Diving Into the Red Ocean. How to Break the Rules of Retail and Come Out on Top

RULE 3
Hire people who you find interesting and feel comfortable with, especially at the beginning.

By the start of 2010, Izbyonka was safely off life support. Its retail locations began to pay off, and the company took its first tentative steps. It was still a start-up, affected heavily by the world around it, but – borrowing yet another medical term – we observed an improvement in the patient's condition.

That is when the key employees appeared at the company, the ones who remain at its core: Alena Nesiforova, Renata Yurash, Tatyana Berestovaya, Evgeny Kurvyakov, Maksim Fedorov, and others.

The company now lives by the rules of a unified, well-functioning organism: perhaps not an ideal one, but certainly a harmonious one. In a perfect organism, all the organs work flawlessly, as if in a laboratory. Entire systems can fail in a coherent one, but the organism will turn on its immune system's defense mechanism to fix them.

Meanwhile, the concept of "us" is developing; an important phenomenon in terms of a healthy corporate culture.

Henceforth I will use "we" to mean our collective hive mind, although I can anticipate many questions from readers: "Who are 'we'? What do you mean, 'we decided'?"

Honestly, we do not have a standard answer to these questions. At some point, it became difficult to determine who produced an idea and who developed it into a working concept, or who first questioned the viability of an idea, or the person who caught the whiff of a mood, then set a rule and was the first to follow that rule. We became such integral parts of each other that, over time, distinguishing the "I" became meaningless.

Today, if you look at the way we assembled the puzzle pieces of the small but ambitious Izbyonka team, you might conclude that it was merely dumb luck, because some coincidences are otherwise impossible to explain.

Now, Alexey Ilyichev owns a medium-sized transport company that provides delivery services for Izbyonka and VkusVill. His success story amazes and defies any logical explanation.

"I live in the Tushino district, near the mall, where the second Izbyonka opened. Once, my wife asked me to buy sour cream. She told me to look in the dairy stall there. I did not find a single dairy stall and bought sour cream elsewhere. Later, my wife brought me to Izbyonka and told me to mark it as the place she wants me to buy all our dairy from. I recall a salesperson and a young man running around with boxes, and later I realized that the young man was Andrey Krivenko and Nadezhda Spirova was the salesclerk."

Ilyichev continues: "I had already been working for myself for a long time in the (private) transportation business. Out of curiosity, I asked Andrey what trucks they drove. He answered that they were just getting started and driving products around by themselves but were looking for someone to take the job on. I gave him my phone number, and ten days later, Andrey called me back. We met at the warehouse, and he showed me products and said: 'Here is the milk, and here is the kefir.' I answered: 'Right, but what is next?' Andrey said, with a surprise: 'What do you mean, what is next? Take it, drive it, unload it.' I did not even show him my passport!"

Alexey recalls the early days, "I could not believe that Andrey just handed me the keys to his warehouse full of product! It was fun back then. Such enthusiasm! Of course, I knew from the beginning that I would not be the only driver for long, and that is what exactly happened. After we opened the sixth outlet, the question of a second vehicle came up. But Andrey stepped away from solving transportation questions from the very beginning, so I handled everything." The next story is about Alena Nesiforova, who worked as a market researcher for DuPont. Nevertheless, she swapped her business trips to Paris and Barcelona for work trips to Kaluga and Ryazan after deciding to work for Izbyonka:

"I studied at the Moscow State Linguistic University, the best linguistic university in the country, and at one point tried my hand at tutoring. I posted an advert on a website, and the first call came from Alena Krivenko (Andrey's wife). She had a lot on her plate, not a lot of time, and a need for English. I was the perfect choice, as I lived right across the street from her son's kindergarten. We started working together and understood that English was not the only thing that we had in common. We talked a lot about life. A couple of years after we met, Alena told me that her husband Andrey was planning to launch Izbyonka and suggested that I give it a shot. I agreed it was a significant risk – I was leaving a large, stable company to jump into the unknown. When I look back on it now, it seems like such an adventure!"

Nadezhda Spirova was one of the company's first salesclerks. She came to Izbyonka in June 2009 and is still working today. She has happy memories of those early days.

"In 2009, I moved to Moscow and worked at Kroshka Kartoshka^[2] for a few months. Then my sister saw an advert in the newspaper for sales staff at Izbyonka and suggested that I go for an interview. The company still did not have an office – I met with Andrey Krivenko and Dima Kozyrev in a café. I liked everything. Andrey told me to come to look at the location on Friday, and on that Saturday, I started work and have been there ever since. In 2016, I transferred to VkusVill.

Nadezhda recalls the early sales tactics of the first Izbyonkas: "We grabbed people and persuaded them to try something. As soon as a person opened his mouth, you shoved a spoon full of cottage cheese^[3] in, and while he chewed, you told him who you were and why he should buy dairy products from you. We, the first salespeople, were like the Three Stooges rolled into one. We were not afraid of being funny, and we deeply believed in the products we were selling."

There are dozens of these kinds of stories. These people, our priceless employees, were the ones who created this company. They erected this fortress, brick by brick. And they did this not because they were paid phenomenal money, or because they were being threatened with fines and punishments, or even because they were consummate professionals. It was just because each of them was first and foremost a human being, and only after that a market researcher, clerk, or analyst. Each of them created their world and did so sincerely. These people just cared.

WE, THE FIRST SALESPEOPLE, WERE LIKE THE THREE STOOGES ROLLED INTO ONE. WE WERE NOT AFRAID OF BEING FUNNY, AND WE DEEPLY BELIEVED IN THE PRODUCTS WE WERE SELLING.

And when someone asks at another conference: "What HR strategies did you use to create your team while launching your business?", we just want to walk up to that person, hug them, and wipe all those HR strategies out of their head. Life, intuition, and engagement are so much more effective than any HR strategy out there.

RULE 4
The earlier you have a conceptual crisis, the better. Izbyonka went through it for a year and a half of its existence, and this period changed the entire company for the better.

By the end of 2010 and the beginning of 2011, Izbyonka had nineteen office workers, about eighty salesclerks and assistants, and the company served thirty-one retail locations.

It was a period of radical reengineering of the Izbyonka project. The key processes were well-managed, and that allowed us to focus on the product offering. We were opening new retail locations and attracting new customers. However, we were faced with an unexpected and vexing problem. A large-scale survey of our clients showed that most repeat customers did not trust Izbyonka. They were drawn to us for our unique products, such as Mechnikov Prostokvasha (a type of fermented milk) and cottage cheese casserole, but they would have been more than happy to buy these products from better-known brands had they offered them. In other words, most of our customers WERE FORCED to visit Izbyonka. This shocking revelation forced us to examine our intoxicating success in a different light. What we perceived as the demand for our products was the lack of alternatives rather than our products' intrinsic value. That fact made the company extremely fragile and vulnerable.

Thankfully, the book Corporate Religion^[4] by Jesper Kunde fell into our hands at about the same time. This book radically changed our relationship to brand positioning. And thanks to Kunde, for the first time we considered the importance of a unified business concept.

Kunde's example of SAS was an organization with a clear and well-defined concept: "to become the best airline for business travel." Everything at SAS was subordinate to this idea, which immediately defines what planes the airline needs, which drinks to serve, which newspapers to offer, etc.

We had cherished the dream that Izbyonka would become an irreplaceable part of the lives of intelligent Muscovites and that we could change their habits and tastes. But how does a brand become a religion? Are there step-by-step instructions for the process? This is where Kunde's work came in handy for us.

The primary message of Corporate Religion is that customers are not naturally inclined to be content with advertising slogans. People are looking for a narrative or message that confirms their faith in a brand. Emotional values are replacing material values – and this is where we found room for growth.

We analyzed Izbyonka based on the algorithm that Kunde proposed: How do we see ourselves? How do others see us? How should people see us? The result was a depressing diagram (Fig. 1).

In an ideal world, all three circles should intersect. The deeper they integrate with each other, the stronger and more successful the company becomes, and the more self-explanatory the concept will become.

Our situation was the reverse: our customers did not understand what we wanted to say to them with our products: we said one thing, but the customers interpreted it in a completely different way.

We had to find a solution to this pressing problem.

The beginning of the solution was the creation of the unified concept department in 2011, which was led by – and is still curated by – Alena Nesiforova, that valiant girl who swapped Paris and Barcelona for Kaluga and Ryazan.

Alena's task was a formidable one: to develop a unified concept for Izbyonka that would convey the company's core values to its customers and rally employees together around a shared idea, just as Dr Kunde had proposed.

"It was one of the most challenging but exciting periods ever, which I am happy and proud to look back on today," says Alena with a smile. "We analyzed the positive aspects of our company and found that there were several: we offered natural foods without chemical additives, short shelf lives for products, assiduous quality control, pleasant service, and producers who were committed to our values and who hailed from different regions in Russia. But these different pieces of the jigsaw did not form a whole for our customers. They considered us to be just another dairy kiosk: if we disappeared, so be it. For the majority, it would not be a major tragedy. But our goal had never been to sell milk. We set out to change the culture of food for Muscovites. We just forgot to tell the Muscovites."

This is a common mistake among small businesses during their initial growth spurt. As the amount of work increases, employees naturally change their focus. You are doing a lot but hitting your target less frequently.

Izbyonka underwent a major shake-up. We had several strategy sessions where representatives from all the key divisions of the business met with Andrey. We agreed to keep holding these meetings until we found a roadmap for development that we all shared.

After several heated discussions, we came to a mutual agreement that we had to develop the subject of healthy eating: not in the haphazard way we had previously tried, but systematically at the department level throughout the entire company. It took several days for us to distill the essence of Izbyonka into just a few words. And then we created our current slogan: "Izbyonka – tasty dairy products for a healthy lifestyle."

Afterward, making decisions became easier and we moved forward towards our common purpose. Our buyers mercilessly "slashed" our products' ingredient lists, forcing our suppliers to remove additives that other retail chains had asked them to add. We did not care if the resulting products had short shelf lives; it was far more essential that parents felt confident about giving our products to their children.

Our development team narrowed the search for retail outlet locations, using new criteria to determine a target audience. A district was no longer assessed by the number of cars and their cost but by the number of stroller moms, who would act as the vanguard to scope out a new store with natural products.

We jettisoned terms such as "farmer," "village," and "environmentally friendly" from our corporate communications because these notions created a false impression of our brand and brought up a lot of negative connotations. The design of our retail locations changed as we distanced ourselves from our prior associations with a "peasant log cabin" and instead presented an image of a modern pavilion of green and white.

We created a newspaper for customers, which focused on the health benefits of dairy products, rather than announcements about sales and discounts. We filled the business card website with information, slowly evolving it into a web portal about healthy eating and lifestyle.

We also reoriented our retail strategy to be part of this information flow. Our sales assistants did not just sell – they educated and consulted, speaking knowledgeably about the properties of Lactobacillus bulgaricus or why kefir made with kefir grains was superior to products made with a powdered starter culture. This strategy was a real hit with our customers, who joked: "At Izbyonka, by not selling to you, the clerks sell twice as much."

The company split into two segments: the unified concept department (the conductor) and the executive management (the orchestra), and under this new arrangement, we hit all the right notes! The position of our circles in Kunde's diagram – how we saw ourselves and how our customers saw us – now intersected.

Over the year, the new concept helped us to bring in a lot of new customers. But the most important thing is that they have become repeat customers, returning again and again, not because they had no other alternative, but because they trusted Izbyonka with its unified concept. And it was through these customers that news about Izbyonka spread like wildfire.

RULE 5
When a company is at the height of success, it is the best time to think about its future – to ensure that there is one.

From 2011 to 2012, new Izbyonka locations in Moscow and the Moscow region sprang up like mushrooms. We opened over 300 successful retail locations and closed almost the same number of unsuccessful outlets. Sometimes, we vacated a rented location after just three or four days of work, forfeiting our deposit, to the astonishment of our proprietor.

Perhaps this seemed odd to outsiders, but Izbyonka's business model was to not hold on to an unprofitable store. Each active retail outlet had to be profitable to enable the opening of the next one. We knew this was the only way for rapid growth without the burden of debt.

Average sales in Izbyonka outlets were now in the target range of about 35,000–40,000 rubles (about $500) per day, with the record holders bringing in up to 100,000 rubles (about $1,350) per day. Obviously, a great deal depended on the rent, but even the first days of a new store could determine its fate; if sales reached only 4,000–5,000 rubles per day ($53–72), we would move out during the first week, wasting no more time and money on an unpromising location. If there were sales of 20,000–25,000 rubles per day ($260–335), we could jump-start the store, if the retail staff saw potential there.

Despite the apparent initial losses, this approach gave us the qualities we needed most: speed, experience, and the ability to experiment. With time, we tested Izbyonka in all the districts of Moscow and the Moscow region, and this was a tremendous boon to our development group in the initial rollout of the VkusVill stores. By that point, we seldom erred when choosing a location.

After opening 300 Izbyonka outlets, we identified a flaw in our chosen format: Izbyonka was a "suckerfish" that could not exist independently. By itself, it could not generate customer traffic and was too dependent on its neighbors. The ideal situation for Izbyonka was alongside butchers, fishmongers, sausage sellers, and bakers – a quartet that complemented Izbyonka and its dairy products, and an efficient and friendly alliance.

It became abundantly clear that Izbyonka was a dead-end project; the number of outlets would always limit its development. At this point, there were no more sites left in Moscow without an Izbyonka outlet.

Customers were also demanding a wider range of goods from us: "We believe in you, but we eat more than dairy products – add something new!" they begged us.

But even in our hypothetical efforts to modernize Izbyonka, we could not make any progress. Major obstacles were the contrasting temperatures necessary for assorted products and the threat to the quality of our products created by storing other products nearby. We also found it impossible to organize the outlets of 15–20 square meters in a different configuration.

The terms of our rental agreement in many of our locations forbade us to sell non-dairy products as part of a non-competitive clause with other tenants. And it would take a Herculean effort to reorient our customers, who depended on Izbyonka for dairy products. We could see no way to introduce sweeping changes to the range of products we sold, given our outlets' existing setup.

The idea of creating a network of health food supermarkets seemed crazy, but everything was moving us inevitably in that direction. If not us, then who? By that time, we had already embedded with the pioneering spirit; we were not going to trudge along the same path. We wanted to soar.

EACH ACTIVE RETAIL OUTLET HAD TO BE PROFITABLE TO ENABLE THE OPENING OF THE NEXT ONE. WE KNEW THIS WAS THE ONLY WAY FOR RAPID GROWTH WITHOUT THE BURDEN OF DEBT.

In September 2011, several people went to London to study British retail. Alena Nesiforova recalls, "We could not afford a dedicated retail tour to study other companies. Instead, we visited Tesco, Waitrose, and Asda stores like regular shoppers. We came at six in the morning to watch how employees unloaded goods, how they worked the cash registers, and how they served customers. We noted what we liked, and, in the evenings, we discussed how we could replicate this back home."

At a company party celebrating New Year's Eve and the start of 2012, the usually silent Andrey picked up a microphone and congratulated everyone on yet another successful year. He announced the origin of a new project that had been whispered about within the company for a long time.

"Izbyonka clearly showed that people need high-quality groceries. And we are not crazy, like everyone said at the beginning. We do many things the way we like them, and that may seem odd to others. But Izbyonka is just the beginning of the path. We have even bigger mountains to climb in our future. Let us move forward!"

His colleagues broke out in applause. It might sound grandiose, but at that moment we faced the new year convinced that we were going to change the entire world, and that the success of the company depended on every one of us. It was an incredible sense of euphoria – this is a state in which many say people can achieve the impossible.