Paul Pellicoro is a terrific dancer and instructor in New York who taught Al Pacino how to dance the tango for Scent of a Woman. He runs a very successful dance studio in Manhattan called DanceSport.
I've been interested in learning to dance in general and to tango in particular every since I was in Buenos Aires and saw them do it there. Wow, what a cool dance.
A few months ago when I was in New York, I saw his studio across the street from the Trump International Hotel, where I was staying. I wandered over one evening and signed up for a single class each in Hustle, Tango and Salsa. I liked the Tango best, so I immediately took something like 20 private lessons at DanceSport over the next couple of months, whenever I was in town.
Now I've taken something like 40 lessons and am still a beginner, but I'm hooked -- love it and think it's something I'll keep doing the rest of my life. One of the reasons for that is Paul and his terrific instructors. He's a great guy and his teachers are simply amazing. If you are a guy and want a great instructor, look up Jennifer Wesnousky at DanceSport in Manhattan.
It's occurred to Paul that his system of teaching is effective enough to go national. We got to be friends after he made me be the girl with him for two hours while he was trying to teach me how to lead. When two guys sweat on each other you get close.
He read my RULE #1 book and he asked me to look at his business a bit from the point of view of an investor, to see what I think about the idea of franchising nation-wide.
Rule #1 is about investing. It isn't just about investing in public companies. The Rule applies to private businesses and real estate equally well. If you have your own business or are thinking about starting one, you might read on. Here is my first email on the subject to him.
Hi Paul,
Loved the look of the new studio and love the idea of you taking this nationwide even more. So what's the first thing to look at as you consider whether you can go national? You've read Rule #1 so you know my view about what makes a great business. Every great business has these two things in common:
- A great CEO and
- A great Moat.
I'll give you high marks for you CEO-ship. You're a great guy, honest to a fault, deeply committed to the Big Audacious Goal of teaching America to love to dance, and from our talks, I think you will be owner-oriented, no problem. So that's the first thing. But what about the Moat?
A Moat, as you know, is the water around the castle that keeps the castle from having to defend itself. In business, a Moat is some kind of durable monopoly. For example, friends of mine built a company called EagleRider that franchised nation-wide like you're thinking. They rent Harley Davidson motorcycles. You'd think Harley would have blown them away with all their dealerships, but it didn't happen because these guys were able to get a huge Moat. They created a special relationship with Harley Davidson. HD's get demo-ed and that creates buyers. Good for HD, and EagleRider's relationship with HD makes it nearly impossible for anyone else to compete with them. And now EagleRider is in something like 40 cities and thinking about going public someday.
The key to making a great business is building something that has a highly predictable future. And that comes from some sort of durable monopoly... and I call that a highly defendable moat. What is your moat -- your durable monopoly?
There are only five types of moats: Secrets, Toll Bridge, Price, Switching and Brand. A Secrets moat is what Pfizer has - patents on drugs. You want Viagra (not that you need it, Paul) you go to Pfizer. A Toll Bridge Moat means you have to go to one specific business because you can't get the thing without them, because they have an actual monopoly -- like the power company for NYC or what EagleRider has with Harley -- the only game in town. A Price Moat is Walmart. Switching means it costs too much to switch -- like back office software or Windows, for example.
And then there is Brand: Building a reliable Brand creates a HUGE moat. Whole Foods Grocery is getting there in the natural foods business. EagleRider is there with Harley rentals. A Brand Moat is all about reliability. Coke is a classic example. Remember the mess about "new coke"? That was because they were screwing with the reliability -- that a Coke is a Coke -- and all of a sudden it wasn't. It was a "new" Coke -- and they still haven't fully recovered.
GM is another example of management conspiring with labor to destroy reliability while they lined their pockets with shareholder equity. They let Toyota and others become more reliable and gutted their own brand. Stupid, but they did it.
Your business is either a Toll Bridge or a Brand moat or both. Arthur Murray became both all over America. You wanted to learn to dance, you called the only game in town. But now that brand stands for "old, stodgy, and totally not cool", even though it is still the only reliable choice in a lot of places... That Toll Bridge Moat keeps them in business.
If I were you I would make a case study of Arthur Murray. I'd know exactly how their business works and why it got the rep it has today. Because when you stick your head out there nationally, they are going to try to react and drive you out. So you better know how you plan to crash their party in Chicago, say, and swim that Brand Moat and destroy their Toll Bridge business. It's gonna be a war unless AM intends to just surrender the castle. Not likely, so you better be prepared for a war.
Let me give you an example of just how hard core it can get: Wild Oats competes with Whole Foods. The CEO of Wild Oats bragged that his store could hammer Whole Foods anywhere he chose to go. (In other words, he was bragging that his guys could bust into any Whole Foods castle they wanted to.) The CEO of Whole Foods heard that and immediately built a huge store next to Wild Oats' flagship store in Boulder, CO and simply destroyed them there with modern facilities, many more food choices, and better service. And Wild Oats is going down. Probably they will be taken over by Safeway or someone like that.
The big guys play rough. If you're planning on taking down their castle, be ready to hit hard. Remember they are defending a castle. They have the Brand and the Bridge. You're the invader. You're the barbarian at the gate.
Point is, Moat is critical to your success: both your own Moat and knowing how to cross your competitors'. If you don't have a big Moat, whoever you compete against is going to crush you if you attack them, and then they are going to come to NYC, climb your castle walls and sack your homebase if they can, just like Whole Foods did to Wild Oats. They'll do their best to bury you once and for all by dumping their price, advertising aggressively, stealing your instructors and stealing your students. It will be war.
The ONLY way to win a war like that is to build a huge Moat before you ever start the war in the first place. Build it so they can never get to your home castle wall. Make it so they can't steal your students, they can't steal your instructors, they can't out-advertise you, and you don't care if they cut their price because it will only make them go out of business faster.
Build the Moat and build it well. Then go out there and attack!
Now go play- Phil Town
