Case Study: Growing a business organically – Caffe Nero
Caffe Nero, which began with five stores in 1997, is the third-largest coffee bar chain in the country behind Whitbread-owned Costa Coffee and Starbucks. The business has based its strategy on a programme of opening new stores on a regular basis. Each year a number of new stores are opened and some are closed, but the net number of new stores is positive. Caffe Nero now generates sufficient cash to fund an opening programme of 40 - 50 stores without recourse to external funding such as fresh bank loans or the issue of corporate bonds. Caffe Nero is the third-largest UK branded coffee bar chain, as measured by outlet numbers. It now trades from 230 bars and is expanding at a rate of close to 40 new bars a year. The performance of the business is impressive: Turnover has risen from £26.6m in 2002 to £70.1m in 2005. The business generates a strong cash flow and high operating profit which in turn allows it to finance the opening of new stores without having to borrow money. Caffe Nero is achieving like for like sales growth faster than its major competitors in the market and it serves over 750,000 ABC1 customers every week, and has a strong brand reputation in highly competitive market place.

Tesco expands into China
Tesco plans to become the first British supermarket group to enter the booming Chinese food retail market. It has announced a £140 million deal that could transform the company into the world’s biggest grocer. Tesco is buying a 50 per cent stake in the 25-strong Hymall hypermarket chain from Ting Hsing, the biggest food producer in China. The deal gives Tesco the opportunity to take on the likes of Wal-Mart and Carrefour, the world’s two biggest retailers, which already have a presence in the communist state. The deal makes Tesco the latest in a long line of British companies — including Emap, Kingfisher, Prudential and WPP — to seek business opportunities in China where economic growth has averaged nearly ten per cent per annum in recent years.  According to Tesco, “China is one of the largest economies in the world with tremendous forecast growth"
Suggestions for further reading:
Tesco investor relations
Articles on Tesco on BBC news online

Why do small businesses continue to thrive despite the prevalence of economies of scale and multinational businesses in many markets and industries?
It is incontestable that nowadays, firms that operate on a large scale and can thereby maximise the potential of economies of scale and scope.  However, economic realities also mean that amidst the big firms there are small businesses competing in the same markets and industries.  The most striking evidence of this is the fact that there are no pure monopolies in the world today.  This is mainly due to do with the fact that there is no market where a firm can achieve a minimum efficient scale that meets 100% of its demands. Therefore, firms that are profit or revenue maximising, or even “satisficing”, would not even consider trying to create a monopoly position for themselves: it would simply be too expensive when one considers the diseconomies of scale that would result. 

Take the petroleum industry: even if Royal Dutch-Shell or Chevron or BP were operating at maximum efficiency, with the lowest possible long run average costs, that output would only meet 15% of the market’s demand for petrol.  If any one of these companies tried to expand output to try and take a greater market share, costs would begin to increase as the firm encounters diseconomies of scale.  This would be unacceptable to shareholders as they began to see profits, and perhaps even revenues begin to drop as collateral of an attempt to dominate the market.

The most striking was to illustrate this point is to look at Japan.  Businesses in Japan focus on market share rather than revenues or profits.  They are willing to sustain huge losses in the short term in order to gain a market share that will create greater profits in the long run. It is no coincidence that Japanese business is dominated by six or seven keiretsu, super-corporations like Mitsubishi that have dealings in almost every industry.  This status quo seems bizarre to those of us from Western economies focussed on the bottom line.  I believe that the reason that small firms can survive in even the most competitive markets because they are allowed to.  While it is nigh on impossible to compete with the keiretsu in Japan, even the biggest US corporations are limited by our business mentality, and while some lambaste the mercantile attitude of these firms, it is what makes a diverse market possible.     

It is worth further analysing exactly why it would be prohibitively expensive for larger corporations to squeeze smaller businesses out of the market in an effort to dominate it.  Take the supermarket sector: in Britain at the moment there exists an oligopoly dominated by Tesco.  Indeed there are worries that Tesco is on the road to having an unfair handle on the market.  However, as well as intervention by the government, the market will not allow Tesco to become the only retailer of food (and certainly not the only retailer of insurance or financial services).  Despite its attempts to become all things to all people (“Waitrose quality at Asda prices” as one advertising campaign puts it), it will simply not be able to corner every market: the cost of establishing a Tesco store wherever there are customers is not feasible.

One cannot ignore the impact of specialisation and quality.  While firms that exploit economies of scale and can become major players in an industry as a whole, there is always room for countless small firms to find a niche in which they can perform better than any other firm, including the biggest ones.  A great example of this is in the financial services industry.  There are several large players – Citigroup, AIG, Bank of America, HSBC, Merrill Lynch and JP Morgan to name a few) – however there also exist myriad small businesses that have a niche (often very obscure) in which they can perform better than anyone else.  Two examples would be a political risk insurance broker for investments in emerging markets or a hedge fund specialising in increasing shareholder value through managerial restructuring.  Both of these are highly specialised fields, where it just isn’t worth it for the larger firms to establish themselves. 

The continued survival of small firms in markets where large firms might dominate is caused by the structure of the market itself (i.e. the fall in performance associated with expanding production due to economies of scale) and factors such as such as demand for specialised or high-quality product, that can not necessarily be answered by large firms capable of exploiting economies of scale.

Source: Max Dewez, November 2005

The growth of firms – the importance of the brand
Google is challenging Coca-Cola and Microsoft for global fame after becoming the fastest growing brand in the world, only eight years after it was set up in a California garage Google now outranks Sony, MTV and Reuters in terms of worldwide renown, according to Interbrand, the brand consultancy. The $117bn (£63bn) business is ranked 24th by Interbrand, one year after it first entered the top 100 of the annual brand survey. According to the survey, Google's brand is worth $12.4bn to the company - a considerable achievement for a business that rarely advertises on TV, radio or billboards. Conventional brand-building wisdom states that selling a product to an entire country, let alone the world, requires considerable investment in advertising campaigns, sponsorship and public relations. Google appears to have dodged the old axiom about advertising - 50% of it is wasted, but no one knows which 50% - by not bothering to advertise at all and relying on the global span of the internet to spread the Google word. Coca-Cola holds on to number one with a brand value five times larger than Google's and its closest rival, Pepsi
Adapted from the Guardian, July 2006 and from the Inter-Brand web site