Thanks for sharing this spicy post!
It is interesting that Tabasco’s apparent barriers to entry have persisted for so long. I would imagine they have changed over time, too. During the company’s early history, these barriers seemed tied to Avery Island’s salt-mining operations (I did a quick search for Avery Island info). The access to cheap, high-purity salt with no distribution costs and on-site storage on Avery Island no doubt made it rather cost-competitive. Combining this with adherence to strict quality standards (the petit baton rouge, for example), seems a rather effective operating model.
However, as you point out, the scale of production today has required moving much of the operation to Latin America. Given the simplicity of the production process and relatively low modern barriers to entry (farmable land, high quality peppers, and labor), it is curious that Tabasco has protected its market share for so long, especially given the proliferation of hot sauces available to consumers. It seems that today’s market share would be more tied to strong unaided brand awareness. This is probably due to Tabasco’s long history and sustained market presence therein, since I do not think I have ever actually seen a Tabasco advertisement.
You mentioned the distribution network as critical to its business model. This seems intimately tied to its branding. For example, there is now Chipotle Tabasco in Chipotle restaurants. I wonder if this asset is perhaps its most important one going forward. This wide-spread availability of the product seems to complement its imagine as “the original red sauce.”
Thanks again for a great, interesting read!
Good point, BT. I am not sure exactly what capital cost math they have done regarding the decision not to bring manufacturing in house. I will say that Patagonia represents a very unique business opportunity to third party suppliers for two reasons: sustained double-digit growth (in sales, and therefore in orders), and high margins that pass through to suppliers. Because Patagonia incorporates sustainability compliance into their grading of suppliers (alongside cost), there is remarkable competition between potential suppliers to meet FLA and environmental guidance. The thorough screening of potential suppliers and the frequent auditing of existing suppliers are the most effective mechanisms enforcing this.
Reading through the FLA reaccreditation report makes it sound harsh. That being said, Patagonia is a founding member of FLA, and one of the FLA’s flagship brands. I would imagine Patagonia brings as much awareness to FLA as the FLA brings credibility to Patagonia. This is not to say there are incentives to overlook small grievances that would otherwise impugn compliance. Quite to the contrary, the codependence of these two organizations ensures that compliance credibility is paramount. It is of existential importance to each party at this point. Suppliers recognize this fact, and when they don’t Patagonia quickly cuts ties. As a result, I doubt Patagonia would move to bring manufacturing in house. They have built sufficient enforcement mechanisms into their current operating model.
Thanks for the comment CBR – Yes, Patagonia has done marketing of their sustainability policies. For example, they initiated a marketing campaign similar to their “don’t buy this jacket” one. Called the “Better than New” campaign, it promoted recycling products. In doing so, it also highlighted the durability of these same products. Here is a link talking about this initiative: http://csrcentral.com/patagonia-the-clothing-company-with-a-revolutionary-approach-to-csr-sustainability/
Their self-generated marketing campaigns, I would argue, are not their most important. Achieving B-Corp status, along with their FLA accreditation, generated more WOM awareness than any of their paid media efforts.
As far as price differences go, I am not entirely sure how this breaks out. Maybe a partial answer to your question is that Patagonia and the North Face have really emerged as the two leading players in high-quality, sustainable outdoor clothing. Arc’Teryx is probably the closest competitor outside this top tier, but doesn’t have the same sustainability reputation. Given that Patagonia and the North Face are similarly priced (on the high end), but also both engage in very public sustainability efforts, it is hard to break out exactly what price premium derives to the sustainability portion of their operating model. I hope that helps!
Greg, Dr. Emmet Brown, and Monica – fascinating points! I can’t speak with the same rocket science fluency as you all, but I did take TOM and watch Star Wars once.
Here are a few thoughts I had while reading Greg’s well-researched post.
1. Failure Rate: What would the impact of a continued 5% failure rate be on future contracts? Given that SpaceX is almost entirely B2G (G: Government, if that’s a real acronym), it seems reputational risks of failure are lowered. I wonder if that calculus will change once manned programs begin.
2. Standardization of component manufacturing: It is interesting to hear that standardization of component manufacturing (i.e. bundling together of the same engines to increase rocket size) is relatively new to spacecraft production. I suppose that because NASA has generally relied on reusable spacecraft with intermittent launches and no recent re-designs, there has been little competitive pressure to innovate along these lines. With the shuttle now out of operation, and NASA relying on private company launch services, the incentives (and therefore cost competition) has increased. I wonder if this hospitable business climate will change once NASA’s new shuttle program is back on-line. Specifically, would NASA have institutional pressure to support and sustain its own internal shuttle/delivery program over less costly private players? I am not sure, but I would imagine sustained, reliable performance by SpaceX in the interim will establish enough credibility with the U.S. government to earn it a continued role in space delivery after the new shuttle program begins.
3. Mars Colonization: This was an interesting point brought up in the earlier comments. It seems that Mars has been a major recruiting tool for top talent, and that it is a priority for Musk beyond any business rationale. Given Mars is his goal, it makes sense that he would delay an IPO until after a manned mars mission. I wonder if this would affect NASA’s role at all. Specifically, is SpaceX is successful, I would imagine there would be less Congressional willingness to fund a follow-on NASA mission to Mars. Achieving something on this scale might actually cement SpaceX as a replacement, or at least competitor to, NASA programs. Given the immense barriers to entry in this field (capital requirements and talent), such a move could be incredibly lucrative for SpaceX in the long term.
Greg, Monica, and Dr. Emmett Brown – please feel more than free to follow up with any responses to these questions/ideas. I would love your thoughts!
[Comments to RGO’s post below]
A well-researched post! I would be curious to take RGO’s comment one step further: Online tools have been pivotal to GOTV and awareness-raising efforts since at least the 2000 election, if not before. That said, given the long four-year span between elections and the rate of technological advancement during that period, voter/donor lists seem to be the only long-lasting asset spanning multiple campaigns. It is difficult to envision a campaign using the same tech strategy as an election four years prior. This trait lends support to RGO’s argument that a temporarily strong tech presence might be without value to later campaigns (through regression to the mean / “catching up”). However, if a tech strategy is what drives atypically good voter/donor registration, then the effects of a strong tech presence would be longer lasting, even if the actual platforms and strategies are wholly different.