This article is Part 3 of a three-part series about Graham Turner, Founder of Flight Centre.
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Applying Evolutionary Psychology to Corporate Culture
Conventional corporate structure is made of a hierarchical, pyramid structure which Skroo does not ascribe to. The reason is because it slows decision-making, adds bureaucratic layers and disrupts the flow of customer feedback back up to management. The secret formula Flight Centre employed during their rapid pace was based on the theory of evolutionary psychology written by Professor Nigel Nicholson from London School of Economics. The design of an organisation is centred around teams of 5 to 8 people which hark back to how our hunter gatherer ancestors liked to live and work as a family. Typically 5 to 8 families make a village (an informal group that helps and works with each other), and 3 to 8 villages make a tribe. A tribe ideally consists of 80-150 people. Any larger unnecessary bureaucracy starts to creep in.
On organisational design: “You can take people from the Stone Age, but you can’t take the Stone Age out of people” – Graham Turner
This is how Skroo designed Flight Centre’s frontline teams – roughly 5 to 8 team members in any new shop, belonging to a village of 5 to 8 shops, which in turn linked to a tribe consisting of about 3 to 5 villages (15 to 25 shops). The ideal tribe had around 150 people. As Flight Centre grew beyond those limits, it had to inevitably embrace a level of bureaucracy which Skroo minimised by limiting it to a maximum of 3 or 4 levels – team level, followed by tribe level, then region level, then country level. Senior management should be a maximum of 4 or 5 levels away from frontline staff.
Organisational Structure In the Context of Evolutionary Psychology
To this day Flight Centre is structured this way and Skroo remains adamant the size of its board and senior management team should be no different than a family – a maximum of 5 to 8.
How To Acquire Companies
Skroo has overseen a 20 year track record of acquisitions and proudly stands by the fact he’s made plenty of mistakes. He is the first to admit a success rate of “50/50” is not impressive, but the courage of continuing to take risks is part of why Flight Centre has been successful. It is the reason that has enabled its longstanding leadership team to finetune its acquisition criteria and continue learning from mistakes.
For starters, he eschews “renovators” where on balance more time and capital is required than one estimates. He instead prefers ready-made targets that can already contribute immediately. The premium on acquiring these companies is worth it. Its biggest successes have come from acquisitions in adjacent markets. For example, Flight Centre was able to move into the corporate travel business through a string of acquisitions; it is now one of its largest business areas.
These days, Flight Centre has significant internal capabilities to grow by itself; it will only look to acquire where there are opportunities in niche markets where it does not already have exposure. That may be in new travel segments (such as leisure) or niche geographies where there are new growth opportunities. And this is the other key lesson Skroo has learnt – acquiring is not about empire building for the sake of organisational size; it is about building an advantage in a new niche.
The Makings of a Founder
To this day Skroo remains the CEO and retains a significant shareholding. Reflecting on his own journey, I ask him the ingredients which made him a successful founder and what separated him from others. In typical Skroo fashion, he responds analytically with a sense of realism: “getting my hands dirty on an apple orchard by the age of six set a foundation for understanding small business. It’s not a requirement for success, but certainly helped me learn the basics.”
As he developed, it became clear he was a builder – 2 buses was never enough. With a dry grin he points out he was motivated to pursue life outside the family’s apple orchard because “it was so boring” and of course he pays heed to a splash of luck which helped him survive the cash crisis early on. Somehow I suspect the element of luck is less than Skroo purports.
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This article is Part 2 of a three-part series about Graham Turner, Founder of Flight Centre.
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Finding a Niche
Founders like Skroo always find a way to reinvent and adapt. Motivated by a return to Australia with his family, he looked to exit Topdeck but still had one eye on his next move. From his time in London, he noticed the travel market in Australia by comparison was relatively homogenous, controlled predominantly by big institutions who were happy selling exorbitant airfares with little competition. Skroo saw this environment as a ripe opportunity to build a niche – discount travel. He would have an edge sourcing flights from overseas airlines looking to offload tickets at the last minute given his connections in London.
The discount airfare retailers, known as bucket shops in London, was a concept not well known to Australia. At the time, airfare discounting was illegal, it was only a few years later that regulations would change and allow the market to open. As Skroo recalls, there were a few discount retailers who were prosecuted, but he was lucky to avoid this and flourish when the regulations were updated. He fondly remembers the deliberately handwriting messy promotions on shopfront blackboards as a tactic to attract the discount bargain hunters.
“Again we got into a niche that meant we could almost have as many customers as we wanted within reason” – Graham Turner
Taking the cash lessons from Topdeck, market entry was conservatively executed, preserving cash through the use of partnerships in the pursuit of an expansion strategy. When Flight Centre opened its first stores in Brisbane, Sydney and Melbourne, it did so via joint venture arrangements which minimised the amount of cash required. From those three domestic shops, they would eventually spread internationally not long after.
Graham Turner and Lawrence Lam
Going Global The Right Way
Global expansion has traditionally been difficult for many Australian companies. It was no different for Flight Centre. The difference maker was at Flight Centre, there was a group of co-founders at the helm determined to figure out and evolve their overseas operations. They also had the ability to make quick changes without heavy bureaucracy many other organisations face.
In 1989 the business opened its first overseas shops in London and California. Despite Skroo’s extensive experience in London, the shops struggled to gain traction. Skroo puts it down to two factors: timing and leadership talent. The expansion overseas was premature because in those days Flight Centre did not yet have the level of buying power it needed to acquire the cheapest possible airfares, meaning it could not offer the competitive pricing it needed to break into a new market. Its leadership talent was also quite thin which meant decision-making was made from afar in Australia; on the ground experience was lacking. The disappointing results led to the eventual closing of the London and Californian shops in 1991.
But unlike large corporates, Skroo’s operation was agile, could make quick decisions, and was determined to make the global expansion work. In 1995 they revisited the plan with a much stronger foundation. By then Flight Centre had just floated and had built up 350 shops in Australia, generating about $1 billion in revenues. With that also came a deeper talent pool of managers with greater skill and affinity to what Flight Centre was about – its corporate culture. The previous constraints which prevented a successful expansion were fixed. As Skroo puts it “this time we didn’t underestimate how difficult it was to start something up like that.”
Instead of hiring leaders overseas, Flight Centre sent, as Skroo put it “really good expats”, from Australia with a horizon of five to ten years to lead and grow the overseas operations. This tweak worked. It highlighted the importance of corporate culture and business acumen, which took years to develop. Eventually the expat would hand over to a local manager. Even today the formula for spotting internal talent has not changed – Skroo looks for those who make the right commercial judgements, reflect the corporate culture and are willing to relocate even with young families – “it is a big commitment and people prepared to make those commitments tells you something”.
It was with this approach that Skroo and his team would successfully expand into the UK and US throughout the 1990’s and would set Flight Centre on the path towards a true multinational business it is today.
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Much has been written about Graham Turner’s career and how he grew Flight Centre from a single shop in 1982 to a global enterprise generating $3 billion of revenue in over 80 countries. But not many know about the proverbial mountains he’s climbed to get to where he is today. It is through these many storms that his uncanny business intuition has been honed. In my interview with ‘Skroo’ (as he prefers to be called), we unstitch the fabric of these experiences and the lessons he’s learnt over decades in business.
Graham Turner and Lawrence Lam
Big Businesses Start Small… But Always Differentiated
Introverted, Intuitive, Thinking and Prospecting. This is the combination of descriptors that make up Skroo’s Myer’s-Briggs personality type. In their natural state, INTP types are quiet thinkers with vigorous intellects. They enjoy seeking out unlikely paths and taking an unconventional approach.
It becomes abundantly clear these descriptors fit very well with all that Skroo has overcome in his business journey. It explains why he started a business on the other side of the world ‘just for fun’ with a few mates over 50 years ago.
Just as intriguing as the why, is how he scaled from one bus in 1973 to over seventy by 1980, running tours all over Europe. Skroo tells me the story of how he purchased the first bus and launched Top Deck Travel. At the time bus tour companies were in great abundance throughout London. There was no shortage of competition. But when Skroo and his mates fitted out their first bus, he fitted them with a kitchen and bedrooms, capable of taking long-haul trips as far as Afghanistan. It came simply from the fact they wanted to see more countries on a shoestring budget, but in doing so had inadvertently stumbled across his first business lesson: in competitive markets, a subtle differentiation can open up new pockets of demand. Competitors at the time were focused on coach camping tours, not long-haul tours like Skroo’s bus. What Top Deck offered was unique and fun. Customers could cook, sleep and visit more countries, which made it an attractive and unique proposition.
A Unique Value Proposition
The ease with which seats were filled gave Skroo and his business partner a taste of early success. Although the business concept of blue oceans would be popularised some decades later, Skroo had already discovered the advantages of creating new markets early on through the differentiation of the tour experience. The unit economics were prime for scaling. At a cost of £12 in weekly marketing costs (Skroo tells me the first ads were placed in a weekly travel newspaper published in London called the Australiasian Express), Topdeck could confidently fill a bus which would deliver revenues of £1,650. Even accounting for other expenses, each trip was profoundly profitable.
Scaling became easy with the growing demand and self-generating cashflows. Two years into operations, Topdeck made £15,000 profit and had several buses touring all over Europe. Along the way, he enjoyed many free overland trips, including a 3-month drive from London to Kathmandu. Underneath Skroo’s thoughtful and calm demeanour was a strong desire for growth and success. He still enjoys winning in the game of business. As he says “Founders are generally empire builders. One bus was never enough for me. It had to be 2, 3, or 10.”
But how does a founder balance the investment required to scale, with the cash needs in the short-term? It was a question of balancing long-term growth and short-term liquidity. Initially, they developed a general rule: every bus purchase should only be made if they were confident it could be paid back in 2-3 trips. The model worked well for the first 10 years as they scaled to 70 buses but by 1980 the market changed. Skroo was about to learn his toughest lesson in business when Topdeck almost filed for bankruptcy.
Balancing Liquidity and Scalable Unit Economics
By 1980 Topdeck had seventy buses all over Europe and despite the strong growth trajectory, found itself short of cash when forward bookings in the winter were weaker than expected. And because it had a model that relied on rapid scaling and reinvestment of cash back into more buses, Topdeck became exceptionally reliant on forward bookings. It was the business’s first near death experience and taught Skroo a lesson in cash management. Its importance became abundantly clear as Skroo was turned down by banks who had no interest in financing a bus tour business. There would be no white knights. No one was going to save Topdeck in its most crucial time of need. As Skroo aptly puts it: “banks are more likely to loan money to those that don’t need it”.
They survived by the skin of their teeth only because cash from bookings originating from Australia and New Zealand started flowing through in April of 1980. The southern hemisphere booking season had come through just in time. It was a close call. Survival had come from internal cash, not external. In business there is no such thing as a deus ex machina.
For Skroo, the importance of cash is a recurring lesson he sees over and over again. Forty years on, even after he left the Topdeck business in 1986 and returned to Australia to eventually start Flight Centre, his recollection of that moment is as visceral as ever. That moment shaped how Flight Centre would manage its cash position, and the amount of debt it would hold going forward.
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In Part 1 we detailed how Jack Gance and his brother, Sam, built the sunglass and cosmetics distributor Le Specs before selling the business in 1990. The Le Specs business was originally launched as a pharmacist-to-pharmacist wholesaler, and Jack and his brother Sam were themselves qualified pharmacists with their own established pharmacies.
Separate to the Le Specs business, Jack was concurrently cultivating a footprint of pharmacies in Victoria which grew from 2 to 35 through a series of partnerships. This chain of stores would eventually be branded as the MyChemist. It would be the first iteration of what would spark the creation of Chemist Warehouse – the second phase of Jack’s career and his biggest success. It would become a pharmacy brand that would dominate the Australian market.
Jack Gance (right) with author Lawrence Lam
Creating new opportunities in crowded markets
Prior to Chemist Warehouse, the pharmacy market in Australia was fragmented and traditionally hard to scale due to strict regulations and the requirement to have qualified pharmacists on premises. That was until Jack changed the business model.
Traditionally, the local chemist was a member of the community, just like the local doctor. Roughly 70% of revenues of the average pharmacy store were from prescription drugs, and the remaining 30% being from non-prescription drugs and other health-related products.
The Chemist Warehouse model flips this script. Most sales are from non-prescription drugs such as vitamins, fragrances, cosmetics, skincare, and natural medicines. This segment, often referred to as the ‘front-of-shop’ sales, accounts for approximately 70% of revenues, whereas prescription medicines (behind-the-counter) are 30% of revenues. Readers should not misinterpret Chemist Warehouse as generating less prescription sales, but rather it sells far more front-of-shop products than the average pharmacy in Australia. Prescription sales remain on par, if not more, than the average pharmacy.
Chemist Warehouse’s growth comes from the ability to create a new market within an established industry. It does this by increasing the floorspace allocated to front-of-shop products, flipping the traditional drug-focused pharmacy model into a warehouse focused on showcasing all the non-prescription products. Jack’s retail philosophy centres around bombarding customers with such a wide variety of products that they will eventually find something that they want. “If you walk into a shop looking for a tie and the shop has three ties, you might not buy one. But if the shop has 1,000 ties, you’re more likely to find one or more that suit you”, Jack says.
“If you walk into a shop looking for a tie and the shop has three ties, you might not buy one. But if the shop has 1,000 ties, you’re more likely to find one or more that suit you” – Jack Gance
This philosophy also gives the ability to cross-sell more products. Like the Costco model, customers of Chemist Warehouse often walk out buying more than they intended simply because of the overwhelming product range and overt signage which serves as a reminder of all the forgotten shopping list items. On average, the revenue of a Chemist Warehouse store is roughly four to six times that of an average pharmacy store due to the velocity at which they turn over stock. This brings scale and buying power from suppliers which in turn enables low pricing for customers.
From an investment perspective, Chemist Warehouse is akin to a platform business. It’s reputation as the preeminent low-cost pharmacy brand means consumers will gravitate to their shops. They match these consumers with vendors selling cosmetics, vitamins, skincare, and health products. Their ‘platform’ is the network of 500 stores that give them the footprint to be the country’s number one pharmacy retailer.
The physical store network is connected by unified sales systems and inventory management systems which allow head office a centralised view of the platform. Like most platform businesses, they have self-perpetuating monopolistic characteristics as buyers and sellers reinforce the need to transact through Chemist Warehouse. Ultimately this creates scale and reduces inventory risk for Jack’s business. The more they sell, the lower the prices they can offer, and the more customers they win.
A founder’s connection to their business
Many pharmacy retailers have attempted to create a national chain though none have dominated the market like Chemist Warehouse.
From the outset of my interview with Jack, it’s abundantly clear he retains intimate knowledge of the business despite much of the daily operations now being run by his team of 500 at head office. He cites store sales figures from the prior week and tells me which products are trending in his stores. He receives daily reports from the centralised sales and inventory management systems.
What he detests are business leaders detached from their customers. Jack tells me about a conversation he had with the CEO of a leading Australian health company selling a significant amount of product to Chemist Warehouse. Jack asked the freshly appointed CEO, a non-founder, if he knew the name of Chemist Warehouse’s representative buyer – the key influencer who determines which products Chemist Warehouse will buy and in what quantity. The CEO was not able to. Jack asked if the CEO knew the buyer’s name from one of Australia’s largest supermarkets, another key client. “Jack, I know the CEO of the supermarket chain, but I don’t know the buyer by name. I’m a CEO of a multinational business, I have thousands of clients and it’s impossible for me to know every buyer by name”, he said.
But that is the essence of why founder-led businesses are different. As Jack points out, both Chemist Warehouse and the supermarket chain represent a significant portion of this company’s revenues. In his view, a CEO must foster a close relationship with those individuals at the heart of the decision-making process of their customers.
In search of the next Jack Gance
Jack is cautiously aggressive when it comes to business. An example is Chemist Warehouse’s expansion into the New Zealand and Ireland. “Many companies have failed with big overseas expansion plans,” he tells me, reeling off names of Australian companies that have expanded too fast overseas. Although the eventual plan is to expand into the United Kingdom, Chemist Warehouse has opted to test the market in nearby Ireland first by piloting a small number of stores.
“I don’t assume I know more than the local market,” Jack emphasises. He looks to form partnerships with local operators to minimise the learning curve and expansion costs.
Like many founder-led companies, Jack runs Chemist Warehouse with very little debt. The focus has been on positive cashflow generation and long-term financial stability, an awareness he gained from his Le Specs days which was an operation hungry for working capital.
He favours organic growth over large acquisitions. In 2017, Chemist Warehouse expanded into New Zealand with its first stores initially funded with $5 million of starting capital. New Zealand, with its less stringent regulatory framework compared to Australia, has proven a fertile ground for Chemist Warehouse’s expansion. Aside from the initial capital, the expansion has not required additional investment – the new stores continue to be self-funded by revenues from existing New Zealand stores.
With organic opportunities in abundance, very few acquisitions make sense to Jack. Like most long-term minded founders, that is exactly the way he prefers.
Jack’s style errs on self-reliance rather than outsourcing. Early on he chose to run his own centralised sales software system on Chemist Warehouse’s cash registers to centralise the sales data. The vertically integrated model is a core strategic advantage of the business. It gives head office granular visibility over the entire store network and standardises the technology infrastructure, enabling efficiency when rolling out new stores and products.
A lesson on risk taking
Jack believes true entrepreneurs are risk mitigators. He did this with the marketing deal he struck to launch Le Specs, paying no upfront costs, and instead sharing a percentage of subsequent profits, thereby reducing the expenditure outlayed in case the venture was unsuccessful. And Chemist Warehouse’s cautiously aggressive UK expansion plan has Jack’s risk management philosophy written all over it.
Though a success story, Jack has experienced his share of failures. After he sold Le Specs, Jack remained in management for two years, working with the new owner during the transition. He watched Le Tan decline under new ownership as he lost the decision-making power to reverse the trend. He attributes the experience as a lesson in the importance of maintaining good relationships with suppliers, not just customers. When the new owner took over, suppliers were strong-armed into renegotiating contracts with unfavourable terms for them. This proved successful for Le Tan in the short-term but eroded the quality of the product as relationships later deteriorated.
Companies that localise an already proven global model
Smaller niche markets may appear less appealing to investors, but even in the sunglasses and pharmacy market in a relatively small country like Australia, Jack Gance has managed to create significant value. The conventional view teaches investors to focus on markets with a large Total Addressable Market (“TAM”), but with larger TAM comes greater attention and increased competition. Instead, investors may find opportunity in companies that localise products and services that have already been proven to work overseas.
For instance, Le Specs introduced a tougher, more flexible sunglass range that was first manufactured and sold in France. Jack localised it for the Australian market after his wife Evelynne visited a trade show in France.
Similarly, he describes how the idea of Chemist Warehouse came about after having visited the “busy, in-you-face, warehouse-style” pharmacies in the US during the 1970s.
The localisation strategy epitomises Jack’s focus on risk minimisation; adapting a proven model overseas is much less risky than creating an untested one.
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Jack Gance is a rare entrepreneur who’s created not one but two dominant market leaders from scratch. He built Australia’s leading pharmacy retailer, Chemist Warehouse, after founding and ultimately selling Le Specs, one of the top brands in fragrances, cosmetics, suntan lotion and sunglasses. Throughout my interview with Jack, he sprinkles lessons in getting businesses off the ground with limited capital, on how to create and extend strategic advantages, building businesses over a long horizon, as well as the importance of making fair deals with suppliers.
Jack Gance (right) with author Lawrence Lam
Getting your foot in the door
Within the opening few minutes of our interview, it becomes apparent Jack chooses to take calculated risks in areas where he has a strategic advantage. ‘What exactly do you define as a strategic advantage?’ I ask. In a matter-of-fact tone, Jack explains it’s about getting yourself into unfair fights.
For example, the Le Specs sunglasses business was launched as a pharmacist-to-pharmacist wholesaler. Jack and his brother Sam were themselves qualified pharmacists with their own established pharmacies. Jack had the insider’s advantage of being a relatable colleague familiar with how pharmacists should position the product. Jack was able to distinguish Le Specs, which had a unique feature of being unbreakable, from the hundreds of other sunglass products and distributors to garner the support of fellow colleagues.
The insider’s angle combined with a unique product proved to be enough of a differentiator to give Jack the leg-up he needed. He knew how to price the sunglasses, and he could coach his sales team on how to maximise sales.
A story he recalls involves a time when he would ask pharmacists to step on the sunglasses to demonstrate why they would appeal to the masses. He would also encourage them to repeat this in front of customers – a way to grab their attention.
Combined with the attractive wholesale prices, Le Specs was an immediate success. And as any founder would, Jack pressed on further with an innovative marketing deal which would propel the brand on a national level.
Getting the first break with limited capital
Jack recalls approaching an advertising agency in 1979 to propose a unique marketing deal (at the time he didn’t have the capital to invest large amounts into advertising). Instead of Le Specs giving the agency a large upfront fee, the agency would receive a percentage of sales. In return they would help brand, launch and create the advertising for the product. Jack won them over by ‘throwing the sunglasses on the ground and stepping on them’ – to demonstrate the uniqueness of the product.
The deal incentivised the advertising agency and it went above and beyond to promote the product, finding extra TV marketing slots for Le Specs that otherwise would not have been filled. A year later, Le Specs expanded nationally, having established itself as the market leader in tough and affordable sunglasses.
The marketing deal allowed Jack to limit his initial capital outlay, de-risk the venture and create an incentive structure with the advertising agency that would allow Le Specs to gain national brand recognition.
By the time competitors started entering a year later, Le Specs had already established a substantial lead in market share and support from customers. As Jack says, ‘the advertising deal gave us the break we needed to kickstart our operations’.
Minimise initial risk and capital outlay, gain a foothold and expand your strategic advantage over time – this is the modus operandi that would resonate through Jack’s career.
Expanding your strategic advantage
As more competitors entered the market, Jack had to secure exclusive distribution agreements from the French manufacturer. On one trip, he flew to Lyon to meet the manufacturer to convince them he should be the sole distributor in Australia of its unbreakable sunglasses. Exclusivity helped to temporarily prolong Le Specs’ first mover advantage, crucial in the early stages of the business. Over time, more manufacturers appeared but Jack could only secure exclusivity deals with so many. He could see Le Spec’s strategic advantage was under the microscope of its competitors, soon to be studied, dissected, and replicated. But Jack had other ideas to broaden his business. He was already thinking about the next horizon – In his mind the key question was:
Is Le Specs a sunglasses business, or is it a distribution business?
With the leading brand name and national sales channels, Jack saw Le Specs as a distribution business first, which just so happened to sell sunglasses. And with this conclusion, the way he needed to expand his strategic foothold was to sell another product to his customers.
It was Jack’s intention to diversify into a winter-orientated product to balance out the summer-heavy sales of sunglasses, but he struggled to think of any promising ideas. Instead of taking a dogmatic approach, Jack went with developing another summer product – suntan lotion. Yes, it meant his sales profile was heavily tied to the summer season, but suntan lotion had the advantage of being an easier sell. Jack’s orchestrated sales process made sure every salesperson pitched a bottle of suntan lotion at the same time they sold a pair of sunglasses. The lotion was branded Le Tan, designed to ride off the positive branding of Le Specs. It worked. Sales grew organically as the product range expanded.
With the self-clarity of knowing he was running a distribution business, not a sunglasses or suntan lotion business, there was an impetus to keep rolling out new products. The next idea was the perfume market, which was a much larger market and traditionally sold through department stores, not pharmacies.
This led to the acquisition of Australis, a brand which had historically struggled to grow. The reason, in Jack’s view, was because Australis’s branding was competing head on with fragrance brands like Chanel and Dior. The branding was too serious; Australis would always lose in a battle for sophistication. Instead, Jack emphasised the need for products to create a ‘smile factor’ – he was going to counter the strategic advantage (and million-dollar marketing budgets) of the well-established European brands, with a fun factor with which they could not compete. He commissioned artwork from Ken Done and progressively launched variants of Australis products each year. Australis was followed by Australis for Men, which was followed by Love Is Australis. Sales volumes were stable each year, but the growth came from expansion of new product lines.
Jack gestures the size of each market to me. ‘The sunglasses business is this big, the suntan lotion business is this big, the perfume market is this big,’ his hands widening as he describes each market. And finally, he describes his eventual move into cosmetics and widens his hands even further. ‘And that’s why I decided to move into the cosmetics market with Colours of Australis, which is this big.’
With each product launch, Le Specs’ offering broadened. Concurrently to the growth of the distribution business, Jack and his brother Sam would simultaneously expand their footprint of pharmacies which went from 2 stores to 35 while the distribution business was expanding in its own right. This chain of stores would eventually be branded as the MyChemist chain of pharmacies. The hidden benefit of running both a distribution business and a chain of pharmacies was the inside knowledge of which products sold best. The pharmacies owned by Jack were used as testing arenas for different colours of eye shadow, lipstick and makeup – once demand was established, the new line would be sold externally to other pharmacies.
Fine tuning the optimal business model
There are businesses that face more structural headwinds than others. For example, some businesses generate revenue on a per hour basis, which naturally limits how truly scalable the model can be. That is not to say these businesses cannot be profitable and successful, but they face greater challenges and are more vulnerable to adverse market conditions. This was the nature of Jack’s distribution business.
As revenues grew, the working capital required to manufacture and pre-order the sunglasses, suntan lotion, cosmetics and fragrances snowballed. This business model required a large outlay of cash each year, with cash sales received sometimes up to one year later. There would be a build-up of debtors over the year. Compounding this headwind were the banks, who offered working capital financing but required a personal guarantee from Jack and Sam. The larger the business grew, so too did the working capital outlays. It made Jack uncomfortable knowing that he was personally vulnerable to any unforeseen changes in market conditions.
In 1990, twelve years after he started the Le Specs brand, Jack received an offer to sell his business. He and Sam didn’t hesitate to accept, knowing the buyer had much deeper pockets to absorb the working capital requirements. At the time of the sale, Le Specs, Le Tan and Australis business were one of the largest cosmetic distributors in Australia.
The experience gained from the distribution business would serve Jack well in years to come. Jack and Sam had a group of 35 pharmacies in various partnerships and re-focused on growing those to 50 stores. It would be the early formation of what would become Chemist Warehouse – the second phase of Jack’s career and his biggest success. It would become a pharmacy brand that would dominate the Australian market.
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Part 2 of this feature story on Jack Gance will appear in Morningstar and Firstlinks.
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