Today we are looking at Mr Price’s ~R460m (“1% of Mr. Prices market cap when deal was announced”) deal to buy Yuppiechef and what we can learn from it. Often times I speak about these lessons in separate places but today we can see them all together and how they lead to success.
Yuppiechef is a 15-year-old “omnichannel” (multiple sales channels) kitchenware business: e-commerce retail (70% of sales) + wholesale (15% of sales) + 7 brick and mortar stores (15% of sales) that sells kitchenware and related products aimed at upper-income consumers. Yuppiechef is privately held so we don’t have any publicly available financials to look at what kind of premium Mr. P paid.
- Prior to Yuppiechef’s formation, the founders dabbled online with single product businesses, starting with an electrified racquet that killed flies and then flags.Started Yuppiechef in 2006 as a side business selling kitchen tools.Started with 32 productsMade 11 sales in the first four months (10 to friends and family)After 1 year they had 200 customers
Initially had no capital and new stock was funded from successful sales
Worked from one of the founder’s lounge in Cape Town’s southern suburbs for many years before opening a warehouse
Took five years before founders could draw a salary
Took minor investment in two transactions in 2011 and 2013 from Tiger Global Management (same guys that invested in Takealot, bidorbuy, Private Property).
From the above we can learn a few lessons, some we know already:
- It takes a long time to build a sustainable business, many years
- You need patience and anything that interferes with patience such as you need to live within your means, if these guys had the quick buck mentality like most of South Africans entrepreneurs would they have persevered this long? No, they would not
- You take capital to grow not start a business, Yuppiechef was 5 and 7 years old already when they took external finance, they had traction already. Regardless if they had gone to investors too early, two things would have happened: ( 1) too soon and investors would have dismissed them for having a “hobby” and not a business, (2) too soon after traction and investors would have taken major equity due to “early risk before they have fully proven themselves in the market”.
- You don’t need to start with large, expensive premises if your business has not proven itself. I often preach heuristics, your next move is dictated by reality, not some pie in the sky dreams of “I need to have 1000 products, I need a warehouse”. This is not Silicon Valley.
- “Who you know” in business does not need to be influential, you can tell friends and family about your business and ask if they need products. So maybe before they had friends and family that bought utensils from Woolies, now they can buy from and support a friend. It’s business, not charity.
Yuppiechef Business Model
Yuppiechef is a focussed differentiator on Porter’s strategy scale:
“A focused strategy keyed to differentiation aims at securing a competitive advantage with a product offering carefully designed to appeal to the unique preferences and needs of a narrow, well-defined group of buyers (as opposed to a broad differentiation strategy aimed at many buyer groups and market segments). Successful use of a focused differentiation strategy depends on the existence of a buyer segment that is looking for special product attributes or seller capabilities and on a firm’s ability to stand apart from rivals competing in the same target market niche.”
So we know Yuppiechef, they have a good reputation, they organized, they customer focussed, their prices sell at a premium to identical products available in mass-market stores but people still pay the premium. But they do also have some niche products, I would liken them to Faithful to Nature in that regard. Many Faithful to Nature products can be bought at Dischem or Clicks for cheaper, but they specialise in efficiency and in selling niche stuff to people who care about and will pay a premium for “natural” and “earth-friendly” products.
Yuppiechef sells high-end kitchen equipment to upper-income consumers. Or do they?
The target market
A yuppie is slang for “young urban professional” or “young upwardly-mobile professional” while this term is sometimes used in a negative context or derogatory (making this an interesting choice for a brand name), within business it refers to a market segment of young urban professionals.
Many of us fall into this trap when we measure premium target markets in South Africa, we assume the market is small because the vast majority of people in SA live in poverty. But we often underestimate the poor’s willingness to waste money on stuff they cannot afford.
South Africa’s poor aspirational brand mindset
An aspirational brand is defined as “a brand or product which a large segment of its exposure audience wishes to own, but for economic reasons cannot”.
What do we know about the majority of South Africa’s poor? They like to live above their means, keeping up with the Tweeters, from satellite TV to food to fashion to kitchenware. The latter is what players like Yuppiechef are benefiting from. We assume that Yuppiechefs clientele is an accountant from Century City or a housewife from Constantia, but just like we’ve seen with the popularity Levi’s and Air Jordans on the Cape Flats, Italian shoes in the townships we are now seeing Smeg and Le Creuset in the council houses of working-class people.
People are calling this deal mismatched almost like Mr. Price and Yuppiechef customers are mutually exclusive, who said they don’t share clientele? It is likely that Mr. Price is aware of the foolishness in the local market and they decided to roll the dice. We don’t know, many people can be forced to shop at Mr. Price because they spending all their money on high-end kitchenware. And as entrepreneurs, we often make this mistake when targeting markets.