Growth

Don’t be bean-counted to death

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A salient story about shying away from innovation in tough times makes sobering reading.

 

Plus ca change, plus c’est la même chose is the quotation made famous by the French journalist Jean-Baptiste Alphonse Karr, which roughly translated means “The more things change, the more they stay the same”.

 

I came across a classic example of this during the week. By an amazing coincidence I was reading a book about the history of champagne (no coincidence about that because of my idiot passion for champagne and all that goes with it) while consulting to a joint venture partner of a business where his joint venture partner was a private equity investor. Can’t see the relationship? Stay tuned.

 

Louise Pommery was an amazing woman. She was married to Alexandre Pommery who co-founded the firm of Pommery-Greno, which originally was an agricultural and wine making company in Champagne in France. The wine that they produced was mainly red.

 

In about 1860 Alexandre died and his wife, Louise, took over the wine producing division of the business and concentrated on the production of champagne. In those days, champagne makers added sugar to the wine after fermentation to bring a degree of sweetness to the wine and it was amazingly popular.

 

Louise didn’t like the idea of artificial treatment of the wine and she was aware that the English, who were big clients of champagne, tended to use port as an after dinner drink because of its sweetness with the result that champagne had to compete with port. Louise didn’t like this at all and said she was going to produce “dry” champagne.

 

She inherited from the business conducted by her husband a great financial controller (although in those days, they tended to call them “bookkeepers”. These days we call them “bean counters”). This financial controller kept a close eye on the pennies (sorry, “francs and centimes”) with the result that the business was flourishing and in great financial shape.

 

When the financial controller of Pommery-Greno learnt that Madam Louise intended to depart from decades of successful tradition and embark upon the production of a new style of wine, he pointed to the financial statements. “Are you mad?” he implored M Louise, and asked her to desist from her fantasy for fear of sending the business broke.

 

Madam Pommery was not persuaded by the numbers for three reasons. First, she said that the house of Pommery was doing what all the other champagne houses were doing and she wanted to be different. (Michael Porter, the Harvard guru on competitive strategies came along a century later.)

 

Second, she believed that the addition of sugar was artificially interfering with the process of the wine and that the wines of champagne ought to be able to stand on their own authentic feet. Third, some of her customers in England were making noises about having the champagne drier and she spent each day reading and responding to the correspondence from her customers.

 

So, she told her bean counter to take a back seat. For a while he was gleeful. Her new direction was not working. She said to him “if I have to run a business when I am doing the same as everyone else, then I might as well sell out and go into another business. I will stick with what I think is right and what I think the customers will appreciate.”

 

Guess what? Today, most champagne that we drink is dry and unaffected by artificial ingredients. The house of Pommery became one of the great champagne houses and pulled the francs in like you can’t believe. In fact, so fast that the financial controller had to employ people to count it.

 

So, my joint venture client called me in because he simply could not get across to his private equity partner that you have to be different. The premises needed an upgrade from the one that was done in 1981; the unused premises next door were just aching to be used, so that you could grow the business, but the joint venture partner thought that it was too speculative and it would be better to rent the premises.

 

People who had worked in the business for 10 or more years left, because the private equity people worked out that they could reduce the cost by introducing a different HR regime and salary structure. Capital expenditure was put off so that the bottom line would be better. The private equity bean counters had a field day and cut the guts out of the business and at the same time witnessed a constant deterioration in the customer base.

 

My client had quite a unique presence in the market and did things differently, but the bean counters wanted to do things the way everyone else was doing things and keep the cost and risk under control.

 

The bottom line kept sagging. Perhaps if they could read about the widow Pommery they might surrender the management of the business to someone who wants to differentiate and grow, but instead, the kiss of death seems to be more attractive.

 

Amazing coincidence? Not really, it happens every day.

 

 

 

Louis Coutts left law and became a successful entrepreneur. His blog examines the mistakes, follies and strokes of genius that create bigger, better businesses. Click here to find out more.

To read more Louis Coutts blogs, click here .

 

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