Crazy John’s was a brand that Australians loved. Today, it is gone for good.
The reseller company was the brainchild of the late John Ilhan. He started with one shop reselling Telstra services and products and grew his business to 120 outlets with 900 staff and $200 million turnover. In 2007, Ilhan died tragically while jogging at age 42.
His widow Patricia sold the company a year later to telecommunications company Vodafone for a reported $200 million. Five years later, Vodafone has managed to destroy the entire value of its acquisition. As management follies go, that is significant one.
Admittedly, Patricia Ilhan’s timing was perfect – just before the global financial crisis unfolded.
And the writing was on the wall for resellers, even before the GFC, says independent telecommunications expert, Paul Budde. “Go back 10 or 15 years, and resellers made a profit of 20% to 30%. Now they make 5% and a lot of telecom operators says let’s not give them the 5%, let’s use it ourselves. It is no longer cost-effective.”
A decade ago, there were about 200 resellers, Budde says, and today there are about 10. But Crazy John’s is no longer one of the survivors.
We look at the leadership decisions that led to the end of an Australian success story.
Vodafone’s strategic weaknesses
Business strategy experts say firm, stable leadership is essential to successful acquisitions, and it becomes easy to predict failures. And failures are more common than successes. Studies show that most acquisitions (70%) do not generate profit or value for the acquiring company, according to Nigel Garrow, a lecturer in management (finance) at the Macquarie Graduate School of Management.
Garrow’s research shows that a company that has had the same chief executive and chair for five years or more are far more likely to be successful in the acquisitions they conduct. “Instability in the senior management in an acquirer will tend to be bad in terms of successfully integrating the acquisition,” he says. “The more stable the senior leadership, the better, and clearly Vodafone has had major problems in that regard.”
Vodafone, says Budde, is a very badly-managed company. This started with its debut in Australia, where it moved straight to the 2G network and did not resell 1G. “They relied on new customers and were never able to catch up,” says Budde. “The other providers just moved their customers from 1G to 2G. You can point back to that as taking the wrong strategy.”
The company carries a lot of debt, a situation compounded by its attempt to recoup market share by buying Hutchison Telecoms in February 2009. “Hutchison went into three different technologies, spending billions and then abandoning it all. When they merged, they had all this baggage, and no capability to invest,” says Budde.
Brendan Fleiter, a former Crazy John’s executive for 13 years, says the merger with Hutchison led to big management changes, reports The Australian today. “When the merger happened, there was a lot more interference,” he says.
Finally, like other carriers, Vodafone missed the whole smartphone revolution. All providers had expensive “portals” offering products, services and applications until the iPhone blitzed their entire business model with apps on the phone. “They were all hanging onto monopolist portal idea and trying to get all this money for 10 years, and were caught off guard by Apple. Optus and Telstra reacted quicker than Vodafone, which was in the midst of the merger, and had lots of problems internally,” says Budde.
Reselling on the rocks
The business model for reselling was already on the rocks when Vodafone bought the company in 2008. “It is the reality of the reseller market more than anything else,” says Budde. “The situation is that we are seeing the telecommunications companies having to invest increasingly in new infrastructure – 3G, then 4G – but consumers like you and I not paying more. That has to be arranged, and the only way for companies to organise it is to cut costs.
“You see that mobile is commoditised – it doesn’t really matter which plan. In a commoditised market with low margins, you need to be big. Players with a few thousand less customers can’t survive, and you get market concentrated. People merge and merge and we end up with handful of players.”
The problems with multi-brand strategies
A multi-brand strategy is a difficult one to pull off and an idea that is widely misunderstood, says independent brand advocate, Michel Hogan. “If you have separate and distinct operations, identity, deliverables and promises, that is multi-brand. If not, it is nothing more than a bunch of labels,” says Hogan.
Following the merger with Hutchison, Vodafone removed the Crazy John mascot that was emblematic of the company’s promises. “Love it or hate it, it was unique and identifiable,” says Hogan. “Those ‘brand markers’, as I call them, are a way for people to access and recognise the company. When you remove them, you are monkeying with people’s ability to access and recognise the company.
“Think about it: Qantas got rid of the flying kangaroo. These iconic elements have recognition and people have emotional attachment to them.
“In an acquisition, you are buying that affection. It always seems suicidal to me to systematically dismantle that,” Hogan says.
Companies may decide they have built relationships of sufficient strength with the acquired company’s customers to relinquish the brand. “I guess the hope is to move them over to Vodafone – [the thinking being] we have got enough connection to those customers and we will be able to move them.
“I don’t think that is true; I don’t think the people who sign up for Vodafone are the same as those who sign up for Crazy John. There is a very different underlying promise,” says Hogan.
The death of the founder’s spirit
The death of John Ilhan was a terrible blow for a brand built so closely on his personality and spirit. However, the impact of Vodafone’s ownership on the culture was probably greater, says Garrow.
Once the company was sold by his widow Patricia and all links with the entrepreneurial beginnings were cut, Crazy John’s essential nature as an innovative entrepreneurial company was on shaky ground. Its ownership by a large international company contributed to its end.
Garrow says: “It is very difficult for a relatively sophisticated international company like Vodafone to acquire an entrepreneurial innovative company like Crazy John’s. It is very different from such a highly structured organisation, and that leads to challenges of cultural assimilation.”
Hogan says the company changed so much in essence that the brand was no longer representative. “When you remove the foundation of people’s attachment, their experiences that creates that attachment, you are left with an empty shell, and it is no wonder it struggled. The removing of the picture was a symptom of a deeper malaise that led to what Vodafone is doing.
“When you gut a house you still have the shell, but it is not somewhere you want to live.”]
This article first appeared on LeadingCompany.