A Half-Baked Strategy

Use this story if you need to show how important it is to think hard about what different kinds of customers really value, and what it will cost to service them. It might also come in handy if you need to warn against killing the goose that lays golden eggs before you’ve got a really, really good idea of where to find another one.

Many years ago, there was a bakery wholesaler with branches all around the country. This wholesaler – let’s call them BW – sold the main ingredients for breads and cakes, as well as a number of specialty additives. BW’s largest customer group, and its most profitable, were small-medium bakers including specialty confectioners; they also did a little business with keen home and craft bakers. One customer group they’d never had much luck selling to, however, were the very big buyers, like factory bakers and large bakery and fast food chains.

BW’s salesmen, based in the local branches, called regularly on the small bakers and confectioners, and the branches delivered regular bulk loads of flour, sugar etc to the bakers’ premises. For ad hoc items and urgent top-ups – and often just for the pleasure of a break from the isolated world of the hot kitchen – the bakers would drive to the branch.

Of course, BW faced a number of competitors. These ranged from other national wholesalers through to local independents focused on the trade baker, with supermarkets a key competitor for the home baker.

Stan the Man

Then, one day, a new boss arrived at BW. His name was Stan. Soon everyone knew that Stan was a Man With A Plan, and that his Plan had four steps.

Step 1: reduce sales and distribution costs, and cut stock.
Step 2: reinvest the savings into growing new business with both the biggest customers and the smallest home bakers.
Step 3: convert the resulting higher volumes into lower prices from suppliers.
Step 4: rinse and repeat.
[As Plans go, it wasn’t all bad.]

And because Stan was a careful man, he was going to pilot the Plan in one region first.

They got to work.

The pilot

They built a distribution centre and pulled a lot of the slower moving stock and the bulkiest items into it. The stock holding reduced (tick)…only BW didn’t shed any of the newly freed-up space at the branches. The fact that they still expected suppliers to deliver reduced quantities to the branches meant the suppliers also resisted any effort to cut their prices.

They pulled the salesmen out of the branches and based them at the DC. This successfully reduced the number of sales managers (tick)…only half the salesmen now had much further to drive.

Believing their overall costs were set to fall, and with a new capability to deliver large volumes from the DC straight to customers’ factories, BW charged full tilt at the large baker segment. It was no surprise to them to find that these big customers were fixated on getting the lowest price and would regularly switch suppliers. The unexpected weevil in the biscuit was when BW discovered just how rife bad debts were in this segment.

Switching their attention to building up the higher margin business with the home and craft bakers, BW next refurbished selected branches and added many new stock lines. That cake sank when it became clear that not only did the retail business require substantially different customer service and merchandising skills to the BW norm, but most of the stores weren’t in convenient retail locations. Home bakers stayed away in droves.

Golden goose – cooked

And while all this was going on, what about the little bakers and confectioners who provided the lion’s share of the profit? The smaller customers who, if treated right, tended to be loyal and rarely had bad debts, and didn’t need fancy locations?
They packed a big sad. Most of the things they valued had been eroded. Sure, the prices hadn’t changed but:

  • The branches no longer stocked many of the bits and pieces they needed occasionally and in a hurry. The replacement service, namely the courier from the DC, could never arrive as fast as a quick trip to the local branch
  • On the rare occasions when they did drive to the branch, they found it cluttered with irrelevant SKUs and branch staff distracted by serving home and craft bakers
  • Some of the sales reps had less time to spend on their calls because of the extra driving
  • With none of the reps in the branches, the social glue of Friday drinks at the branch and friendly chat disappeared. The bakers got less love, and they didn’t like it.

The longer the pilot progressed, the more of them drifted away to the competition.

As the profitable customer group shrank, BW was left with razor thin margins from the biggest customers, and expensive-to-serve home and craft bakers.

You could say that thanks to Stan’s Plan the flan really hit the fan.