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

RULE 6
We have been called "the king of naming," but we maintain that the name of a company is not the most important thing.

People often ask us the same question: "Why did you bother creating a new brand for supermarkets and investing in its development? After all, Izbyonka was already a household name that enjoyed the trust of its customers." This is a logical and fair question.

As we were thinking about the look and feel of our initial supermarkets, we needed to get rid of the annoying vestige of peasantry and farming, which had dogged Izbyonka throughout its existence. With the new brand, we wanted to emphasize the modern aspects of this project; its progressive character and tech savviness. In other words, we wanted our customers to understand that we were not some outdated nineteenth-century outfit, but we were a young and brave bunch, dedicated to proficiency in the best practices from around the world.

Izbyonka had completely different associations, all of which were nauseating by this point. To the average customer, the name evoked a cozy grandmother from the countryside, who lovingly milked her cow in the evenings, then climbed into a worn-out car in the early dawn and drove the milk to Moscow. When we leveled with our customers that this idealized grandmother existed only in their imagination, they always shouted, "How could Izbyonka mean anything else? More than anything, Izbyonka means grandmothers, and cows, and villages…"

AFTER "IZBYONKA," WE WERE AFRAID OF NOTHING; IN COMPARISON, EVERYTHING WOULD BE AN IMPROVEMENT.

This is the reason we decided on a new name, and that is how VkusVill began.

Of course, we could have produced a clever little backstory to explain the origin of the VkusVill name; a legend with hidden meanings or a secret message that we wanted to publicize by our name. But VkusVill's name appeared out of desperation.

We spent much time discussing the concept of our new stores. We understood how they would look, what they would sell, and who would work there. But we could not figure out what to call them.

Our trip to London had impressed us with the unique characteristics of British retail, and upon our return, we were brimming with enthusiasm to begin. We could no longer carry on without a name.

Andrey Krivenko joked, "After 'Izbyonka,' we were afraid of nothing. In comparison, everything would be an improvement." But we were stymied and could not come up with a name.

We had to register our brand name in all the product categories, so we needed to produce an imaginative name without possible crossings. We offered many options, but the patent office rejected 99.9 percent of them as they compromised other brands already registered in Russia.

We called in the marketing agency, Brandtime (greetings, Vladlen!). We tasked them with finding us a name with lightning speed and registering it. It took about a month.

There was a great deal of back and forth negotiations, but we finally settled on "VkusVille," with a soft "L" at the end, which contains the Russian word for "taste" and the notion of "village"; and the general connotation is "tasty village" or "a village with taste." But we could not register the name, as there was already a "Vkusavelle" registered elsewhere.

An excerpt from an email sent by Alena Nesiforova (13 January 2012): "By the way, 'VkusVille' got rejected; there is some 'Vkusavelle' out there… We are rushing to produce a new name now."

Only then did VkusVill appear.

Mind you, the stress should be on the first syllable – "Vkus" in the word VkusVill – but even our employees ignore this rule, so we have made peace with both versions.

The name took off: it is easy to remember and evokes all kinds of associations. Occasionally, we get a note from some wit wondering whether we were high when we called our companies Izbyonka and VkusVill.

We just smile, confident in our belief that the most important thing is what a company does, not what it is called.

RULE 7
Understanding how experienced you have become is simple: if you analyze what you did a year ago and realize that now you would do something a bit differently, it means you have grown.

On 15 June 2012, we launched the first two VkusVill in a soft opening: customers could make purchases but we did not publicize our store launch. That enabled us to shut down the stores if something went wrong. By 17 June 2012, each of the four original stores was officially open. We still remember the addresses of the first four stores by heart:

● Lyusinovskaya str. 36/50 (near "Dobryninskaya" metro station)

● Trofimova str. 35/20 (near "Kozhukhovskaya" metro station)

● Bolshaya Spasskaya str. 8, building 1a (near "Sukharevskaya," "Prospekt Mira," and "Komsomolskaya" metro stations)

● Dubki str. 2a (near "Timiryazevskaya" metro station)

We chose these locations based on the established presence of a successful Izbyonka in the district and their relative proximity to the city center. We thought the first VkusVills should open inside the Third Ring Road so that customers could stop for groceries on their way home from work. Later, we understood it was useless to break into the city center: VkusVill was a store for suburban communities, although our primary customer travels home from work by public transportation, not by car.

As always, we had opened in a rush. The cash registers froze up, refrigerators switched off, and delivery trucks were late. Every disaster that you can imagine happened, but still the first four VkusVills opened their doors to customers.

Today, we cannot help but shed a tear when we look back at the shelves and storefronts from that time. Only the milk section offered anything like a choice. The widest selection! But in all the other categories, there was a distinct scarcity. Our new technicians could not source enough quality suppliers who could provide products with the proper ingredients. The inventory in the four stores was laughable, and many of our suppliers were not ready to amend their ingredients and recipes for such minuscule orders. But we cobbled together some range of commodities on the fly.

Our stores' range of commodities included just over 200 items (today the total is around 2,000). We had to resort to "spreading" the same goods along shelves to conceal how empty they were, a well-worn tactic from the 1970s in the Soviet Union during acute food shortages. Our first customers commented, "Back in USSR!" It stung, but we agreed that an entire shelf of just apple juice and five-liter water jugs could not invite any other connotation.

To develop VkusVill, we recruited the two top sales assistants from Izbyonka.

"Neither of us understood how to work in a self-service store. We were used to our little stands with the small inventory we knew by heart. Here, there was a real supermarket, with lots of new products," recalls salesclerk Elena Pozhidaeva.

"There was a lot of bustling around and unnecessary worry, but from the first day of working at VkusVill, I could tell that it was the store for me. I was responsible for its success. We did not sleep at night, we were too tired to talk to our families, but we felt amazingly fulfilled with the work that was going on – it was a memorable time of my life."

Local retail manager Tatyana Berestovaya adds: "The company's primary source of income was Izbyonka, and we could not abandon it. We had to combine opening the new stores with our regular work at Izbyonka. During the launch of VkusVill, I slept two to three hours a night. I would come home late, lie down, and not remember if I had changed my clothes or not."

The salesclerks of VkusVill stuffed their first customers to the gills, as if it were a cruise ship buffet. We knew from our experience with Izbyonka that sample tastings were the best way to sell unfamiliar products to customers, so we relied heavily on well-stocked sample tables throughout the stores. Salesclerks kept up a brisk pace, steaming, frying, boiling, and cutting something or other, and the customers ate and ate and ate.

We launched our loyalty program, "Давайте дружить!"^[5] (Davayte druzhit!) with the rollout of the first VkusVill stores. We gave all Izbyonka customers free bonus cards. Over time, the loyalty program changed many times and became a valuable tool both for us and our customers. But at the beginning, the principal purpose of the program was to entice Izbyonka customers to the new VkusVill stores. At Izbyonka, they could earn points on their cards to spend at VkusVill. In our naivete, we thought this strategy would see people go all the way across Moscow to one of only four VkusVills to spend their 150 bonus points on berry juice or bread.

WE MOVED ON, MADE MISTAKES, AND TOOK A HIT, BUT WE BUILT THIS PROJECT. AND WE DID IT ALL WITH INCREDIBLE ENTHUSIASM AND ENERGY.

Alena Nesiforova, our irreplaceable unified concept manager, puts it well: "During the launch of VkusVill, everyone involved gave their all. If we had planned everything ahead of time and thought through our actions several steps ahead, I am not sure whether everything would have worked out. Each day, every single employee at the company brought their ideas, thoughts, and words into work. Each new plan was born out of an argument, but that is exactly what gave us the company we have today. The VkusVill project was created half a year before the stores opened. For a new retail format, this is record time. But the real work began after the first stores opened, when we were putting out fires left and right: the wrong selection, the wrong buildings, the wrong design, the wrong loyalty program. We changed the first four stores past the point of recognition. What we had then and what we have today are two completely different projects. We moved on, made mistakes, and took a hit, but we built this project. And we did it all with incredible enthusiasm and energy."

RULE 8
An internal crisis taught us the invaluable lesson to base our work on common sense and not numbers. For this reason, we no longer use KPI or any other quantitative assessments to measure our employees' efficiency. And we never will.

We recall the summer of 2013 without relish. We nearly cancelled the VkusVill project because it almost shut down the entire company. The supermarkets were deeply unprofitable.

In comparison with the crisis of Izbyonka in 2009 – when the company was hemorrhaging money – VkusVill was not so catastrophic: Izbyonka was still doing very well, generating enough income to cover our new baby's mistakes with room to spare. We chugged along for an entire year under this model – if the money we spent on VkusVill did not exceed the income from Izbyonka and we did not see any red flags, we continued to hope everything would work out.

By summer of 2013, we had many newcomers in our ranks: buyers, retail managers, salesclerks, and analysts. Each new person came with his or her baggage and tried to execute the job as he or she knew best. Faced with the challenges of our everyday hustle and a lackluster financial situation, our focus on the customer and our unified concept eroded, and we repeated the same mistakes from two years ago.

It was hard for our technicians to find suppliers for just four stores and to convince them to change their ingredient lists, and remove substitutes, dyes, aromatics, and other additives from their products. At a certain point, the new technicians began to feel themselves being humiliated and their work was made overly complicated: if everyone else sells deli meat made with sodium nitrate, why on earth should VkusVill want to sell without it?

Our desire to sell products under our brand hampered us. It was challenging for our new technicians to convince suppliers we did not need their brands – with their cows in skirts or similar nonsense. We were after a high-quality product, not questionable regional marketing.

The executive management took their lead from technicians and opened four additional VkusVill stores. They hoped it would become more like a retail chain and would be interesting for suppliers: a chain of just four stores may not seem like a serious player, but one with eight might. And we hoped now we might see some financial success.

But in the end, those four new VkusVills nearly dragged the entire company down. Instead of managing four unprofitable stores, we suddenly had eight – all during the summer period when sales typically fall by 20 percent. Izbyonka had worked full steam ahead and went into overdrive. It could never survive such recklessness.

In this critical situation, the directors of the executive management looked for the root causes in all the wrong places. Our employees have always loved their freedom. Our company has never been characterized by its bureaucracy, employee fines, inter-office memos, and budget meetings. Trust and responsibility have always been and still are the most important values for our people. We worked that way from the founding of Izbyonka, and could not imagine working any other way.

At this point, things took an unpleasant turn as the executive management determined that the root of the problem was the excessive freedom granted to our employees, rather than the fact that there was no customer traffic at any of the eight VkusVills! They decided it was the lack of strict regulations that was stalling VkusVill and creating a situation where one person might do the work of three while the others slacked off. If we toughened the rules, executive management suggested, everything would be fine.

The peak of the crisis came that August. We did not have enough money to pay our suppliers, and rumors of our impending bankruptcy swirled around. Suppliers refused to load their product into our trucks, fearing with good reason that they might see no payment.

But this was not the scariest part. Our loyal and cohesive team crumbled like a sandcastle in a storm. "Why did we get involved with this VkusVill idea, anyway?" people grumbled, "we could have lived perfectly well by just selling milk."

It became pointless to work for VkusVill: employees did not want to spend energy and time on something that was doomed to failure. Focusing on Izbyonka and developing a comprehensible, well-known project seemed like a far more promising task.

You might well ask: why did the founder of the company, Andrey Krivenko, not intervene? Andrey did not make any principal decisions. He completely entrusted the launch and development of VkusVill to the team led by executive management; the team of Izbyonka employees and new hires. But as the ship sank deeper and deeper, truly little trust and understanding remained with those still on board.

Several years later, when VkusVill became our blockbuster project, I sat down with Andrey to talk about that period, when everything looked likely to grind to a complete halt. Here is a fragment of that conversation:

"Andrey, can you give us your version? How did it come about that we nearly went out of business in 2013?

"The problem was not so much VkusVill itself, but something larger. It was part of our experiment in self-governance. Early on, I decided that the company should not depend on my decisions. One of my mistakes was introducing a balanced indicator system (BIS), which created an ideal picture. Each top manager on the management board had their indicators, like a double-edged sword. A typical example is our account manager, Maksim Fedorov, who is the only one who still works with this system. He has two indicators: write-offs and shortfalls, and he has to find a balance between these.

"Our mistake was to expand this system to all of our employees, and only with time did we understand that a BIS only applies to mathematical models. For Maksim, it is all about math.

"We set up a BIS for the entire company. Valera Razgulyayev (information manager) told us he faced the challenge of tracking the fulfillment of BIS for all employees; when an employee had low indicators, it was time to pull them up. That was, of course, total nonsense. It was all pulled out of thin air. We got carried away.

"That summer, I purposefully did not get involved in the company micromanagement. VkusVill was spending incredible amounts of money and we suffered considerable losses. Despite this, we opened four more stores – and as a result, in August 2013, we stopped paying our suppliers on time."

"You astonish me! You talk about it as though we are talking about a minor risk of just 10,000 rubles ($134) rather than the fate of an entire company. As if we had lost it, it would be no big deal."

"No, those problems were solvable. But the interesting thing was that amid all these back payments and losses, everyone's BIS was ideal! Our suppliers were refusing to load our trucks, but employees got their paychecks ahead of time, although everyone knew perfectly well what was going on. It was an excellent lesson for us: this system failed because we needed to base our work on common sense, not on indicators."

"Tatyana Berestovaya remembers that when you returned to Moscow and understood how dire the situation was, you went white as a sheet for several months. You called all the retail managers together at eight o'clock in the morning and went through every problem together with them."

"That was not a waste of time. Thanks to this crisis, we found a sustainable model for VkusVill. Of course, it was not without its losses. We downsized sales staff, and Aleksey Farafonov (COO) left us into logistics. But it left a bad taste in my mouth: if the BIS model would not work for us, we had to find something that would.

"It was when we remembered Gary Hamel's article, 'First, Let's Fire All the Managers'.^[6] I kept going on about the idea of building a company without managers. Afterward, there was Laloux with Reinventing Organizations, Taleb's Antifragile, and so on.

"The self-governance system works well for us. I have been an outsider to the company for some time now. I do not even take an active role on the management board anymore; all the urgent questions ultimately get to me, and we implement new projects on the ground level."

Back in 2013, Andrey had to micromanage the company and submerge himself in key divisions work. The first self-governance experience for the organization was a fiasco, but this just got Andrey more excited.

After returning to "power," Andrey put the question bluntly: "What are we going to do? Close VkusVill and forget about it, or put it on life support and try to bring it back?"

At that moment, after all of our arguments and disputes with each other, we realized it would be a colossal waste of energy to stop then. It could not be possible that we had spent an entire year sweating, losing sleep, and forgetting to eat, only to lose everything so meaninglessly.

We relaunched the VkusVill project.

"Big money destroys all good beginnings. We just took the money away from VkusVill. And it somehow survived," Andrey Krivenko said five years later at a talk for readers of Republic, an online portal. Everyone laughed.