to issue. The premium you can charge as number one goes only so far.
If Hindman's strategy is right, eventually the competition will be defeated, or at least reduced to not much more than a nuisance. The question is: how long will it take?
How to behave like a market leader
While you can find handbooks on accounting, finance, and yes, even marketing, there is no primer on becoming the number-one competitor in a marketplace. Here are the rules Jim Hindman created for Jiffy Lube.
* If you're going to be number one, act like it. Hindman insists that his employees be friendly, their service quick, and their uniforms spotless. "If you look like you don't care, people think you don't care, and pretty soon you act as if you don't care."
* Be consistent. Each store or outlet should look like every other. The message should be: the quality care you got in Boise will be matched in Bayonne.
* Keep things clean. "Bathrooms to me are a very personal matter," says Hindman. "We market clean toilet seats. Clean bathrooms say something about an organization." So do gum wrappers in the parking lot and inventory thrown carelessly about.
* Get on TV as soon as you can. People may believe what they read, but they believe what they see on television even more. A critical part of Hindman's strategy was to get on TV as quickly and as often as possible. The company spent nearly $11 million for TV ads last fiscal year and is expected to spend $16 million for this fiscal year, which ended in March. This is, Hindman acknowledges, a double-edged sword. "Consumers expect that what they see on television will be what they find when they go in for an oil change."
OUR REPORTER GETS LUBED
It's nice to be number one, but can too much growth lead to breakdowns in performance?
Spelling out your ground rules for becoming number one is one thing; executing the strategy can be something else, as we discovered when we visited the Jiffy Lube on Route 35 North in Hazlet, N.J.
To get to the service bay, the driver must position his car on a grate under which employees work. One person told us to drive straight, while another said to turn the car to the left. We apparently listened to the wrong one, because both employees yelled at us. From there it was downhill.
The lead technician told us we needed our manual-transmission fluid changed. When told that our car, a 1981 Honda Prelude, had had an exhaustive tune-up just 10,000 miles before, she said the fluid still needed changing. "The manufacturer says it should be done every 7,500 miles." Based on that, we agreed to spend the additional $14.95.
It turns out we wasted our money. The owner's manual -- which we checked later -- suggests that the fluid be changed every 30,000 miles.
We couldn't even find solace by running away to the bathroom. Although the floors and mirror were clean, there was no toilet paper.
There was at least one piece of good news, however. We got out of the shop when promised.
We left with a bill of $45.48, the unneeded transmission fluid having boosted the basic $27.95 charge by more than half.
On the way out we noticed the Shell station next door was advertising an oil change for $17.99.