The Empire Builders Podcast

After Mattel took a loss on the Clash of the Titans toys the almost did it again with Conan the Barbarian. Dave Young: Welcome to the Empire Builders Podcast, teaching business owners the not so secret techniques that took famous businesses from mom and pop to major brands. Stephen Semple is a marketing consultant, story collector, and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode, a word from our sponsor, which is, well, it’s us, but we’re highlighting ads we’ve written and produced for our clients. So here’s one of those. [Handyside Ad] Dave Young: Welcome back to the Empire Builders Podcast, Dave Young here alongside Steven Semple, and we’re talking about empires, empires. And Steven whispered the subject of today’s empire in my ear, and I would’ve been hard-pressed to call it an empire because I don’t know all that much about it. But I think again, it’s cartoon property that happened after I was pretty much done watching cartoons. He-Man, right? As in He-Man and the Masters of the Universe, that He-Man? Stephen Semple: That He-Man. Dave Young: Okay. Stephen Semple: That He-Man. When you think about it, it’s toys. There’s been movies. There’s the cartoon. It’s pretty huge. Dave Young: Yeah. Okay. I’m anxious to hear about it. Stephen Semple: Yeah. Dave Young: And is he the one that’s become kind of a meme, too? Like, there’s He-Man meme? Stephen Semple: Oh, sure. Oh, look, there’s a meme for everything today. So it’s really a story of lost opportunities, but at the same time, sort of seeing changes in the marketplace and doing some really interesting things because in 1975, The Six Million Dollar Man really changes action figures. Dave Young: Sure. Stephen Semple: Because to make an action figure, you’re only licensing from others, and it was product-orientated rather than brand-driven, and along came The Six Million Dollar Man, and it was a guy. Right? Dave Young: I mean, we were all running around going… Stephen Semple: Yeah. Yeah. Yeah. Dave Young: Pretend we could see, and hear, and lift things. Stephen Semple: Yeah. And along that time, out was coming the movie, The Clash of the Titans. And so there was this whole thing of, okay, let’s create action figures around Clash of the Titans. And the movie did poorly. And so the toys did poorly. And Mattel had been involved in that. And this shaped Mattel’s thinking because when Star Wars came along, Ray Wagner at Mattel passed on it because of his experience with Clash of the Titans. It’s like, “Well, we’re not doing this.” Dave Young: Wow, okay. Stephen Semple: Because again, they wanted to create the toy, right? The Star Wars they wanted to create the toys before the movie came out. So another movie comes along, Conan the Barbarian. Dave Young: Sure. Yeah. Stephen Semple: Right? And Mattel is like, “All right, we’re going to get all over this.” And they end up buying the license for Conan. They made samples, and they had all these expenses, and then Mattel discovers Conan the Barbarian is an R-rated movie. Dave Young: Yeah. No kids are going to see it. Stephen Semple: Can’t do it as a toy. Dave Young: Oh, no. Stephen Semple: But at the same time, they sort of started looking at all of these action figures that are out there, and all of the male figures are kind of wimpy. And they had started down this exploration of making a Conan the Barbarian style action figure. So they thought, why don’t we do this massive figure? And they first did these ones called Tankhead, and Bullet Head, and H-Man. And they wanted them to be comic book-like and bring action to the figure and how they stand. And they were making them bulkier and create this visual shelf presence and over-the-top muscles, all these ideas that they had drawn from Conan the Barbarian. Dave Young: All right. Stephen Semple: And what they also noticed is that when kids play with things, they want to have the power to do what they want to do. Dave Young: Absolutely. Stephen Semple: Which is where the line, “I have the power,” came from. Dave Young: Okay. Stephen Semple: Where Conan holds up the sword, and he says, “Oh, I have the power.” Right? That whole idea came from watching kids play with toys. And in fact, a lot of the ideas that came from the toy play, they learned from watching girls play with Barbies in terms of- Dave Young: Makes sense. Stephen Semple: … how they do it and then the other- Dave Young: But you’re creating story on the fly. Stephen Semple: You’re creating story on the fly. Yeah. And you have the power to create your own story. And what they also noticed was while kids like thinking about dreaming about things in the future, they also like drawing upon things from the old, which is part of the reason why they created things like this Castle Grayskull, right? Yeah. Now, one of the other things that was really interesting about Castle Grayskull when they created it… Now, first of all, when they created it was very expensive. It was going to retail for like $20. And everyone said, “Well, no one’s going to buy this.” But the interesting thing is every castle was slightly different in terms of how that the paint happened on it. The way they were painting it, they actually discovered there was a manufacturing flaw in how they were painting it, and each one of the castles looked slightly different, and people were like, “Oh my God, all these castles are a little bit different.” And you’re like, “Perfect.” Dave Young: Collecting them? Stephen Semple: Well, no, they’re just like, it doesn’t need to be perfect. It doesn’t need to be exactly the same. That’s okay. And there was a point where they were getting ready to roll the characters out, and they ran out of money for tooling. They wanted to have a creature for He-Man to ride. And so they took a cat from another toy, painted a green, put a saddle on it, put armor on it, and all of a sudden, you had Battle Cat. So they’re creating all these things. They know there’s play value in it. They believe it’s going to stand out on the shelf because it’s now this big, bulky character and all this other stuff. But the business model for selling toys up to this point was TV shows, or in the case of Star Wars, movies. So you got no TV show, you got no movie, you’ve been running out of money even for tooling. So, how are you going to promote this character? Dave Young: Stay tuned. We’re going to wrap up this story and tell you how to apply this lesson to your business right after this. [Using Stories To Sell] Dave Young: Let’s pick up our story where we left off, and trust me, you haven’t missed a thing. Stephen Semple: The business model for selling toys up to this point was TV shows or in the case of Star Wars movies. So you got no TV show, you got no movie, you’ve been running out of money even for tooling. So, how are you going to promote this character? Dave Young: I mean, do you make the TV show? Stephen Semple: They didn’t have money for that. Dave Young: Yeah. Stephen Semple: How are you going to tell the story? Well, what they did was they created little mini comics, and they put it in with every toy. Dave Young: Oh, beautiful. Stephen Semple: So they had these four different mini comics that came with the toys. And what they did is they went to DC who is producing comics, and they actually created also a three issue miniseries with DC where it was Superman versus He-Man. Dave Young: Oh, wow. Okay. Stephen Semple: Right? They changed the rules. You can now promote a toy without a TV show. They did it with the mini comics. Dave Young: Oh, that’s really cool. Stephen Semple: Now, the mini comics became so popular, and the toy became so popular, they now had the money to create the show. Dave Young: Okay. So it all came first the… Stephen Semple: Yes. And then the show, what the show forced them to do is create a better story and backstory, right? And then they created rules of how the characters are interacted and things along that lines. But what I thought that was really, really interesting in this whole story was, okay, so the business model is you need a TV show to make it work. So all the toys have been done up to that point. TV show to work. Star Wars was the exception. They spent all this money in the Conan and the Barbarian. They can’t end up doing it. They left all this stuff, create the toy anyway. And then it’s like, all right, how do we promote this? And what the guys recognized is it wasn’t about having the TV show, it was about having the story. So how could you do it? Mini comic book. Dave Young: I love it. Stephen Semple: Put it in with each toy. Right? So I just thought that that was really interesting because it would be easy to stop at that point and go, “Well, we can’t do this because there’s no show.” Dave Young: Yeah. Stephen Semple: There’s no show. And instead, they broke the mold and said, “No, it’s about the story.” Dave Young: Well, and so when was all this? This was in the late 80s, early or… Stephen Semple: Yeah, late… Yeah, mid 80s. Dave Young: Mid 80s, late 80s? Stephen Semple: Yeah, mid to late 80s is when all this was going on. Dave Young: And so it’s why it has survived and become so… There are so many memes from it. There’s He-Man, and there’s Skeletor. There’s a lot of Skeletor memes out there. Stephen Semple: Oh yeah. Yeah. Yeah. Dave Young: But there’s a whole generation that grew up with this. Stephen Semple: Yes. Dave Young: Yeah. I love it. Stephen Semple: Yeah. So to me, again, the part that was sort of interesting on He-Man is just again, finding this different way to do it, but recognizing what the power was in the show. While kids want to make things up, it’s almost like they need a little story to help them along. Dave Young: Yeah, absolutely. I will admit that I’m too old for He-Man. It was after my cartoon-watching time. Was it yours? Do you have any… Stephen Semple: You and I are the same Dave Young: Yeah, same demographic there. Stephe

Two start-ups a couple of years apart became the inspiration for each other to get better and better and better. Dave Young: Welcome to the Empire Builders Podcast, teaching business owners the not-so-secret techniques that took famous businesses from Mom-and-Pop to major brands. Stephen Semple is a marketing consultant, story collector and storyteller. I’m Steven’s sidekick and business partner, Dave Young. Before we get into today’s episode, a word from our sponsor, which is, well, it’s us. But we’re highlighting ads we’ve written and produced for our clients, so here’s one of those. [AirVantage Heating & Cooling Ad] Dave Young: Welcome back to the … Wait, what? Gosh, you told me the title, and I have some thoughts, and I forgot the name of the podcast there for a second. Welcome back to the Empire Builders Podcast. Stephen Semple: We’re doing two together here, Dave, Firestone and Goodyear. Dave Young: Stephen Semple’s over there. I’m Dave Young. And this morning we’re talking about Goodyear and Firestone, both? Stephen Semple: Yes, together. Dave Young: Because it’s kind of one thing now, right? Stephen Semple: No, they are separate. Dave Young: Was it? Stephen Semple: They’re separate. Dave Young: No, they’re separate. Stephen Semple: The story is so intertwined between the two of them. I couldn’t figure out a way to break it. But it’s almost kind of like when we did Hertz Avis, like they’re so interlinked. Dave Young: Yeah, yeah, yeah. Stephen Semple: Yeah. So we’re doing it as a single podcast, the two of them. Dave Young: All right. Where do we start? Stephen Semple: Well, what’s interesting is they were both started within two years of each other, both in Akron, Ohio. So Goodyear was founded on August 28th, 1898 in Akron, Ohio by Frank Seiberling. And today they’re the third-largest tire maker in the world with about 18 billion in sales. And Firestone was founded in August, two years later by Harvey Firestone in Akron, Ohio. And in 1988, Firestone was purchased by Bridgestone for $2.6 billion. Dave Young: That’s the one. That’s the one I was [inaudible 00:02:51] yeah. Stephen Semple: Yeah, and Bridgestone today is number two behind Michelin with Goodyear being number three. So both really, really big, really big companies. Dave Young: And in 18 when? Stephen Semple: So 1898 was Goodyear, and 1900 was Firestone. Dave Young: And this is before, this is before mass production of automobiles. Stephen Semple: Yes. Yes. Because if you go back to Episode 35 where we talk about Ford, 1908 is the Model T. So it’s pre-model T. Dave Young: Yeah. So which came first, the tire or the car? Stephen Semple: Well, because there were tires on carriages. Dave Young: No, that’s true. All right. Stephen Semple: And today Michelin is the largest in the world. So if you want to learn about Michelin, go back to Episode 27, because it’s also really interesting how Michelin grew their business. But so we’re dealing with Goodyear and Firestone. Dave Young: All right. So Goodyear- Stephen Semple: And if you think about it, you’re right. Most of the transportation at this time when these companies started were either horse-and-carriage or bicycles. That’s what basically people were using. And Harvey Firestone, he grew up on a farm and went to a business school and was a carriage salesman in Detroit. And at this time, the use of natural rubber is expanding due to vulcanization being created. Because before vulcanization, natural rubber was not very durable. It would crack and all these other things. And carriage wheels were basically a wood wheel with a metal rim around it, no give, a hard ride. Dave Young: Right. Yeah, yeah. I mean, even a rim made of rubber would be better than a rim made of steel. Stephen Semple: Right. So basically he’s a carriage salesman. What he realizes is that what we should do is we should put rubber, instead of steel around the wheel, and that would make a smoother ride. So he leaves Detroit, moves to Akron, Ohio, because Akron, Ohio at the time is the center of the rubber industry. Dave Young: Okay. Why is that? Stephen Semple: I think it had to do with just the fact there was a couple of companies that sprung up in the area. There was the resources in terms of water and a few things along that lines. Dave Young: And the rubber barons came in [inaudible 00:04:56]. Stephen Semple: But there was a lot of that that was happening with … Look, you see it in technology. A couple of companies happen and then … Dave Young: Yeah, there’s this- Stephen Semple: It attracts the talent, it attracts the people, it attracts the investment. Dave Young: There’s this synergy that happens. It was before the word existed. Stephen Semple: Yeah, basically. So he creates and starts selling a wagon wheel that has a solid rubber tire. And so he’s doing these solid tires, and he starts seeing the market shifting to a pneumatic tire. So a tire with a tube in it. Dave Young: With the air inside it. Yeah. Stephen Semple: And he’s also starting to see car sales increasing so he decides to do that. Because even though it’s a niche, he’s seeing it as growing, and he didn’t really get great traction on the wagon tire. But the first pneumatic auto tire is this thing called a Clincher. The tire is attached to the rim by these metal hooks, but these metal hooks can kind of become a bit of a problem. They can tear the tire, things along that lines. So he decides to make, Firestone decides to make a superior car tire, and he creates this new rim and tire system that’s basically better than the Clincher tire. But the problem, at this point, is the rim is part of the car. Basically, it’s hard to change all that. So who’s willing to- Dave Young: Every car has a different one and … Yeah. Stephen Semple: Right. So what he does is, is he approaches Henry Ford because he hears the Model T is coming out, and Firestone undercuts the Clincher to get a foothold in the industry. He says, “Look, I’m just going to come in with a really cheap price. That’s how I’m going to get into there.” And he gets an order for 2,000 units, $110,000 order, and he’s basically betting everything on the ability to deliver on this order. Okay? Dave Young: Wow. Okay. Stephen Semple: Now, enter Goodyear, a little bit of Goodyear history. So I mentioned Goodyear was founded by Frank Seiberling, and Frank had tried several businesses with no success, but he saw the rubber industry as an area for growth. Younger brother joins, and they need a name, and what the inventor of vulcanized rubber was Charles Goodyear. So they decided to call the tire company Goodyear after Charles Goodyear. Dave Young: Just associate yourself with that. Yeah. Stephen Semple: Yeah. Now- Dave Young: Did Charles, was he in on it, or did they just named it after? Stephen Semple: They just named it Goodyear. Dave Young: Okay. You can do that, huh? Stephen Semple: I guess. They were able to. Dave Young: All right. Stephen Semple: So they’re buried in debt, things aren’t going so great, but what they wanted to do is the big growth around this time was bicycles. So they create a vision to create a new type of tire for the bicycle, because it’s a huge craze at the turn of the century, turn of a couple of centuries ago. So there’s like 300 manufacturers of bicycles in the United States, including the Wright Brothers. Dave Young: Right. Yeah. Stephen Semple: But again, they were solid tires. And what these guys created was a pneumatic tire, what Goodyear has created was a pneumatic tire for bicycles because it’s way more comfortable than a solid tire, right? Dave Young: Way more comfortable. Yeah. Stephen Semple: Yeah. So they’re all in and this has to work, but here’s the problem. Bicycle sales stop because, essentially, everyone who wants one has one. So bicycle sales kind of collapsed. And so they’re struggling here, and what they decide to do is they look at the auto business, and they go, “Hey, the auto business is going over there, and we could create a better tire than a Clincher.” Dave Young: Yeah. [inaudible 00:08:24] Stephen Semple: Great. And so who do they decide to approach? They decide to approach Henry Ford because they hear about this Model T coming out. But Ford has already done a deal with Firestone, right? But Goodyear says, “We got an advantage. Here’s the problem. Their tire, the Goodyear tire, Clincher tires will also work on a Goodyear rim. Clincher tires will not work on a Firestone rim.” And here’s what Goodyear says to Ford, says, “You got a problem. Because if somebody needs a new tire, not everywhere had access to Firestone tires, but everybody has access to Clincher tires. So, therefore, our solution is better.” So basically, Ford cancels the deal with Firestone and goes with Goodyear. Dave Young: Oh, no. Stephen Semple: And basically says to Firestone, “I need you to make Clincher tires, which has almost no money in it for Firestone because they got to pay a licensing deal with Clincher. Isn’t it interesting in all of this, Clincher clearly didn’t innovate because we’ve never heard of Clincher before this moment? Dave Young: Oh, right. Yeah. I mean, terrible name, but- Stephen Semple: Clearly didn’t innovate. Dave Young: Right, didn’t figure out that we don’t need these metal things. Stephen Semple: Because they’re clearly the leader at the time, and we don’t hear them any longer. Dave Young: Yeah, yeah. So they had a lead in the market, but … Stephen Semple: So 1908 comes out, the Model T comes out. It’s Goodyear tires on the Model T, Episode 35, go back and learn about the Model T, and Goodyear takes out ads that Goodyear tire is better. By 1909, all GM cars are Goodyear tires. By 1910, Goodyear is doing like four million in sales, which is like 30 million today. Firestone is not done. Dave Young: Yeah. Stephen Semple: So back to Firestone, they see these Goodyear ads, and they figure we’ve got to get a competitive advantage over Goodyear. We’re going to go back to 1908, go ba

Joan Barnes wanted to meet new moms and that was the inspiration for a place for moms to hang out with other moms. Dave Young: Welcome to the Empire Builders Podcast, teaching business owners the not-so-secret techniques that took famous businesses from mom and pop to major brands. Stephen Semple is a marketing consultant, story collector, and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode, a word from our sponsor, which is… Well, it’s us, but we’re highlighting ads we’ve written and produced for our clients. Here’s one of those. [Tommy Cool Plumbing, Cooling & Heating Ad] Dave Young: Welcome back to the Empire Builders Podcast, Dave Young here with Stephen Semple, and we’re talking about empires. Stephen just whispered the name of the topic into my headphones, and I recognize it, but I don’t recognize it. I don’t have any direct experience with this other than when I was a little kid watching Romper Room, but I don’t think it’s the same thing. The topic is Gymboree, but it sounds like it’s probably related, but I doubt that it is. Stephen Semple: Gymboree is not big any longer. There’s a bit of a sad story on that. Dave Young: It was a place though, wasn’t it? Stephen Semple: Right, it was, and it was huge at one point. It was part of the culture and it was mentioned in movies. It was a really, really big deal at one point. Dave Young: Yeah, here’s the issue. Here’s why I don’t remember it. I didn’t grow up in a place. It wasn’t the kind of place it would have a thing. I think I told you I drove 100 miles on our first date to go to Starbucks at a Barnes and Noble. Stephen Semple: It wasn’t even a real Starbucks. Dave Young: No, it wasn’t even a standalone Starbucks. Stephen Semple: Well, to give you an idea how big it got in 2010, Bain bought the company for $1.8 billion, 1.8 billion, and seven years later it went bankrupt. Dave Young: Oh, boy. That’s a bigger story than Gymboree if we wanted to go there. But let’s go go with building the empire. Stephen Semple: Let’s go with the building of the empire. Dave Young: How many buyout people does it take to ruin a company? Not many. Stephen Semple: But here’s the thing that’s interesting about this story. We often talk about this whole idea of unleveraged assets, and unleveraged assets becomes a very, very big part of this story. It’s very, very cool. The business was founded by Joan Barnes in 1976. She grew up outside of Chicago, studied dance and English in college, and got married. They moved to the West Coast. She’s this new mom in this new area looking for connections, and she started to host these get togethers with parents and kids at a local Jewish center. Joe Barnes, her husband, was a journalist. This journalist background becomes important a little bit later. As I mentioned, they grew up outside of Chicago and they picked up and moved and landed in San Francisco, where he got a job. And then they moved out to a suburb in 1973. She was basically lonely. 1973 was actually one of the lowest birth years in a long time, and so she was looking for people who had kids. Both of their families, both her family and his family, were back on the East Coast, and so she wanted to meet other moms. At this point, this whole idea of play groups didn’t exist. It was this new idea. And so she was in this dance company and had a friend in the company, and this friend had been offered a job to run activities for kids in a local community center. She was nervous to do it. Joan suggests, “Why don’t we share this idea?” And so it was a preschool after school programs. Joan went to a local YMCA that had this gym that they had set up called Kindergym, and she went and she checked it out. Everything there was this full-sized gym equipment and they modified how it was being used, but it was like full sized trampolines and full sized this and full sized that. As soon as she saw it, she had this vision of what it could be. Dave Young: I mean, there’s nothing funnier than a five-year-old on the uneven bars. Stephen Semple: Yeah, there you go. Dave Young: I’m just saying. But go ahead. Stephen Semple: So she had this vision: scale down the equipment, make it colorful, add music, lively teacher. This could be something really special, and maybe this is what could be done at the Jewish center. Now, some of the things were available it turns out she found out for special needs kids and the rest needed to be built, so she started to do that. But here’s the other thing. She knew how to get press to promote this. She had learned from her husband. She created a story of what the plan would be like, and she managed to get this big full page feature article in the local newspaper. In 1976, they opened this Kindergym in the JCC, and it’s immediately this huge success. It’s oversold. They hire preschool teachers to run the program. The goal was for the kids to have fun and let moms connect with other moms. That was the goal. It’s so successful they open another one in a center close by, and at this point they get approached by an entrepreneur, Max Shapiro, to put up some money. Basically the idea was, let’s do more of these. I’ll put up the money, you run them. Max Shapiro had run a basketball camp with Rick Barry, who was an ex-basketball player, that he had sold. He had some money kicking around to do this. They went down to San Montejo and they opened a Kindergym in a temple there, and they hired someone of the preschool background to run it and did the same idea. Joe went and got a story in a local paper, big story in a local paper. Basically it filled up, and she was running it almost like a franchise. They expand to five or six locations, and at this point she buys out Max and she makes the people that are running these couple of locations partners. It’s 1976, and there’s nine locations in California. They’re making a little bit of money. Joan decides she’s going to get a license to open franchise. Here’s the thing, she didn’t get any legal advice on setting any of this stuff up. She tries to trademark Kindergym, and she’s running this for a couple of years as a franchise until she discovers you can’t franchise Kindergym. It’s too generic a name- Dave Young: Oh, because kindergarten, kinder… Stephen Semple: But she’s already got these franchises isn’t been operating under the name Kindergym. They’re trying to think of different names, trying to think of different names. One day, one of the names sticks. Her husband even calls and the says, “Gymboree, Gymboree, Gymboree.” What a great name, Gymboree. They decide to set it up as Gymboree, and she decides to do it right this time. She goes out and gets some advice, a guy by the name of Bud Jacob, who has experience in franchising, likes the idea, likes her, and decides to help her out. It’s 1982 and they need to raise some money, and Bud introduces her to Stuart Muldaw, who invests. Now at this point, they’re still renting church halls. This is how they’re doing it. They’re going and renting church halls. It’s no leases, none of this other stuff. It’s handshake agreements. He invests $300,000 into the business for 30%. Here’s what they’re looking for. They’re looking for women that were just like Joan when she started this. They’re looking for women in their late 20s, early 30s who are raising families but wanted to do something, wanted to do something more, wanted to bring some extra income into the household. Their strategy is they’ll create a PR strategy in every community that they’re thinking about going to, so just replicating the idea. Again, remember Joe knows how to create this because of her husband, and also was very successful. But here’s another idea that they created. They also did advertorials in the Wall Street Journal. For those who don’t know what advertorials are, their advertisements that look like an editorial. Dave Young: Yeah, you write your own news report, news story, and then pay to have it placed in the paper. Stephen Semple: Right, and this speaks to how well she understands influencers. Because what she was looking at when she created these advertorials, they were not written to the women. They were written to the husbands. The whole idea is the father would read this article in the Wall Street Journal, this advertorial, and think to themselves, “This would be perfect for my wife,” which is really interesting because so many people would want to target the buyer instead of targeting the influencer. Dave Young: We call it indirect targeting. You write an ad that’s ostensibly an employment ad for your company. But when you talk about the kind of people you want to hire, you’re really talking to every consumer out there saying, “No, this is the kind of people that we are.” I love that, I love that. Stephen Semple: But today, so few people think that way. It’s all about target, got a target. But here she was purposely targeting the influencer, targeting the father who would read it, this be perfect for my wife. Now, here’s one of the things they were really picky on. Fit was one of the biggest things. If they didn’t think there was a good fit, they didn’t offer the person the franchise, and they focused on the East Coast. At this point, they’re focusing because they didn’t need help on the West Coast. LA was exploding. A lot of the people that they had focusing in on already understood press and media because they were actors on the side and all this other stuff. The West Coast was growing organically, so they were focusing these advertorials and whatnot on the East Coast. Here’s how much it was growing. By 1986, they have 400 centers. They’re doing 15 million in sales in 400 centers. But here’s where the problem happened. Audio: Stay tuned. We’re going to wrap up this story and tell you how to apply this lesson to your business right after this. [Using Stories To Sell Ad] Dave Young: Let’s pick up our story where we left off. Trust me, you haven’t missed a

In 1947 Dave Pace spiced up America with Salsa and this turned into a 90 Billion Dollar category. Dave Young: Welcome to the Empire Builders Podcast, teaching business owners the not so secret techniques that took famous businesses from mom and pop to major brands. Stephen Semple is a marketing consultant, story collector and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode, a word from our sponsor, which is, well, it’s us, but we’re highlighting ads we’ve written and produced for our clients. So here’s one of those. [ECO Office Ad] Dave Young: Welcome back to the Empire Builders Podcast. I’m Dave Young here talking to Stephen Semple. And the listeners may not know this because we only release these every week or so, right? Stephen Semple: Mh-hmm. Dave Young: But we often record them one after the other. And we just got done recording the episode about Doritos and Tostitos. And now you’re telling me that we’re going to talk about dip, Pace Salsa. Stephen Semple: Pace Salsa. Yeah. Dave Young: So the picante sauce people. Stephen Semple: Correct. Correct. Absolutely correct. Dave Young: And that’s great with Doritos. Stephen Semple: I never thought about it being with Doritos. Dave Young: Really? Stephen Semple: Tostitos, I would, but not Doritos. Dave Young: How about both? Stephen Semple: Okay. Dave Young: I say you can dip a Dorito into anything. I’m in that camp. I’m firmly in the camp that anything dippable is- Stephen Semple: You’re all-inclusive in your attitude towards Doritos and dip. Very open-minded. Here’s the thing I’m going to say. If someone has not listened to the Doritos, Tostitos story, you really should go back and listen to it before listening to this one because there’s certain things that kind of come together in terms of what’s happening in the world. Dave Young: Like chips and dip. Stephen Semple: And these stories are kind of linked even though this story starts in 1947. Well, the Doritos story starts in the late ’50s. They still have kind of a bit of a shared history. Dave Young: These stories that are on a collision course, a deathening. Stephen Semple: They are. And this story’s also not just about pace salsa, but it’s really about the origin of the salsa in the United States as a category, which is a $90 billion category. And the business was started by David Pace in 1947 in San Antonio and was sold to Campbell Soup in 1995 for $1.1 billion. Dave Young: All right. Stephen Semple: So not a bad little payday. Dave Young: Not a bad deal. Stephen Semple: Yeah. So now David Pace was from Louisiana and he moved to Texas after World War II. He had been running a small food business processing sugar substitutes, which were popular both during the war and shortly after the war with rationing because of the sugar rationing. But as rationing was coming off, what he knew is there was going to be less and less of a need for these sugar substitutes. So he was looking for a new idea. And so we have to remember, it’s 1947, food’s kind of boring in the United States. It’s not diverse. It’s bland. It’s meat and potatoes. The condiment that was used to improve food was ketchup. That was the condiment to improve food, right? And Mexican food was not really a thing. About the only thing that people knew about Mexican food, it was spicy. Here’s the part that I came across that really surprised me the most. In New York City, one of the most diverse cities in the world, and certainly the most diverse city in the United States, there was just one Mexican restaurant in the city and New York at the time. Dave Young: In the ’40s? City. Stephen Semple: In the late ’40s, ’47. Dave Young: Okay. Wow. Stephen Semple: There was only one. That was it. Now, you could get Mexican food in the South because let’s face it, 100 years previous, a lot of parts of the South were part of Mexico, right? Dave Young: That’s right. Stephen Semple: As we like to remind ourselves. So here he is in- Dave Young: Well, Tex-Mex started just spreading in. Stephen Semple: Yeah. So here he is in San Antonio. He was stationed in Texas during the war and he’d settled in San Antonio, but he had never had Mexican food because now he’s off the base living in San Antonio and he tries salsa for the first time. And he’s like, wow, this is great. And he decides he needs to bring it to the market. A couple of challenges he ran into. First is how to make it. There’s lots of recipes around. He wanted to make his own version to sell the non-Mexican, so he wanted to tone down the intense flavors. He also needed to be able to jar it so it had shelf life. Here’s one of the fun challenges he ran into. A couple of the recipes he worked with would ferment once put in a jar. Well, what happens in a jar when something ferments? Dave Young: Botulism? Stephen Semple: No, kaboom. They blow up. Dave Young: Kaboom. They blow up. Okay. Yeah. Stephen Semple: So exploding jars, exploding jars of salsas, not really the objective. Dave Young: That’s never a good look either. Stephen Semple: Not really. But he gets it figured out and he brands it as Pace Picante Sauce. So it was first of all, promote it as a sauce, not a dip. And he starts selling it locally. He advertises it in the newspapers, but again, not as a dip as a sauce, like a marinade, something you brush on meat before baking. That was how it was being positioned. Dave Young: Well, it’s still, that’s the label on the jar is Pace Picante Sauce. Stephen Semple: Yeah. Dave Young: I’ve always wondered about that. He did that so he didn’t have to… Well, go ahead. Stephen Semple: But that was just kind of how he thought about it. And so for over a decade, he works on building up a following in Texas. It was building slowly. He liked spicy food, but most people didn’t, because even though he took the spice down, it was still spicy. Now he hires his son-in-law, Kit Goldsbury, and Kit hates spicy food, like can’t stand it, but still thinks he can sell it. And Kit starts at the bottom working every job and works his way up. And there’s a point where Kit becomes more senior. And Pace is now in five states and is making some money. They’re having some success. Dave Young: Good. Stephen Semple: But Kit’s goal is he wants us to become coast to coast. He wants to turn this into a big thing. But here’s what he notices. It’s too hot for northerners, but northerners want flavor because they’re eating Doritos. They’re eating nacho Doritos and cheese Doritos. They’re eating those things. So it’s not like they don’t want flavor. They just don’t want the heat. Dave Young: Yeah. Stephen Semple: There’s a marker for something interesting, unique, and different, but to go national, he needs to mute the heat. Dave Young: Needs to call it mild. Stephen Semple: Right. And around this time, Tostitos takes off and which is being used for dipping and it’s a massive success. So he decides to lean into the dip angle because he saw what was going on with Tostitos and he said, “You know what? We need to make this as a dip, not as a sauce, but I still need to take down the heat.” So he hires tasters to try all the jalapenos out there to find out which is the one that would work the best. Here’s the problem. Taster’s results were really inconsistent. He goes, “Okay, so I’ve still got to solve this heat problem.” So he hires a food scientist to engineer a heat-free jalapeno. Dr. Rasplicka, I think is how you pronounce his name, who basically created this measurement system for capsaicin, which is about how hot it is. And from this, they were able to figure out how to remove the heat because they were able to identify each one, able to identify the source of it and create this non-heat version of salsa. Dave Young: Okay. Stephen Semple: Now, you jump the gun on it a little bit, as you often do. So remember, while Americans didn’t want heat, they wanted something interesting. So of course they didn’t call it bland. What did they call it? Dave Young: Stay tuned. We’re going to wrap up this story and tell you how to apply this lesson to your business right after this. [Using Stories To Sell Ad] Dave Young: Let’s pick up our story where we left off and trust me you haven’t missed a thing. Stephen Semple: Well, Americans didn’t want heat. They wanted something interesting. So of course they didn’t call it bland. What did they call it? Dave Young: Mild. Well, they’ve got the three. They’ve got mild, medium, and hot. Stephen Semple: Right. And that’s exactly what they did. They had the other spice levels, but they didn’t go with bland. They went with mild. Dave Young: Yeah, yeah, yeah. This the Goldilocks rule, right? Stephen Semple: Yeah. Dave Young: Wow. Stephen Semple: And so therefore, and with mild, everyone can enjoy it. And then of course they offered the other spice levels and they market it as a dip. Very quickly, sales went from $3 million to over $50 million. Dave Young: I can imagine. Stephen Semple: So successful, supermarkets started placing salsa in the chip aisle because it was not in the chip aisle previously. In 1991, salsa passes ketchup as the number one condiment in the United States. Dave Young: Not till ’91. Stephen Semple: Not till ’91. Dave Young: Okay. Stephen Semple: 1995, Campbell’s buys the business for over a billion dollars. Dave Young: All right. Stephen Semple: Now, I forget what year it was. I think it was ’92, but anyway, early ’90s, Campbell’s actually created a Heinz Salsa. Dave Young: Really? Stephen Semple: Yes. And it failed miserably. Dave Young: Sure. Stephen Semple: But if you think about it, we often bump in these situations where companies do these line extensions, right? Where it’s like, “Well, why not? It’s tomato. It’s a condiment. It’s all this other thing. We can do a Heinz Salsa.” Why wouldn’t a Heinz Salsa work? People love Heinz ketchup. They’ll love Heinz Salsa.” It bombed. It totally bombed. Like bombs so much to the degree that it only existe

Arch West had the heart of an entrepreneur and liked to take risks. Unfortunately he worked for Frito-Lay and had bosses to convince. Dave Young: Welcome to the Empire Builders Podcast, teaching business owners the not so secret techniques that took famous businesses from mom and pop to major brands. Stephen Semple is a marketing consultant, story collector and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode, a word from our sponsor, which is, well, it’s us, but we’re highlighting ads we’ve written and produced for our clients. So here’s one of those. [AirVantage Heating & Cooling Ad] Dave Young: Welcome back to the Empire Builders Podcast. I’m Dave Young and Stephen Semple is here with another Empire Builders story. And today, whispered in my ear as the countdown started that we’re going to talk about Doritos and Tostitos. And my brain instantly had electric shot go through it because are they the same? Are Tostitos and Doritos, is it the same company? Is Frito-Lay- Stephen Semple: Same company. Yeah, yep. Frito-Lay. Dave Young: Yeah. How about Takis? Stephen Semple: Oh, I don’t know. Dave Young: They get bought up yet? Stephen Semple: I don’t know. But [inaudible 00:02:04] did, they were actually created by Frito-Lay. Dave Young: By Frito-Lay. Again, back to my childhood, we’d go to the lake in the summer and always had bags and bags of nacho cheese flavored Doritos. Stephen Semple: There you go. Dave Young: And my mom used to say, “We’re going to eat so many of these. There’s just going to be corners poking out of us.” Oh my gosh. They’ve been around a while. Stephen Semple: They have been around a while. Yeah, they were launched in 1966. Dave Young: Doritos or … Stephen Semple: Doritos was done first and it was launched by Frito-Lay in 1966. Dave Young: All right. Stephen Semple: Yeah. Today, Doritos is part of Pepsi. And the estimated sales coming from Doritos is like 2 to $3 billion a year in sales. That’s a lot of cheese nachos. Dave Young: It is. Stephen Semple: It’s one of the top snack brands in the world sold in over 100 countries. So now while it’s a product inside of a big company, there’s a reason why I feel like it’s a bit of an empire building story because it’s an interesting little story of risk taking an entrepreneurship inside of this big corporation. That’s why I felt like it still kind of fits. Dave Young: Okay. Stephen Semple: And it’s all because of the actions of a guy by the name of Arch West, who’s a Frito-Lay executive. And when you hear this story, you realize he’s got a heart of an entrepreneur and is a bit of a risk-taker. Dave Young: Arch West. Stephen Semple: Arch West. So Arch came from nothing. He was raised in a youth home. He went to the military. And after the military, he gets into food marketing and he becomes a VP at Frito-Lay. Now, our story starts in the late 1950s. And like all good stories, it starts with a visit to Disneyland at Anaheim because that’s where all great stories start. Dave Young: So Arch goes to Disneyland. Stephen Semple: So Arch goes to Disneyland. And in Disneyland, there’s a restaurant called Casa de Fritos, which of course has been created. I don’t know if it’s still there, but at the time Casa de Fritos, which was basically created for distributing Frito’s products. It’s like this made up Mexican restaurant in the international food area of Disneyland. And remember, this is the ’50s. Dave Young: So Frito’s was in existence. Stephen Semple: Yes. Fritos was in existence. Dave Young: The little curly corn chip thingies. Stephen Semple: Correct. That was in existence. Dave Young: So I keep thinking like Lay’s Corporation- Stephen Semple: Frito-Lay had already merged at this point. Dave Young: So Frito became Frito-Lay? Stephen Semple: Yep. So it was Frito-Lay, wasn’t part of Pepsi yet, but it was Frito-Lay. Dave Young: Yeah. Stephen Semple: And they had this restaurant in Disneyland called Casa De Fritos for distributing Frito products. And as I said, it’s this made up Mexican restaurant, because remember this is the 50s in Disneyland. So how authentic is it? Probably not at all. Dave Young: Probably had Speedy Gonzalez and his friends. Stephen Semple: Right- Dave Young: … Taking orders. Sure. Stephen Semple: As you can imagine. But as the story goes, what was happening was they were throwing out … At the end of the day, if tortillas were left over, they were throwing them out. And a Mexican delivery guy said, “You shouldn’t be throwing these things out. You should cut them up and deep-fry them and serve them as tortilla chips.” Dave Young: Yeah. Stephen Semple: So Arch tastes these tortilla chips and he was like, “Wow, these have a really interesting flavor.” And he thinks to himself, I think there’s an untapped opportunity here and we can make something of this. So first he’s got to sell the ideas to his bosses. So Arch West makes a presentation to the executives and they’ll look at him and say, “Yeah, leave development to R&D. They create the stuff you sell it.” Dave Young: Stay in your lane, buddy. Stephen Semple: Stay in your lane, buddy. Now remember I said at the beginning, Arch is a risk-taker and has the heart of an entrepreneur? So what does Arch do with this no? Dave Young: I mean, he’s going to take them home and fry them. I don’t know. Stephen Semple: Yeah, he ignores it. He takes some discretionary funds that he has and he applies them to developing the chip. Dave Young: Okay. Good for Arch. Stephen Semple: He does this for three years. Dave Young: Three years- Stephen Semple: … Inside of Frito-Lay, he’s developing these chips with these discretionary funds for three years because he can’t make them the way they made them in the restaurant because it’s got to be shelf stable. So there’s kind of a bit of a challenge to making them. So after three years, he creates this secret shelf staple tortilla that he now has to get approved by the bosses, the very same bosses who three years ago told him, stick in his lane that he’s used company funds to develop. Dave Young: Oh, Arch, I love you. Stephen Semple: Right. Do you see why I believe this story deserved to be here? So he has this plan to convince bosses. He arranges to have the chips secretly supplied to the bosses before the meeting and he arrives late on purpose because he figures they’ll all try them. And his hope is, well, they better like them. Dave Young: They better like them. Yeah. Stephen Semple: So it turns out the board likes them. And at this point, he already has a name for them because he wanted it to sound like something easy and he wanted to have this foreign feeling. And he also liked this idea of combining Fritos and Cheetos because Cheetos had already been out there. So Fritos, Cheetos, Doritos. Dave Young: Doritos. Stephen Semple: Yeah. And they decide to launch it. So they launch it in 1966. Doritos is launched and it’s the only tortilla chip around. And the Baby Boomers are coming of age. They want to market this chip to the Baby Boomers. So if you’re going to market to it, what do you call it? You call it the With It Chip. This is the With It Chip because that’s the with it generation. Dave Young: Because it’s with it. Stephen Semple: Yeah. Yeah, yeah, yeah. So just tell people it’s with it and it’ll all work out because they’ll all think it’s hip and cool. Dave Young: Yeah. I can see that happen. Stephen Semple: Yeah. Bombed- Dave Young: … Calling it riz. Stephen Semple: Yeah, it bombed because here’s the problem. The chips were plain and chips at the time are used for dipping and dips were popular at parties, but that was with the Boomers’ parents, not the kids. So it was not so with it actually. Turns out to be not with it at all. So there was this great disconnect because the kids are like, “We don’t do dip.” The parents were the ones doing dip and the parents didn’t want to do … It was this complete failure in terms of positioning. So around this time, Wayne Calloway joins the company. Wayne doesn’t see that product as a failure because he looks at it and he says, “Look, here’s the problem. Boomers don’t want to use it as a dip, but they still want the flavor, so we need to add flavor.” And around this time- Dave Young: “We need to make the dip into a powder and apply it to the chips.” Stephen Semple: Right. And around this time, Frito-Lay had been investing tons of money into food science. And there was this new emerging technology called gas chromatography, which basically breaks down the elements so you can figure out how to make an artificial powdered form of things. Dave Young: Okay. Stephen Semple: So after months of experiments, the team presents a range of options. So they now have to choose a flavor. And here’s how they looked at things. And this is the other reason why I think there’s great lessons here, because we always talk about looking around the world for ideas. Taco Bell had come on the scene around this time and was growing really, really quickly and was super popular. When Taco Bell first came out, it exploded. So the first flavor they looked at was … Dave Young: Stay tuned. We’re going to wrap up this story and tell you how to apply this lesson to your business right after this. Dave Young: Let’s pick up our story where we left off and trust me you haven’t missed a thing. Stephen Semple: Taco Bell had come on the scene around this time and was growing really, really quickly and was super popular. When Taco Bell first came out, it exploded. So the first flavor they looked at was taco flavor. Dave Young: Okay. Yeah. Stephen Semple: Because they’re like, “Well, look, there’s this thing going on over here.” Dave Young: Sure. Stephen Semple: And it sells well, but they’re still not completely satisfied. So what they noticed was as Mexican food is growing, they noticed that nachos are starting to become a common restaurant idea. Dave Young: Yeah. And that’s just cheese. There’s no such t

Mario Bros. is the biggest franchise of all time. Bigger than Star Wars, Marvel… bigger than Harry Potter. Nintendo is an empire. Dave Young: Welcome to the Empire Builders Podcast, teaching business owners the not-so-secret techniques that took famous businesses from mom and pop to major brands. Stephen Semple is a marketing consultant, story collector, and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode, a word from our sponsor, which is… Well, it’s us, but we’re highlighting ads we’ve written and produced for our clients. So here’s one of those. [Travis Crawford Ad] Dave Young: Welcome back to the Empire Builders Podcast. Dave Young here with you, and Stephen Semple’s alongside, with another empire-building story for us that- Stephen Semple: An exciting story. Dave Young: It’ll take you back to childhood, but it doesn’t take me back to childhood because I’m too goddamned old. Stephen Semple: Well, it depends how you look at this, this might be- Dave Young: No, I suppose. I suppose the company [inaudible 00:01:55]. Stephen Semple: It might be older than your childhood, but depends what we decide to talk about. Dave Young: Yeah, it’s just like when the big games came out, the… So we’re talking about Nintendo today. Stephen Semple: Correct. Correct. Dave Young: And I had Atari and things like that. And my kids all had the Nintendo. I actually have a Nintendo Switch, but I didn’t get that until I was… Stephen Semple: It also originally started as an arcade game, if we go back, because we are going to go back far enough. Dave Young: Well, that’s true. That’s true. Stephen Semple: Yes, yes. But if we actually went back to the company, Nintendo, we would be going back to 1889. Dave Young: Okay. So not so much my childhood. There you go. Stephen Semple: 1889. Yeah. And we’re really not going to talk so much about the origin and Nintendo as a company, but really, the origin of the video game business, and more specifically Donkey Kong, and went on later to become the Mario Brothers franchise. That’s really what we’re going to talk about. Dave Young: Now, hold on. Hold on. Hold on. Now, I don’t know everything, but I’m pretty sure video wasn’t around in 1889. Stephen Semple: It was not. Dave Young: There was no video games. Stephen Semple: No, there was not. So that’s why we’re really going to be talking about more of the recent history of Nintendo. Dave Young: A real Donkey Kong, climbing ladders and throwing barrels. Stephen Semple: Okay. That’s it. That’s it. Dave Young: Or a monkey, a gorilla. Yeah. Stephen Semple: And here’s the thing, the Mario Brothers franchise is huge. It’s one of the biggest franchises in history. There’s been 800 million video games sold worldwide, making it the bestselling video game of all time. It’s bigger than Pokemon in game sales alone. The estimated lifetime sales across all revenues for the Mario Brothers franchise is $60 billion. Bigger than Star Wars, bigger than Harry Potter, bigger than Marvel. Dave Young: Wow. Stephen Semple: The movies alone sold over a billion dollars. There’s theme park now. It’s huge. It’s absolutely massive. And the Nintendo company is very old. It was founded back in Kyoto, Japan in 1889 by Fusajiro Yamauchi. That’s it, Yamauchi. Dave Young: Oh. Stephen Semple: Boy, I’m going to struggle with these names. Dave Young: What were they doing back then? What was the company doing? Stephen Semple: The first product they did was a playing card called Hanafuda, and it was very, very successful. So they actually started- Dave Young: As a gaming company. Stephen Semple: … in game business doing playing cards. Dave Young: Okay. Stephen Semple: Now, during the 1950s, during Japan’s economic recovery, because if you remember, the economy was decimated in World War II, and through the Marshall Plan and whatnot, there was this rebuild going on. And during that time, they had a new leader, Hiroshi Yamauchi, who decided to explore all sorts of new businesses. He was doing all sorts of stuff. They had taxis, they had love hotels. Yes, you heard it right, love hotels. Dave Young: Love hotels. Stephen Semple: Instant rice, and of course, toys. And most of the things they did failed, except toys held a promise, so they continued to lean into toys. So it’s April 1978, so this is basically really where our story starts, and Taito, a competitor, releases a game called Space Invaders. Dave Young: Oh, right. I remember Space Invaders. Sure. Stephen Semple: Remember Space Invaders? And of course, this is back in the day of arcades, and you’re putting money into the games. This is so big in Japan, there’s 100 yen shortage. It would be like being in the U.S., and we run out of quarters. Dave Young: Right. Stephen Semple: It’s so big. So Nintendo, because it’s having some success in the game space, decides to make a knockoff of Space Invaders. So it’s October 1980, they create this knockoff called Radar Scope, and they decide also to ship it to the U.S., because they’ve started up a U.S. division. And it takes four months for the game to travel from Japan to the United States, and once it arrives, the trend has changed, it’s no longer Space Invaders, it’s now Pac-Man is the big game. Dave Young: Okay. Stephen Semple: So they’re left with these 2,000 unsold cabinets sitting in the United States. Enter Shigeru Miyamoto, who’s a graphic designer with Nintendo, and he has an idea, and he says to them, “Look, let’s reuse the cabinets, and let’s just create a new game. Let’s do that.” And it’s like, “What the heck? Let’s give this a try.” So Shigeru grew up in rural Japan, and this deeply influenced how he looked at games, because he grew up in a place where there was no television, none of these things, and he would go and he would play in like a cave that was nearby, and he would create all of these stories and characters. And this is the ’80s where the games do not have characters or a story. Dave Young: Okay. Yeah. Stephen Semple: They didn’t have that. Dave Young: Space Invader, you’re just knocking down… Stephen Semple: Right. Pac-Man, the same thing, there was no story. Pong, all that stuff, no stories. He takes a look around and he realizes that Nintendo has the rights to use Popeye, so Shigeru makes a suggestion to create a game using Popeye, where they already have the rights, and he moves ahead and does that. And so he also decides to make a game where characters move up rather than scrolling left to right, and there’d be different levels, which was also a relatively new idea. And he created this whole thing where they could jump, and using just a joystick in the buttons that already existed. So they started to create this game, but they hit a snag. Just before the release, they discovered Nintendo only had the rights to use Popeye for playing cards. Dave Young: For playing cards. Darn it. Stephen Semple: Now, turns out this was a gift from heaven, and the best thing that could ever happen in Nintendo. Dave Young: So it would’ve been Bluto up at the top, and Popeye trying to get up there, climbing the ladders and- Stephen Semple: And saving- Dave Young: So sort of a nautical theme? Stephen Semple: And saving olive oil. Dave Young: Yeah. Stephen Semple: Because remember, he would always capture olive oil. Dave Young: Yeah. Stephen Semple: And Popeye was this love triangle, right? Dave Young: Yeah. Stephen Semple: So what does Shigeru do? Replaces- Dave Young: Bluto becomes- Stephen Semple: … with- Dave Young: … the gorilla. Stephen Semple: Right. Popeye becomes Mario. Dave Young: Yeah. Stephen Semple: And olive oil is Princess Peach. Dave Young: Okay. Stephen Semple: It’s the same story. Dave Young: Yeah. Beautiful. Stephen Semple: It’s exactly the same story. And if you think about it, even the whole idea of this gorilla capturing the princess kind of sounds like King Kong, doesn’t it? Dave Young: A little bit. Sure. Stephen Semple: A little bit. And of course, they can’t use the name King Kong, so it’s Donkey Kong. And the reason why Donkey Kong is, he went looking through English dictionaries, and there’s all this stubbornness, and all this other things that go along with it. So we went, “You know what? This monkey, this Kong is kind of stubborn.” So Donkey Kong is the name of the game. Dave Young: Did they run into any issues with the King Kong folks? Stephen Semple: Nope. Dave Young: No? Stephen Semple: No, because you think about it, it’s a completely different name, Donkey Kong, right? Dave Young: Yeah, but it’s still a big gorilla with the word Kong in it. Stephen Semple: Yeah. Nope, no. It was different enough. Dave Young: [inaudible 00:09:14] just because it’s stubborn, and it sort of went with the word Kong? Stephen Semple: Yep. So it was different enough. It was all great. And the original character was not Mario. Dave Young: Stay tuned. We’re going to wrap up this story and tell you how to apply this lesson to your business right after this. [Using Stories To Sell Ad] Let’s pick up our story where we left off, and trust me, you haven’t missed a thing. Stephen Semple: And the original character was not Mario. The original character was Jumpman. Jumpman. Dave Young: I kind of remember that. Stephen Semple: Jumpman. And the game allowed them to reuse the cabinets, and just do it. And think about it, the objective of this, because he was also just a very junior graphic designer, and the objective on this was, “Hey, if we can sell these 2,000 unsold cabinets sitting in the U.S., that’ll take the financial strain off of our U.S. operations, and it will be great, it will keep them afloat.” And here’s what happened, they sold in 1981 alone 60,000 cabinets. Dave Young: I tell you, I poured a lot of money into one of those cabinets when I was in college. Stephen Semple: So Shigeru goes from this low-level designer to the creator of one of the best performing games up to that point. And one of the things that also en

300 hundred restaurants in 22 countries might not sound like a billion dollar empire, but you would be wrong. Dave Young: Welcome to the Empire Builders Podcast, teaching business owners the not-so-secret techniques that took famous businesses from mom-and-pop to major brands. Stephen Semple is a marketing consultant, story collector, and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode, a word from our sponsor, which is… Well, it’s us, but we’re highlighting ads we’ve written and produced for our clients, so here’s one of those. [OG Law Ad] Dave Young: Welcome back to the Empire Builders Podcast. I’m Dave Young. Stephen Semple is here, and we’re going to talk about the building of another empire. And I’ve got to admit, I don’t know a whole lot about this one. I’ve maybe… Stephen Semple: Oh, wow. That’s exciting. Dave Young: We’re going to talk about P.F. Chang’s. I’ve maybe eaten at one of them, I would say less than half a dozen times in my life. Stephen Semple: Okay. Dave Young: And I think it’s just more of a convenience and proximity issue. I’m never really near any of them. Stephen Semple: So while they’re big, they’re not massive. They’re 300 restaurants in 22 countries, so they’re not like many of the other things we’ve talked about where there’s thousands of them. Dave Young: Right. Stephen Semple: So no, they’re not as prevalent. But look, 300 restaurants is still pretty successful. Dave Young: Yeah, that’s a lot. How did they get started? I’m not going to guess. I’m going to let you tell me. Stephen Semple: Okay. The business was founded by Philip Chiang and Paul Fleming. And Paul Fleming, you might recognize because he’s of Ruth’s Chris Steakhouse fame. Dave Young: Oh, okay. Stephen Semple: They got together, and they founded P.F. Chang in Scottsdale, Arizona- Dave Young: That makes a lot of sense. Stephen Semple: … in 1993. Now, Philip spells his last name C-H-I-A-N-G. So at a certain point, he changed his spelling just to make it easier. Drop the I and make it easier. Dave Young: Drop the I and made it just… Spell it the way it sounds. Stephen Semple: … Spell it the way it sounds, make it easier for the U.S. market. And the company has been bought and sold a few times over the years, but the first acquisition from the founders, from Philip and Paul, happened in 2012 by Centerbridge Partners in a deal worth a little bit over a billion dollars. Dave Young: Wow. Stephen Semple: They did okay. They walk away with some cash. Dave Young: Now, was it before or after they started putting it in supermarkets? Stephen Semple: I do not know the answer to that question. Dave Young: Probably predates. Stephen Semple: I’m going to suspect after. Dave Young: Okay. Stephen Semple: But the story starts with Philip’s mother, Cecilia Chiang. Cecilia was born in Beijing in 1920 to a really wealthy family. She grew up in a palace in China, ate high-end food, full staff, chefs, the whole nine yards, part of the aristocracy. And during the Chinese Civil War and the Japanese occupation, her family fled China and relocated in Japan, and there, the family opened a restaurant. Now in the 1960s, she travels to the U.S. Cecilia travels to U.S. to help her sister who came to America because of the economic challenges in Japan, and her sister had opened a restaurant in San Francisco and needed help- Dave Young: Okay. Stephen Semple: … and Cecilia came over to help her. But that venture failed, but Cecilia still remained in the U.S. And look, Chinese food in America at that time was not good. If you look at just about every food that has come to United States, the first people who brought it, whether it was Italian, whether it was Mexican, whether it was Chinese, the first immigrants were the people who were poor. Dave Young: Yeah. What years are we talking about here? Stephen Semple: 1960. Dave Young: Okay. Stephen Semple: So the first immigrants who came were the people who were poor, so therefore, typically the food is not the great food, it’s not made with the great ingredients. And so here she is, she’s looking around and she’s saying, “Look, there’s this poor Chinese food, all basically from the Canton region.” And most of it has been also turned into an American version, because basically, again, people were making it with whatever was available, so it really became very Americanized. Dave Young: Right. Stephen Semple: And Cecilia saw that, and what she wanted to do was introduce America to a more refined Chinese food, what she had experienced growing up as a wealthy person in China. So in 1961, she opens a sit-down restaurant with food from Northern China called The Mandarin. Dave Young: Okay. Stephen Semple: And it opens not in Chinatown, because here’s the thing that she recognized, context is everything. If she opened it in Chinatown, people’s expectation would be it would be the same as all the Chinese restaurants in Chinatown. Dave Young: All of them. Right, right. Stephen Semple: So what she did, she opened it on Polk Street, not far from Pacific Heights in San Francisco. Dave Young: Okay. Stephen Semple: Bit of a bold move, but she wanted to be seen as different, and that was how you did it. Dave Young: Makes sense. Stephen Semple: Now, the menu had some things that were unfamiliar, like pigeon, and it did not have some things that were expected like chow mein. And she struggled initially, because America was not really ready to try new things. Now, after two years of struggle came her breakout moment. The restaurant was visited by a guy by the name of Herb Kane, who was the most influential columnist in San Francisco history. He was a writer for the San Francisco Chronicle. But here’s the interesting thing, not a food critic. And he comes in the restaurant, falls in love with it, and gives it a great review. And overnight, the place becomes famous. You couldn’t get into it. It was visited by the likes of Julia Child, James Beard. It was totally on the radar. And I actually think the review may have even been more powerful because he was not a food critic. Dave Young: Sure. Yeah. Stephen Semple: But it also goes to show you… We talk about influencers, influence and all these other things, most restaurants be like, “We’ve got to get the food critics in here.” This guy was just a columnist who came in to try out their food- Dave Young: Right. Stephen Semple: … and it made them famous. And one of the things he loved was Peking duck, and so today Peking duck is pretty normal, it was really new back then. And suddenly, authentic Chinese food started to pop up. This really started it. In the late 1960s, Chinese restaurants in the United States doubled to about 10,000 of them. 1966, the first sushi restaurant opens. She opens the second restaurant, and Philip… And we’re talking about Philip Chiang? Dave Young: Right, right. Stephen Semple: Philip, her son, joins the business, and opens The Mandarin Cafe in LA, where he starts modernizing Chinese dishes for American diners, so starts doing a bit more of a fusion, right? Dave Young: Mm-hmm. Stephen Semple: Now, it’s here that Philip meets Paul Fleming, from Ruth’s Chris Steakhouse. Dave Young: Right. Stephen Semple: And Philip starts to build a bit of a friendship with Paul, and wants to work with Paul, wants to leverage his knowledge. Because after all, Ruth Chris is an upscale restaurant, and there’s this rise of casual chains, but Paul is not super excited, because none of them are Chinese, nor is Cecilia. She’s like, “I don’t really want to do this.” Philip is determined, he stays in touch with Paul. So 1979, things really start to change, because the restaurant called China Coach is opened by Wolfgang Puck, and it grows very quickly to 50 restaurants. And it’s the early ’90s, and Cecilia is ready to sell the restaurants. Dave Young: Stay tuned, we’re going to wrap up this story and tell you how to apply this lesson to your business right after this. [Using Stories To Sell Ad] Let’s pick up our story where we left off, and trust me, you haven’t missed a thing. Stephen Semple: And it’s the early ’90s, and Cecilia is ready to sell the restaurants, which basically frees Philip to make the changes he wants to do. He cycles back to Paul. Paul’s now looking at it going, “Well, there is this place for this growth and all of this.” So they decide to start something new. And Philip wants to bring other Asian cuisines, he wants to take it beyond Chinese. Dave Young: Okay. Stephen Semple: So he wants to add other Asian foods to it. So he spends three years developing the menu, and they changed the spelling of his last name to make it easier. And in 1993, here’s the other thing I found really, really interesting, they chose to open in Scottsdale in 1993. And here’s where Philip learned something from Cecelia, she did not open in Chinatown, she opened somewhere where there was not Chinese restaurants. At the time in Scottsdale, it’s described as a Chinese food desert at the time. Virtually no Chinese restaurants in 1993. Now, many people would go, “Well, you want to open up somewhere…” Nope, open it in Scottsdale. Opening weekend, they had 1,000 people, some waited for hours. Dave Young: Wow. Stephen Semple: Lined up around the block. Now, what really made them successful is Paul brought his ability to be able to scale a business, upscale dining, and really grow the business. And this is what allowed them to quickly… They quickly drove to 200 locations in a few years. And in 2012, 19 years later, they sold it for $1.1 billion. Dave Young: A billion bucks. Stephen Semple: Yeah. And there was also a point in there where they went public, gave them a bump, and then they were sold, and business was taken private, and it’s changed hands a few times. Dave Young: Well, one thing I’ve always known is that they’re not like every Chinese restaurant you’ve ever been in. Even every small town in America has a Chinese restaurant that th

When no one wants your Meat Slingshot, what do you do? Make a better flying disc and name it after a pie plate, naturally. Dave Young: Welcome to the Empire Builders Podcast, teaching business owners the not so secret techniques that took famous businesses from mom and pop to major brands. Stephen Semple is a marketing consultant, story collector and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode, a word from our sponsor, which is… Well, it’s us, but we’re highlighting ads we’ve written and produced for our clients. So here’s one of those. [ECO Office Ad] Dave Young: Welcome back to the Empire Builders Podcast. Dave Young here with Stephen Semple and today’s topic, Wham-O. It’s from Wham-O. In all the toy stores, I’m trying to think. Slinky wasn’t Wham-O, was it? Stephen Semple: No, Slinky was not Wham-O. Dave Young: Yeah. I’m trying to think of what Wham-O was. Stephen Semple: Frisbee’s. Dave Young: Frisbee’s. Stephen Semple: Hula Hoops. Dave Young: Okay. Stephen Semple: All sorts of crap, right? Dave Young: I didn’t realize the Frisbee was a Wham-O product. I mean, I remember the name. I remember the ads and it’s a cool name. Stephen Semple: Yeah. Well, it’s so funny. Wham-O was Frisbee, Hula Hoops, Slip ‘N’ Slide, Super Ball, all of those- Dave Young: Probably lawn darts. Stephen Semple: All of those sorts of things were Wham-O. But what I find funny is before getting on, we were talking about this whole thing of sounds and things like that and communication. And then all of a sudden it’s like, “Oh, we’re going to talk about a company whose name actually has that real kinetic feel of Wham-O.” Dave Young: Mm-hmm. I love a name that is also a sound. And if we have time, I’ll tell you about a client I’m working with that we changed the name of the company to make it a sound. Stephen Semple: Oh, that’s cool. Dave Young: Yeah. Stephen Semple: That’s awesome. Oh, the other ones that they did, Hacky Sack and Silly Strings was a couple of the other ones. Dave Young: Were they responsible for lawn darts? That’s my question. Stephen Semple: I’m not sure if they’re responsible for lawn darts. So since it didn’t come up- Dave Young: Maybe not. Yeah. Stephen Semple: … I guess probably not. The company started in 1949 out of, basically a lot of these things out, of the garage in South Pasadena. And it was Richard Knerr and Arthur Melin, who are basically two university graduates, started this company. And their first product was a slingshot, was a wooden slingshot made from ash wood. And the name Wham-O was actually inspired by the sound of the slingshot hitting a target. Dave Young: You release it… Yeah. Stephen Semple: Yeah. Yeah. Dave Young: Very satisfying. Stephen Semple: But here’s the funny thing is, it wasn’t originally… The idea behind making it was not actually a toy. They loved training falcons, and it was to train falcons for hunting. Dave Young: A slingshot? Okay. Stephen Semple: They would shoot the meat into the air. They got frustrated that the regular slingshot wouldn’t fire it the way they wanted to do it, so they made their own. Dave Young: So they made a meat slingshot. Stephen Semple: Made a meat slingshot. Dave Young: It turns out there wasn’t a huge market for meat slingshots. So you pivot and put it in the hands of children eventually. Stephen Semple: It’s the 1950s, dude. Dave Young: Uh-huh, that’s right. “You’re going to put an eye out.” Well, somebody already did. Stephen Semple: Be careful with that hamburger you’re firing out. Dave Young: But that was their fault, not ours. Yeah. Those were the days, right? Stephen Semple: Right. Dave Young: When the manufacturer could say, “Well, that’s your fault. You shouldn’t have been an idiot.” Stephen Semple: “What’d you expect a rock to do?” But again, so many businesses, it started with them just solving their own problem. And their own problem was they wanted this thing. But what they found out, they created one that was so good that all of a sudden was like, “Wow,” people became interested in this. Dave Young: It the wrist rocket? Stephen Semple: You know what? I was able to find- Dave Young: I don’t know if that’s the same kind of- Stephen Semple: I wasn’t able to find pictures of the original thing around, because it didn’t do particularly well, but it kind of put them onto a path. Because very quickly they added blow guns and boomerangs. Dave Young: Nice. Stephen Semple: Right? But the whole idea was these types of things. And they get to the stage with these various products. So they’ve got the slingshot, they got the blow gun, they got the boomerang, they got these little niches going on and they’re selling basically $100,000 a year of this stuff. But they’re thinking to themselves, “If we’re going to really make this a business, we need a bigger idea.” And I’m going to say, if you’re going to really make this a business, you need an idea which is not going to put somebody’s eye out. Dave Young: Probably. This is, again, like you said, the 1950s. Stephen Semple: 1950s. Really, no seat belts, like, “Come on now.” Dave Young: The BB gun’s already invented. Stephen Semple: You know, it’s funny, when you think back to how we were with safety and things like that, one of my really fond memories… Now this wouldn’t have been the ’50s, this would be the ’70s, but one of my really fond memories of being a kid was we’d be hauling stuff somewhere and we had this old green wood trailer with oversized tires on it that bounced like crazy when you’re driving down the road. And one of the funnest thing is we would go somewhere and coming home, all the kids would pile into the trailer in the back as we’re driving down the road. Dave Young: You’d be the ballast to hold down the sheets of plywood. Yeah. Well, who needs tie downs when you’ve got 200 pounds of children? Stephen Semple: And the weird thing is, it’s not like anybody thought that was weird. Dave Young: No. Stephen Semple: That was what you do. Dave Young: Yeah. And if you weren’t on the trailer, you were sitting on the edge of a pickup with your back to the road. Stephen Semple: Exactly. Exactly. Anyway, back to Wham-O. They’re needing a bigger idea. And while they’re on the beach, they come across this flying disc called Whirlaway. Dave Young: Okay. Stephen Semple: Right? And they decide… They also found another one called Pluto Platter. So it didn’t work. It wasn’t really selling. And so Wham-O, they buy the rights to this. They go, “Look, we’ll buy the rights to this.” They make a few couple of design changes. And Morrison saw this people also tossing these metal pythons, right? Dave Young: Oh, okay. Stephen Semple: And so that was actually where he came up with a little bit of the design change. He kind of looked at that and went, “Oh, this is much better than this Pluto Platter thing.” Dave Young: You drop the edge down and balances itself a little bit better. Stephen Semple: Yeah, yeah. And one of the pie plates they came across, guess what the name of the pie plate was? Dave Young: Frisbee maybe? Stephen Semple: Bingo. Dave Young: Yeah? Okay. Stephen Semple: Frisbee. Dave Young: Okay. So they buy that too or just- Stephen Semple: They just trademarked that because it wasn’t trademarked. So they went and trademarked the Frisbee name. And in the first two years, they sell a million Frisbees. Dave Young: Wow. Stephen Semple: Right? And what they did to promote it, so here’s the really cool idea, they go to university campuses and they also gave it to people and people, guess what, immediately found on university cool ways to do tricks and stuff with the Frisbee. So that then got it going. And look, this was pre social media days. Imagine what you’d be able to do today in terms of demonstrating all this crazy stuff on social media. Dave Young: Well, you’d have to get people off their phone. Stephen Semple: Yeah. But what they have now is they have a way of creating ideas. And what they realized was they had to look for things and just make them better. So they created this open door policy. They would listen to anybody, “Come pitch an idea, we’ll listen.” So the next one was a neighbor had come back from Australia with this bamboo exercise hoop, and you had to use it doing a movement like a hula dancer. Dave Young: Yeah. Okay. Stephen Semple: And so they do a handshake deal. And if it’s a hit, we’re going to give you royalties. And instead they make it out of this lightweight, colorful plastic, and they put little beans inside so that it makes a sound. Dave Young: Absolutely. Stephen Semple: It also has a little bit different feel to it. They took this idea to parks and they demonstrated it. And what am I talking about, Dave? What’s the name of the toy? What’s the name of the toy? Dave Young: Oh, it’s the Hulu Hoop. Yeah. Stephen Semple: Bingo. Yeah, it’s the Hulu Hoop. And in 1958, they launched the Hula Hoop, and it’s the biggest toy fad in history. And I think it still is. Dave Young: Oh yeah, I think. Stephen Semple: I think it still is. Dave Young: Yeah. Stephen Semple: And they were farming out the product they couldn’t keep up with production. Now, here’s where a little problem happens for them. Remember that handshake deal? If this is a deal, we’re going to pay your royalties? Dave Young: Yeah, yeah. Stephen Semple: They didn’t pay any royalties and they got sued. Dave Young: Shoot. They should have paid the royalties. Stephen Semple: On top of that, knockoffs happened, right? Dave Young: Yeah. Stephen Semple: Because it was pretty easy to copy and people were making it cheaper. And then by the end of 1958, they actually reported a loss because of so much of this competition going on. Dave Young: Really? Okay. Stephen Semple: Yeah. So they stopped production. They’ve got growing debt. They’ve got a warehouse full of unsold product. So they need to find another hit. Because what they’ve noticed is in their business model is the to

Momofuku Ando is the father of Instant Ramen. Feeding Japan after the war. But how do you get Americans to eat it? Dave Young: Welcome to The Empire Builders Podcast, teaching business owners the not-so-secret techniques that took famous businesses from mom-and-pop to major brands. Stephen Semple is a marketing consultant, story collector and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode, a word from our sponsor, which is … well, it’s us, but we’re highlighting ads we’ve written and produced for our clients. So here’s one of those. [AirVantage Heating & Cooling Ad] Dave Young: Welcome to the Empire Builders Podcast. I’m Dave Young. Stephen Semple’s right there standing by, and he just told me what we’re going to be talking about and, man, it took me back to college days. In fact, I was looking at photos over the weekend. I have some photos of when I was in college, and this is way back 20 years before the turn of the century, to tell you how long ago this is. Stephen Semple: I hate how you put it that way. Dave Young: This is 20 years before the turn of the century. That’s a lifetime ago. But there were days in college where it’s like, “Well, gosh, Mom and Dad haven’t sent me any money and I haven’t gotten the job that I told myself I’d get,” so you go to the store, and what do you find? It’s either ramen or, if you want an upgrade, Cup O’ Noodles. And the Cup O’ Noodles, as everyone that’s ever been poor knows, is a noodle soup in a cup, and you take the lid off, put some water in it, throw it in the microwave, voila. Am I right? Is that what we’re talking about, or is this some new form? Stephen Semple: No, no, that’s what we’re talking about. That’s what we’re talking about, not some new Tesla called Cup O’ Noodles. No, no, you’re right, but I want you to hold onto that thought of it as being an upgrade from ramen, because we’re going to revisit that. Dave Young: Not an upgrade? Stephen Semple: We’re going to revisit that whole idea, because that’s brilliant. It was started in the 1950s and it was a new idea then, but today there’s over a hundred billion servings of instant noodles eaten every year. And it’s estimated that Cup O’ Noodles sells between 18 and 25 billion servings a year. It’s inside of a larger organization, so it’s hard to know exactly, but that’s the estimates I’ve come across. Dave Young: Dude, that’s like feeding the planet three times in one day. Stephen Semple: Right? Isn’t that crazy? Dave Young: Yeah. Stephen Semple: So, empire? Yeah. Dave Young: Yeah. There’s some guy sitting on top of that noodle money somewhere, and I guess we’re going to hear the story. Stephen Semple: So in the 1950s in the United States, food is boring. Eating out was like literally going to diners, and international food really only existed in big cities that had Chinatowns. Dave Young: Yeah. Stephen Semple: And, following World War II, there was actually a strong anti-Asian feeling in the United States. Meanwhile, back in Osaka, Japan, there’s a food crisis after the war because basically Japan has been decimated, and bread is being distributed by the U.S. and it’s really plentiful, but people wanted more traditional meals. Dave Young: They’re not used to bread. Stephen Semple: Right. It’s not part of what they normally eat. So Momofuku Ando is a 48-year-old businessperson. He’s lost his company. He went to jail for tax evasion. All sorts of bad things went on, but he’s out of jail and he’s looking to start his new business, and he sees people lined up for ramen, so there is a ramen tie in here. Dave Young: There you go, yeah. Just to be fair, I wasn’t talking about ramen from a store or from a vendor. I’m talking about those little bricks of Top Ramen. Stephen Semple: Yeah, yeah. Hold onto that. Hold onto that thought. We are going to come back to that, yes. So, ramen was created when noodles basically came over from China, and 1910 is the earliest record we could find of a ramen shop in Japan, so it looked like it was around 1910. Dave Young: Yep. The Japanese didn’t have noodles till 1910? Stephen Semple: They didn’t have the type of noodles in ramen, yes. Dave Young: Okay. See, I mean, we could go a whole nother direction on this if you wanted to, in the Japanese industrialization of them going around the world and bringing all kinds of new technology back to Japan in the early 1900s. Stephen Semple: Yes. Dave Young: Turns out, including noodle technology. Stephen Semple: Including noodle technology, and we forget how closed Japan was. Dave Young: Oh, yeah. Yeah. Stephen Semple: Basically, the only thing that was imported was silk. Right? That was about it. Very, very closed economy, and then yes, lots of … And when things changed in Japan, boy, they changed in a hurry. It went from basically medieval to industrial in like, that. It was crazy. Dave Young: Yeah. Stephen Semple: Yeah. Dave Young: I mean, you and I are both whiskey fans, and we know that the story of Japanese whiskey is the same story. The Japanese guy goes to Scotland, falls in love with Scotch whiskey, figures out how to make it, comes back to Japan and builds the Japanese whiskey industry. Stephen Semple: Yeah. Dave Young: Let’s go back to noodles. I’m sorry. I will distract us all day long. Stephen Semple: No, but it is an interesting thing. Now, the main drawback to ramen is it’s hard to make at home. The noodles need to be fresh. They’re hand-cut. They’ve got to come from shops. And so what Momofuku decides is he wants to make a ramen product that is tasty, non-perishable, easy to make, affordable, and ready in five minutes with hot water. Dave Young: Wow. Stephen Semple: That’s his goal. Dave Young: That’s a goal. Stephen Semple: On top of that, he has no culinary training. So he invests every last penny into this, because he needs something he can put into a grocery store as well on the non-perishable, because there’s few refrigerators or ovens in Japan at this time. Dave Young: Okay, yeah. Stephen Semple: And the key is the broth, and it can take days to make the broth. So here was his question. If everyone loves ramen, why is it so hard to make? And so he tries drying the noodles, then he gets the broth dried into the noodles, and he spends several years working on this and nothing seems to work. And one day, he notices his wife tempura-frying food and the batter dehydrates immediately the moment it hits the oil, because what does oil do? Removes water. So now what he does is he drops the noodle into this high-heat oil, and it creates a shell. He then takes fresh noodles, cooks them in the broth until it’s saturated, drops it into the oil, and the water is cooked out. It works. Dave Young: Wow. Stephen Semple: It works. He’s now got this dried noodle. Now he needs to get it in the store. So he starts with chicken ramen, and that’s more expensive. It’s about six times the price of regular ramen, but what he finds is people are willing to pay for the convenience. So in 1961, it hits stores in Osaka and it sells like crazy, and it’s called Magic Ramen by customers. Dave Young: Magic Ramen. I like that. Stephen Semple: Yeah, and he gets to the point where he borrows a million yen to open a factory. In the first year they’re doing 13 million packages, and the second year, 50 million packages a year. Now, to put that in perspective, 50 million packages a year, the TV dinners at that time is one half the number of sales of the amount of ramen that they’re selling in Japan, of this instant ramen. Dave Young: Wow. Okay. Stephen Semple: It’s 1962, and this idea is getting very copied. There’s now 70 companies in the space in Japan in a few short years. And some are also cheaper and the economy in Japan is still recovering, so Momofuku decides he’s going to spend a couple of million bucks and he’s going to bring this product to the United States. Dave Young: Okay. Stephen Semple: Now, the timing is really bad. In 1968, there’s a hoax letter written to the New England Journal of Medicine by Dr. Kwok that MSG is unsafe and The New York Times reports on it, and this becomes a placebo effect on all Chinese food. Dave Young: What year was this? Stephen Semple: ’68. Dave Young: ’68, okay. Stephen Semple: The letter was written on a bet by Dr. Howard Steele, who was a pediatric who was having a hard time getting published, and there was this bet that, “Oh, I bet you if you wrote something this way, it would get published,” so he creates this hoax and it gets published. Dave Young: And people still believe it? Stephen Semple: Yeah. He created this fake research facility with a made-up name, and it’s amazing. Sounds kinda familiar for the world we’re in today, and MSG is declared unsafe for years later. Dave Young: Well, my wife thinks MSG doesn’t agree with her. Stephen Semple: Well, some people, it may not. Dave Young: Maybe it doesn’t, but I don’t know. Stephen Semple: But again, that could be just a food intolerance, right? Dave Young: You don’t know, yeah. Stephen Semple: Yeah. So Momofuku travels to the United States. Here’s one of the things he figures out. He runs into a bit of a challenge with the U.S. market. He realizes he needs to do sampling, because it became successful in Japan because it was a familiar food that became convenient, right? So it was only one step away, a familiar food that became convenient. It was not a familiar food in the United States, so he decided he needed to do sampling, so he goes over to the U.S., sets up sampling in grocery stores. This anti-Asia movement is so strong, people won’t even try it. It’s too new. Dave Young: Yeah. Stephen Semple: Won’t even try it. Dave Young: And don’t know what ramen is. Stephen Semple: Right. So when he’s done, he’s got all this product left over and he decides, “I’m not going to take this product back to Japan,” so he leaves it for the staff, but what he notices is the staff are eating it, but very differently. Dave Y

Larry Page said in the early day, a guiding principle is Do No Evil. I wonder if we can say that today or is it just business as usual? Dave Young: Welcome to the Empire Builders Podcast, teaching business owners the not-so secret techniques that took famous businesses from mom-and-pop to major brands. Stephen Semple is a marketing consultant, story collector, and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode, a word from our sponsor, which is, well, it’s us, but we’re highlighting ads we’ve written and produced for our clients. So, here’s one of those. [Out of this World Plumbing Ad] Dave Young: This is the Empire Builders Podcast, by the way. Dave Young here, Steve Semple there. I wonder, Stephen, if we could do this whole episode without mentioning the name of the company that we’re going to be talking about. I ask that for the simple reason of they already know. They already know what we’re talking about. They already know we’re talking about them. They probably knew we were going to talk about them. Stephen Semple: Because of all the research I’ve done on my computer. Dave Young: No, because they’re listening to everything. They probably already know the date that this is going to come out and how long it’s… I don’t know, right? When they first started, and I don’t think we felt that way about them, and I can remember back in the early 2000s, just after the turn- Stephen Semple: In the early days, they had a statement. Larry Page was very famous. Dave Young: Yeah, “Do no evil.” Stephen Semple: “Do know evil. Do no evil,” and that was a very, very big part. In fact, in the early stages, they made a bunch of decisions that challenged the company financially because they were like, “This is not good experience for the person on the other end.” I wonder if anybody’s guessed yet what we’re going to be talking about. Dave Young: Well, then you go public, and it’s all about shareholders, right? It’s like the shareholders are like, “Well, we don’t care if you do evil or not. We want you to make money.” That’s what it’s about because you have [inaudible 00:03:01]. Stephen Semple: All those things happen. Dave Young: Yeah. Stephen Semple: This company that we’re talking about, we’ll go a little while before we’ll let the name out, was founded… On September 4th in 1998 was when it was actually founded. Dave Young: Oh, ’98. It goes back before the turn of the century [inaudible 00:03:14]. Stephen Semple: Yeah. It was founded by Larry Page and Sergey Brin, who met at Stanford. Interesting note, the Stanford grads also created Yahoo. Dave Young: Okay, yeah. Stephen Semple: That’s giving you another little clue about the company that we might be talking about. Dave Young: In the same geek club. Stephen Semple: Yeah, so 1998. I was thinking back, one year after I graduated from university, Windows 98 is launched and, believe it or not, the last Seinfeld episode aired. Dave Young: Are you kidding me? Stephen Semple: No, isn’t that crazy? Dave Young: ’98. Stephen Semple: Yeah. Dave Young: I mean, I was busy raising four daughters in ’98. Stephen Semple: Yeah. Today, this company, as you said, because you didn’t want me to name the company, has more net income than any other business in US history. It has, now, I got to let the cat out of the bag, eight and a half billion searches a day happen. And yes, we’re talking about the birth of Google, which is also now known as part of the Alphabet group. Dave Young: Alphabet, yeah. It’s funny how they got to get a name that means everything. Did they have a name before Google? I know Google was like… Oh, it’s a number really, right? It’s a gazillion, bazillion Googleplex. Stephen Semple: As we’ll go into a little bit later, they actually spelled it wrong when they registered the site. That’s not actually the way that the word is spelled. I’ll have to go… But yeah, the first iteration was a product called BackRub was the name of it. Dave Young: Backrub, okay. Stephen Semple: Alphabet also owns the second largest search engine, which is YouTube. Together, basically, it’s a $2 trillion business, which is larger than the economy of Canada. It’s this amazing thing. Going back to 1998, there are dozens of search engines all using different business models. Now, today Alphabet’s like 90% in the market. Up until this point, it’s been unassailable, and it’s going to be really interesting to see what the future of AI and whatnot brings to that business. But we’re not talking about the future, we’re talking about the past here, so back to the start. Larry Page was born in Lansing, Michigan. His dad is a professor of computer science. His mom is also a computer academic. This is in the ’70s. Between 1979 and ’80, his dad does a stint at Stanford and then also goes to work at Microsoft. Now, Larry and Sergey meet at Stanford, and they’re very ambitious, they’re equal co-founders, but Larry had this thing he also talked about where he said, “You need to do more than just invent things.” It wasn’t about inventing things, it was about creating things that people would use. Here’s what’s going on in the world of the web at this time to understand what’s going on. Here’s some web stats. In 1993, there’s 130 websites in the world. In 1996, three years later, there’s 600,000 websites. That’s a 723% growth year over year. The world has never seen growth like that before. Dave Young: Right, yeah. It was amazing to experience it. People that are younger than us don’t realize what it was. Josh Johnson, the comedian, has a great routine on trying to explain to people what it was like before Google. You needed to know something- Stephen Semple: What it was like for the internet. Dave Young: Yeah. You had to ask somebody who knew. If you needed the answer to a question, you had to ask somebody. And if they didn’t know, then you had to find somebody else, or you had to go to the library and ask a librarian and they would help you find the answer- Stephen Semple: Well, I don’t think it’s like a- Dave Young: … maybe by giving you a book that may or may not have the answer. Stephen Semple: Here’s an important point. I want you to put a pin in that research. We’re going to come back to it. I was about to go down a rabbit hole, but let’s come back to this in just a moment, because this is a very, very important point here about the birth of Google. Larry and Sergey first worked on systems to allow people to make annotations and notes directly on websites with no human involved, but the problem is that that could just overrun a site because there was no systems for ranking or order or anything along that lines. The other question they started to ask is, “Which annotations should someone look at? What are the ones that have authority?” This then created the idea of page rankings. All of this became messy, and this led to them to asking the question, “What if we just focused on ranking webpages?” which led to ranking search. Now, whole idea was ranking was based upon authority and credibility, and they drew this idea from academia. So when we would do research, David, and you’d find that one book, what did you do to figure out who the authority was on the topic? You went and you saw what book did that cite, what research did this book cite. The further you went back in those citations, the closer you got to the true authority, right? Do you remember doing that type of research? Dave Young: Yeah, sure. Stephen Semple: Right. They looked at that and they went, “Well, that’s how you establish credibility and authority is who’s citing who.” Okay. They decided that what they were going to do was do that for the web, and the way the web did that was links, especially in the early days where a lot of it was research. Dave Young: Yeah. If a whole bunch of people linked to you, then that gives you authority over the words that they used to link on and- Stephen Semple: Well, and also in the early days, those links carried a lot of metadata around what the author thought, like, “Why was the link there?” In the early days, backlinks were incredibly important. Now, SEO weasels are still today talking about backlinks, which is complete. Dude, backlinks, yeah, they kind of matter, but they’re… Anyway, I could go down a rabbit hole. Dave Young: Yeah. It’s like anything, the grifters figure out a way to hack the system and make something that’s not authoritative seem like it is. Stephen Semple: Yeah. It’s harder that you can’t hack the system today. Anyway, but the technology challenge, how do you figure out who’s backedlinked to who? Well, the only way you can do it is you have to crawl the entire web, copy the entire web, and reverse engineer the computation to do this. Dave Young: Yeah. It’s huge. We’ve been talking about Google’s algorithm for as long as Google’s been around. That’s the magic of it, right? Stephen Semple: Yeah. In the early days, with them doing it as a research project, they could do it because there was hundreds of sites. If this happened even two years later, like 1996, it would’ve been completely impossible because the sheer size to do it as a research project, right? Now, they called this system BackRub, and they started to shop this technology to other search engines because, again, remember there was HotBot and Lyco and Archie and AltaVista and Yahoo and Excite and Infoseek. There were a ton of these search engines. Dave Young: Don’t forget Ask Jeeves. Stephen Semple: Ask Jeeves? Actually, Ask Jeeves might’ve even been a little bit later, but yeah, Ask Jeeves was one of them once when it was around. Dave Young: There was one that was Dogpile that was… It would search a bunch of search engines. Stephen Semple: Right, yeah. There was all sorts of things. Dave Young: Yeah. Stephen Semple: There was another one called Excite, and they got close to doing a deal with Excite. They got a meeting with them, and they’re looking at a license deal, million

When your year’s earnings are stolen and you need a quick way to make some cash on the cheap, you invent chocolate chip cookies. Dave Young: Welcome to the Empire Builders Podcast, teaching business owners the not-so-secret techniques that took famous businesses from mom-and-pop to major brands. Stephen Semple is a marketing consultant, story collector and storyteller. I’m Steven’s sidekick and business partner, Dave Young. Before we get into today’s episode, a word from our sponsor, which is, well, it’s us, but we’re highlighting ads we’ve written and produced for our clients. So here’s one of those. [North Texas Gutters Ad] Dave Young: Welcome to the Empire Builders Podcast. Dave Young here, along with Stephen Semple. Gosh, Stephen just keeps coming up with topics that are just so near and dear to my heart, and I think I might know the essence of this. Is it an empire? We’re going to talk about the birth of the chocolate chip cookie. Stephen Semple: Sure, but what’s the empire? There’s a lot sold? Dave Young: There’s a lot of… Boy, if you would have invested in chocolate chip cookies back in the day, think how much you’d have today. I’m guessing this has to do with Toll House- Stephen Semple: Yes. Dave Young: … and the inn… Was it an inn or a woman’s name? Stephen Semple: Yes. Inn. Dave Young: It was an inn. They’ve told the story I think on the bags or something. Anyway, have at it. I’m all in on chocolate chip cookies. Stephen Semple: So it’s the late 1920s and cookies have actually emerged as a business. The National Biscuit Company, Nabisco- Dave Young: 1920s. Stephen Semple: … yeah, has been a top seller for the last 20 years with their Oreo, mainly bought in stores, not made at home. Basically, to really understand the birth, we’ve got to go back to Whitman, Massachusetts, to Ruth Wakefield, who taught Home Ec, and she was also college-educated and she was interested in cooking. Ruth, her husband Ken, quit their job, invest their life savings into converting a 19th-century old home into a restaurant. They want to create a restaurant of their dreams, has these seven tables, doing traditional New England food, even has a kid’s menu with a dessert menu, but by the time they open the doors, it’s 1930. They’ve invested two years in doing this. Dave Young: Oh, no. And? Stephen Semple: And they’re down to their last few dollars. Now, they had picked a location with lots of traffic. They had picked a location that was basically where wealthy people traveled from Boston to Cape Cod and went through this area. They called the restaurant the Toll House. Now, because it was located on an old toll road, it was not the toll building, but it was located on an old toll road. Dave Young: Sure. Stephen Semple: Things started slow, but word got out and it started to get busy and they were known for their desserts, including the simplest. They did this butter pecan cookie that came with ice cream. Soon, customers are requesting the cookie without the ice cream. So they add cookies, they add these cookies as a standalone dessert. It’s 1935. It’s Labor Day. It’s the end of season. They’ve got lots of cash. They’ve done really well, and they are robbed. Dave Young: Oh, no. Stephen Semple: All their money is gone. They’re now at this crisis point because they’re the end of the season- Dave Young: Were they keeping all their money in a cookie jar? Stephen Semple: Perhaps. Basically, it’s the end of the season, they have no money, and they need to make something that is affordable, but it won’t cost much to make so they can create cash. They start with the butter pecan cookie, but then, she has this idea of a chocolate cookie. Dave Young: Yeah, pecans are expensive. Stephen Semple: Right, right. So Ruth says, “Okay, here’s what I’m going to do. I’m going to take a baker’s chocolate bar. I’m going to cut it up and add it to this cookie.” That was the idea. Now, they’re made out of baker’s chocolate, which is unsweetened, and it didn’t work out so well, and so they then started taking a Nestle semi-sweet bar and they took basically an ice pick to that and chip it away and let small pieces into it, which then created this sweetness without it being overly sweet. Dave Young: Yeah, because you’ve got the sweetness of the sugar and the dough and all of that working for you, too. Stephen Semple: Yeah, and they called them chocolate crunch cookies. Dave Young: Chocolate crunch cookies. Stephen Semple: Because remember it was the pecan. They were still a pecan with the chocolate chips. Dave Young: Oh, okay. Stephen Semple: And people started asking for the recipe. In fact, Boston Globe newspaper published the recipe and the recipe went crazy. Now- Dave Young: Sure. Stephen Semple: … enter Edouard Muller, who’s the Nestle CEO, and he’s in the US office. Sales are down 60% because war breaks out in Europe, not down in the US, but he wants to break into the US market because the US market is small for them at that point. He sees this sales spike in the Northeast. He’s like, “There’s this 500% increase in sales around Whitman, Massachusetts area.” Dave Young: Of Nestle chocolate. Stephen Semple: Right. He’s like, “What’s going on with that?” So he approaches them about buying the rights for the recipe. Dave Young: Okay. Didn’t know you could do that, but sure. Stephen Semple: Well, and in many ways, one could argue it was published by the newspaper, so it was in public domain, but he approaches them and he says, “Look, I want the rights to this recipe.” They pay her a dollar for it, plus hire her as a consultant, publish the recipe on the package and share the name of the restaurant so it also promotes the restaurant. That’s the deal they cut. Dave Young: Toll House. Yeah. Okay. Stephen Semple: Nestle changes how their bar is made, making it easier to cut up, and they rebrand and sales drop. Dave Young: Sales dropped? Stephen Semple: Yeah. Because what they find is the texture’s all wrong, people can’t break it along the lines of the bar and all this other stuff. So they have this crazy idea: why not just sell the broken pieces? Dave Young: Sure. Stephen Semple: And they start off calling them Nestle Toll House Morsels. Dave Young: Yeah, brilliant. Stephen Semple: The other thing he does is he gets it out of the candy aisle and puts it in the baking aisle. Because that was the other problem is it was sitting in the candy aisle. Dave Young: It’s where it belongs. Yeah. Stephen Semple: Put it in the baking aisle. Sales soar. Now remember the story of Ruth chipping off the chocolate? So why’d they call them morsels? People, because they knew the story, were calling them chips. Dave Young: Chips. Chocolate chips. Stephen Semple: Right. Now global sales in Nestle in 1945 rise 125% to 225 million, which would be about four billion today. During the war, they advertise, “Bake for your soldiers overseas,” and offer this as a recipe. Now, following World War II, we come into the convenience age and we have the new Nestle CEO, Carl Abegg, who does pre-made cookie doughs, and he launches those in 1955. And here’s the thing. When we talked about this as being the birth of the chocolate chip cookie, up until 1950, the bestselling cookie was Oreo. Dave Young: Really? Okay. Stephen Semple: Yeah. 1955, Oreo is no longer the favorite cookie that has been for decades, is now the chocolate chip cookie. Dave Young: In a package like Chips Ahoy or something? Stephen Semple: Yeah. Well, just like chocolate chip… Yeah, just basically that ends up becoming the category. Dave Young: But you couldn’t make Oreos. Stephen Semple: Well, that’s true. That’s true. But the point is, it starts to shift. Now Nabisco starts to also want to enter the race with something new. Lee Bickmore wants to get into this game, but now not with a prepackaged chocolate chip cookie. The problem was, how do you make something shelf-stable, can’t use eggs and butter, they are hard and not chewy but they still taste good, they’re crispy rather than chewy? He does this test market with children and parents, and they also remove the nuts from the original recipe. So now what they’ve got is they’ve got this hard, crispy cookie with no nuts in it, and they decide to package that up. Well, what’s a great fun name to put on it? Chips Ahoy. Dave Young: Chips Ahoy. Yeah. Stephen Semple: Right? Fun way to emphasize a large number of chocolate chips. Dave Young: And it’s all chips. Yeah. Stephen Semple: Yeah. They advertise on kids’ shows and magazines. They have a cookie man as the character, and they advertise there’s 16 chips in it. Dave Young: So kids are breaking them apart, counting them. Stephen Semple: Yeah. That was Nabisco entering the race, and then basically Nestle does these attack ads saying the real Toll House cookie needs to be baked at home, and so this whole chocolate chip cookie war happens. But the part I wanted to talk about on this was what I thought was really interesting was the evolution of this idea of a chocolate chip. Dave Young: Stay tuned. We’re going to wrap up this story and tell you how to apply this lesson to your business right after this. [Using Stories To Sell Ad] Dave Young: Let’s pick up our story where we left off, and trust me, you haven’t missed a thing. Stephen Semple: What I thought was really interesting was the evolution of this idea of a chocolate chip. It came from this person having this restaurant, making the desserts, hit this point where, holy smokes, we’ve got to come up with something that is small-priced, that we can easily make, that we can create some cash, and she just decides, “Well, I’m just going to hack some stuff off of this bar of chocolate.” Advertises the recipe, it gets no one. And the smart part, we’ve got to give Nestle… It would be one thing to say this is all a creation of Ruth Wakefield, we have to give Nestle some credit here. They noticed a sales increase in a particular market where they were doing nothing different and they

Ferdinand wanted to make cars for the people, but the Porsche brand we know is an empire of performance. Dave Young:  Welcome to the Empire Builders Podcast, teaching business owners the not-so-secret techniques that took famous businesses from mom and pop to major brands. Stephen Semple is a marketing consultant, story collector, and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode, a word from our sponsor, which is, well, it’s us, but we’re highlighting ads we’ve written and produced for our clients, so here’s one of those.  [ASAP Commercial Doors Ad] Dave Young:  Welcome to The Empire Builders Podcast. It’s the podcast where we talk about empires that were built, businesses, business empires. You know what we… If you’ve listened before, you know…  Stephen Semple:  Something like that. I get it. Businesses that have done pretty well over the years.  Dave Young:  They started small.  Stephen Semple:  They started small.  Dave Young:  They started small and then they got big. They got so big to the point that you could call them an empire.  Stephen Semple:  That’s it. That’s the idea.  Dave Young:  It’s a pretty simple premise.  Stephen Semple:  That’s it.  Dave Young:  So as we counted down, Steve told me the topic today and it’s Porsche.  Stephen Semple:  Yes, sir.  Dave Young:  Porsche. I’m assuming this is the car.  Stephen Semple:  The car, yes, the car.  Dave Young:  Okay.  Stephen Semple:  The car.  Dave Young:  And I’m trying to… I know some Porsche jokes, but I probably shouldn’t tell those on this show. I’m trying to think if I’ve ever actually been in a Porsche.  Stephen Semple:  Oh, well then you’ve got to come up and see me, Dave.  Dave Young:  You own one. I know you own one.  Stephen Semple:  Well, I have one. Bernier’s got two. I don’t know how many Steve has.  Dave Young:  I see how it is. I see how it is. Maybe I will tell my Porsche joke. So you guys that own them, do you call it Porscha? Because some of us just say Porsche.  Stephen Semple:  Well, if you actually take a look back, that’s the proper German pronunciation as Porsche.  Dave Young:  Porsche, okay.  Stephen Semple:  And it’s supposed to not be… It’s not Italian Porsche, right? So it’s Porsche.  Dave Young:  Porsche, Porsche. Okay, I’ll accept that. I’ll accept that. I’m guessing we’re-  Stephen Semple:  Well, look, you got to always call a dealership to double check. They’ll tell you.  Dave Young:  Now, if I had to guess where we’re headed to start this off sometime around the 40s, maybe earlier.  Stephen Semple:  A little earlier than that, actually. It was founded by Ferdinand Porsche in 1931 in Stuttgart, Germany. You’re not far off. But the interesting thing is where the growth really happened, even though that’s when it was founded, when things really started to happen, was actually post-World War II.  Dave Young:  That makes sense.  Stephen Semple:  You’re correct on that.  Dave Young:  So, it started in 31 and by the time you hit the late 30s and 40s, you’re part of the war machine.  Stephen Semple:  Yes.  Dave Young:  Okay.  Stephen Semple:  So it was founded in 1931, Stuttgart, Germany by Ferdinand. And when we take a look at the history of the business for a very long time, they were a part of the VW group, although they were recently spun off into their own separate business. And there’s a lot of shared history between VW and Porsche. A lot of people make fun of the fact that it’s basically a VW. There’s so much connection. Now here’s the other thing is, there’s a lot of connection in Nazi Germany here as well. And I mean-  Dave Young:  That’s what I was intimating but trying not to say, but yes, there was definitely.  Stephen Semple:  And not one of these ones of, “Oh, I’m a business and I got sucked up into the machine.” I mean, very early on. Very early on. Ferdinand was a member of the SS following the war, both he and his son were charged.  Dave Young:  No kidding.  Stephen Semple:  He served two years in jail. His son six months. So we’re not talking loose connections here. He was a buddy of Adolf. Let’s just put it out there. And if you remember, going back to episode 21, VW was founded by Nazi Germany. So episode 21 about The Beetle, and Ferdinand was the guy who designed the Beetle.  Dave Young:  Right, right. I remember you saying that, Ferdinand Porsche.  Stephen Semple:  And look, Porsche has not always had the success it has today. It’s become pretty big. They do 40 billion EU in sales. They have 40,000 employees. They make 300,000 cars. There was a time that they’re making cars in the hundreds and thousands. It wasn’t that long ago. But let’s go back to Germany to the early 1900s. And if we think about Germany at that time, pre-World War II, pre-World War I, there was lots of history of engineering and science in Germany. More Nobel Prizes in Science was awarded to Germany than anywhere else in the world at that time.  Dave Young:  Right.  Stephen Semple:  Germany was a real leader in science and engineering. And the first commercial automobile was made in Germany by Mercedes-Benz. So it’s 1906 and Daimler recruits Ferdinand because Ferdinand had been the winner of the Pottingham [inaudible 00:06:05] Prize, which is the automotive engineer of the year, which is given to new chief engineers and basically allows the person to have this designated doctor engineer honoris causa, Ferdinand Porsche. And he would go around calling himself all of that.  Dave Young:  Okay.  Stephen Semple:  And this is an honorary doctorate because he never actually finished college, but he had real engineering chops, Ferdinand. So he moves to Stuttgart, which at the time is a center of car making in Germany, including all the suppliers. And he works for Benz for 20 years. Okay. Now, it’s Germany in the 1930s and 2% of the population own a car in Germany as compared to the United States, which is 30%.  Dave Young:  In that time?  Stephen Semple:  In that time.  Dave Young:  Okay.  Stephen Semple:  Ferdinand comes up with this idea of we should make an inexpensive car. We shouldn’t be making car for the wealthy. We should make an inexpensive car. The board rejects the idea. Ferdinand leaves in 1929. And in 1931… Kicks around for a few years, and then 1931 starts a consulting firm. Now, this dude knew how to name things. You’re ready for the name of the company?  Dave Young:  Of the consulting firm?  Stephen Semple:  Of the consulting firm.  Dave Young:  Okay.  Stephen Semple:  I have to read this to get it right. The Doctor Engineer Honoris Causa Ferdinand Porsche Construction and Consulting and Design Services for Motor Vehicles.  Dave Young:  Now, if I know anything about German, that was all one word that you just said, right?  Stephen Semple:  Well-  Dave Young:  No spaces in between any of those words.  Stephen Semple:  Translated, you’ll see it as Dr. in H period, C period, F period, Porsche, capital G, small M, small B, capital H.  Dave Young:  It just rolls off the tongue, doesn’t it?  Stephen Semple:  Now, here’s the crazy thing. Up until 2009, that remained the official name of the company. You actually can find, if you see Porsche’s older than that, that if you look for that, it’ll be stamped somewhere in the car that that’s the manufacturer.  Dave Young:  They changed it finally because it was just too expensive to-  Stephen Semple:  It cost too much-  Dave Young:  Put that many letters in a dye cast.  Stephen Semple:  Exactly, exactly.  Dave Young:  Holy cow.  Stephen Semple:  So it’s 1934 and they land a contract with Germany to design a small affordable car for the people called the Volkswagen.  Dave Young:  Volkswagen.  Stephen Semple:  Beetle. Right, there you go. Now, here’s the thing that’s weird. Post World War II, the allies are in trying to rebuild Germany and no one owns VW. VW was owned by the state. So now it’s in the hands of the British and the British and the allies want to create a strong economy in West Germany because it’s now the Cold War. So the big defense to defending against East Germany and the expansion of communism is to really get the economy going in Germany. And so the British government, as we know from episode 21 about the Beetle, approached Porsche who designed it and said, “Help us get this car built.” And this is where it gets just a little bit weird because the son goes in one direction. Ferdinand’s doing his own thing. They both got arrested for war crimes. Son gets out first because he did six months.  And his son’s name’s Ferry and his dad is in jail for two years. So between this time where dad’s still in jail and son’s out, here’s one of the things they did towards the end of the war. We don’t know exactly how many, but it was probably about 20 of their best engineers and they moved them out into the farmland of Austria and basically had them working in a barn because they didn’t want to get them arrested or killed, quite frankly. So Ferry gets out and he goes to this barn in Austria and he’s looking around and he goes, “What the heck are we going to do to make some money? Let’s start fixing up cars.” Now, not a huge business fixing up cars. It’s post-war and there weren’t a lot of cars in Germany anyway, but they had to do something.  Then the dad gets out of jail and he ends up doing this work with Volkswagen. Now, here’s what’s interesting. And this is where the really tight ties between Porsche and Volkswagen start. The deal that the German government gives Ferdinand, the deal that the allies give Ferdinand is this.  Dave Young:  Stay tuned. We’re going to wrap up this story and tell you how to apply this lesson to your business right after this.  [Using Stories to Sell Ad] Dave Young:  Let’s pick up our story where we left off and trust me you haven’t missed a thing.  Stephen Semple:  The deal that the allies give Ferdinand is this. We want your help designing and distributing this car. We will give you a royalty for

When two employees of Handy Dan hardware store gave this idea to management, they got fired! So, they started Home Depot. Someone’s kicking themselves now! Dave Young: Welcome to the Empire Builders Podcast, teaching business owners the not so secret techniques that took famous businesses from mom-and-pop to major brands. Stephen Semple is a marketing consultant, story collector, and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode, a word from our sponsor, which is… well, it’s us. But we’re highlighting ads we’ve written and produced for our clients. So here’s one of those. [No Bull RV Ad] Dave Young: Welcome back to the Empire Builders Podcast. I’m Dave Young. That’s Steve Semple whispering in your other ear. And on today’s episode of the Empire Builders- Stephen Semple: [inaudible 00:01:44] your live stereo. Dave Young: We knew that it would only be a matter of time having so recently discussed the Lowe’s Empire that we would be discussing Home Depot, and today is that day. Stephen Semple: Today is that day because really, there’s a pretty shared DNA there. Dave Young: Sure. And again, I always think, “Well, okay, start as a little hardware store and then somebody grew into a big hardware store and then they made a bunch more.” Stephen Semple: It’s a little bit like that. Dave Young: A little bit? Stephen Semple: Except this is a little different. It’s a little bit different. Dave Young: Okay. I always like a good twist. Stephen Semple: There’s a little bit of a twist in this. So it was founded in February 6th, 1978, Marietta, Georgia by Bernard Marcus, Arthur Blank, Ron Brill, Pat Farrah, and Ken Langone. So these guys basically got it started. Dave Young: So it doesn’t go near as far back as Lowe’s. Stephen Semple: Yeah. Lowe’s is a little bit earlier, but not much. And today they have over 2,300 locations. They do 160 billion in revenue with over 450,000 employees. So it’s a big deal. And we all know who the Home Depot is, right? We’ve all pretty much heard of it. Now, a couple of the guys got basically fired from a hardware store in the West Coast called Handy Dan. Dave Young: Handy Dan. Okay. Stephen Semple: And it wasn’t really all that big and it was one-stop. But here’s why they got fired. They kept pestering management saying, “You need to go larger, then you need to go national.” And basically, management got tired of listening to that and fired them. So I told you there was a little twist. So when they left, they called one of Handy Dan’s investors, Ken Langone, and said, “Here’s what we want to do. We want to make 100,000 square foot hardware store, stock everything, make it cheaper, and make it more like a wholesaler. That’s what we want to do.” And they drew their inspiration from Walmart. They’re looking at what Walmart was doing. They said, “We want to do the Walmart thing for hardware and building.” And Ken was like, “Great, let’s do it.” And they drew up a plan that basically said they needed $25 million to get going, and they had to settle on raising three and a half million. So this is important to keep in mind because it shapes a couple of things that they do. And so the first thing that they needed to do… And they had a guy, Pat Farrah join them for merchandising. The first thing that they needed to do was create a name for the company. Now, I don’t know if you remember Crazy Eddie’s, the guy in New York City? Dave Young: Yeah. Stephen Semple: New York City. And he was selling electronics and all this other stuff. Dave Young: But he’s no Handy Dan. Stephen Semple: He’s no Handy Dan, but they were inspired by Crazy Eddie’s. And what I found interesting is in Toronto around the same time, there was a furniture company that started that also was inspired from it because it was Bad Boys. They would dress in the black and white retro, “I’m a prisoner” uniforms. And they’d be like, “Bad Boys. Does anybody have a better price? Nobody.” That was their slogan. But what these guys decided was they were going to call it Bad Bernie’s Buildall. Dave Young: Bad Bernie’s Buildall? Stephen Semple: Bad Bernie’s Buildall. Yes. The investors didn’t like it. That name did not go forth. Dave Young: Of course they didn’t like it. Stephen Semple: Well, because it didn’t have the name Home and all those other things. So they said, “Okay. Well, let’s call it the Home Depot.” Dave Young: Look, Lowe’s doesn’t have the name Home in it either, but it’s not Bad Bernie’s. What was it? Builders? Stephen Semple: Buildall. Dave Young: Buildall? Stephen Semple: Yes. Dave Young: It doesn’t roll off the tongue. It blurts out of your mouth in a not great way. Yeah. I have to side with the investors on this one. Stephen Semple: I have to say, I think even on this one, the investors, they’re often not right, but I think on this one they were right. So they opened in Atlanta, 60,000 square feet. Remember that little bit of a difference in terms of the money that they wanted to raise? Dave Young: Yeah. Stephen Semple: They wanted to raise the 25 million and only had three and a half million. So it made a couple of things difficult, such as stocking 60,000 square feet full of merchandise. Dave Young: Sure. That’s a lot of merchandise. Stephen Semple: So to make it look full, they went out and they bought empty paint cans, thousands of empty paint cans and thousands of empty boxes and basically put them on the shelves. Dave Young: Oh, boy. Stephen Semple: And they wanted to make it feel like a working warehouse so they threw sawdust on the floor. So it’s sawdust on the floor, empty boxes, empty paint cans. Dave Young: Just have one guy driving around with a forklift randomly just… Stephen Semple: They couldn’t afford a lit sign, so they had to make it bright to stand out. So that’s why they went with the orange. Now here’s what’s really interesting. Dave Young: Okay. That makes sense. Stephen Semple: Our client in Edmonton who sells used RVs has a location that’s relatively close to the airport, so you can’t do a lit sign. Jay Mistry Art Design. We picked a very specific shade of orange because what we knew is the setting sun would hit it. And when the setting sun hits that sign, it looks like it’s glowing. And then we got Rick to buy a spotlight and Jay even said to him, “Spotlight has to have this specific criteria to it.” And we put the spotlight onto it and it looks like it’s glowing. There’s cheap ways to make a sign look lit without lighting it. But anyway, that’s why it was orange. Dave Young: Shining the light on it is fine. Stephen Semple: Right. But that’s why they went with the orange, is like, “We can’t light it. It’s got to stand out.” So they do launch day. Launch day does not go well. Literally, they had a newspaper ad that was supposed to run that didn’t run. Nobody showed up. They literally sent kids and family into the parking lot, literally to hand out dollar bills, come to the store. First year’s a disaster. They lose a million dollars in the first year. Dave Young: Here’s what we know about hardware. When do we buy hardware? When we need it. Stephen Semple: Yes, when we’re fixing something. Yep. Dave Young: When we’re fixing something, when we need it. I don’t need it today, but I don’t know if I need it tomorrow because nothing’s broken yet and I don’t have a project I’m working on. So you got to be patient in the hardware business, don’t you? Stephen Semple: Well, they also did something interesting to stimulate sales. So the first year they lose a million dollars and then they get this chance to buy fireplace accessories really cheap. Now think about this. It’s the summertime, they’re in the South and there’s these cheap fireplace accessories. They buy 4,000 of them and they plan to sell them at just above the price and advertise it like crazy. They’re selling these things for 37 bucks. And here’s what’s crazy. People travel from miles away to buy this stuff. And when they’re there, they’re walking around and they buy other things. So the original history- Dave Young: Get an empty can of paint. Stephen Semple: Yeah. And to get some paint. Dave Young: A big box. Stephen Semple: So the original history of Home Depot is they did all these flash sales. Flash sale, flash sale, flash sale. Okay. So in 1980, they do more sales. But one of the things they also do is they start hiring professional contractors and start running these clinics inside the store. This whole idea is we’re going to do a flash sale. Dave Young: I remember that. Yeah. Stephen Semple: Right. We’re going to do a flash sale to bring people in and then people will maybe watch the clinic and then they’ll buy other stuff. Dave Young: They’ll learn how to do tiling or all that stuff. Stephen Semple: So it’s 1985, they have 50 stores. Lowe’s has 300 stores and Lowe’s secret shops them. They start copying each other at this point. Now, Sam Walton, founder of Walmart, ends up becoming important in all this because Sam Walton calls them and you’re going to love Sam’s advice. Dave Young: Stay tuned. We’re going to wrap up this story and tell you how to apply this lesson to your business right after this. [Using Stories To Sell Ad] Dave Young: Let’s pick up our story where we left off and trust me, you haven’t missed a thing. Stephen Semple: Sam Walton calls them and says, “Guys, love what you’re doing, but you need to shift your model.” And you’re going to love Sam’s advice because it speaks to what we do from the standpoint of running these sales, there’s a downside to running all these sales. And he said, “Get rid of the flash sales, buy in bulk, keep everything as cheap as possible.” If that’s your dealio, low prices, don’t do flash sales, just do low prices, advertise that you got low prices on everything, go that way, and sales soar. So remember, Home Depot was 50 stores and Lowe’s was 300 stores. So that was ’85. So 1992, seven years later after implementing Sam Walton’s advice, Home

From negotiating on the phone for some art to generating 10 Billion dollars a year, Pierre Omidyar built an empire out of other peoples stuff. Dave Young: Welcome to the Empire Builders Podcast, teaching business owners the not-so-secret techniques that took famous businesses from mom-and-pop to major brand. Stephen Semple is a marketing consultant, story collector and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode, a word from our sponsor which is, well, it’s us, but we’re highlighting ads we’ve written and produced for our clients. So here’s one of those. [Travis Crawford Ad] Dave Young: [inaudible 00:01:32] and sold. eBay is the topic today. Oh, by the way, welcome to the Empire Builders Podcast. I’m Dave Young, that’s Steve Semple in your other ear. Is that how this works, are we each in one ear? Stephen Semple: I’m not sure. Dave Young: I don’t think that’s how this works. Stephen Semple: I don’t pay enough attention to things like that. Dave Young: As the countdown timer went down, Stephen told me we’re going to talk about eBay and I went immediately to the sound of the auctioneers of my youth back in my hometown. Stephen Semple: Oh, God. Dave Young: There’s cattle sales and estate sales. On any Saturday morning walking around in a small town, off in the distance you hear somebody with one of those cheap portable PA systems, “Give me five, give me five, give me five, give me five, five, five.” Aren’t you glad that eBay doesn’t have sound effects? Stephen Semple: Maybe it should. It might make it more entertaining. Dave Young: There’s some AI auctioneer going 24/7 for two weeks. Stephen Semple: Oh, my God, Dave, the fact you’ve now said it, you know what meme is going to happen. Oh, no, you put it out there. So when you come across this as a meme- Dave Young: There’s that little mute thing on the screen where if you turn it on, there’s some AI, “We’ve got $12.50. Since Tuesday, we have $12.50. Anyone, anyone?” Stephen Semple: So when this meme is driving us nuts on social media, you can blame Dave Young. Dave Young: I don’t see it happening. Oh, yeah, back. Oh, we’re going to talk about eBay. Stephen Semple: But talking about auctions for a second, here’s what I always find fascinating. Somebody will have something and they’ll go, “Okay, do I have an opening bid of $500?” Nothing. “Okay, do I have an opening bid at $200? Now do I have an opening bid of $100?” Somebody bids for 100 and then the damn thing ends up selling for 750. Dave Young: Yeah. Stephen Semple: And I’m like, “Wait a minute. It sold for 750 and no one was willing to open at 500. What the heck?” I don’t get it. Dave Young: I know. There’s a … Man, I’m not a big auction person. It stresses me to be in the bidding war. Stephen Semple: Right. Dave Young: I don’t know why. Even on eBay. Stephen Semple: Right. Dave Young: But there’s a psychology of auctions- Stephen Semple: Clearly. Dave Young: … that certain people … I don’t know for sure, I’m not a psychologist, Stephen, but I play one on a podcast. I think there’s a compulsion that’s similar to gambling and I think it’s just there’s a dopamine hit involved when you’re active in an auction. Stephen Semple: There probably is. Dave Young: And I think there’s a bit of a compulsion to it maybe. Stephen Semple: Maybe. Dave Young: Because it also, as long as you have the money to do it, it’s probably a little safer than gambling because if you lose, you don’t lose then. Stephen Semple: Right, right. Dave Young: If you win, hopefully you’ve won and purchased something that’s worth more than you paid. Stephen Semple: Right. Dave Young: That’s the upside. The downside is that you didn’t get the thing that you wanted. Stephen Semple: Right. Dave Young: But you didn’t lose any money. Stephen Semple: Cool. Well, let’s talk about eBay. Dave Young: Let’s do. Wasn’t Musk involved in it, and Thiel and those guys? Stephen Semple: No. Dave Young: Or am I thinking wrong? Stephen Semple: You’re thinking wrong. Dave Young: I get all my American oligarchs confused. Stephen Semple: They were over in the PayPal world. Dave Young: Okay. Stephen Semple: But the thing that’s interesting about eBay is it’s still a really important player in online retail. We can kind of forget about it because the growth has been stalled a little bit in the last bunch of years, but they still do $10 billion- Dave Young: That’s amazing. Stephen Semple: … in sales, which- Dave Young: I remember back when, probably in the first five or six years of eBay, you could use eBay, like if you had something you wanted to sell. Stephen Semple: Yeah. Dave Young: Not a garage sale, but just list somewhere to sell. Stephen Semple: Yeah. Dave Young: You could actually scour eBay and see what it was probably going to get you, what would be a good way to price it. That was always a way to see what are these going for? Stephen Semple: Right, because you could see what things were bidding at. So they are a really important part of the history of online retailing. And they were founded by Pierre Omidyar who was born in France to Iranian parents, and immigrated to the United States as a kid. And the company was founded in March ’96. And he had worked at a startup that he had got bought out from, he did pretty well. And he set up a consulting business called Echo Bay Technology Group, so that was the first thing he had going on. Dave Young: Echo Bay, okay. Stephen Semple: Echo Bay, Echo Bay Technology Group. And one day, a friend noticed that he had bought these bunch of drawings and was like, “Oh, tell me about these drawings.” And he was like, “Well, I saw them listed in the newspaper and I gave the guy a call, and we backed-and-forthed a few times, and I got a really good price on it.” And this was a seed of an idea. He was like, “You know what? There’s lots of stuff listed in newspapers and classified ads.” And if we remember, back in the day, going way back in the mid-’90s. Dave Young: Sure. Stephen Semple: The most profitable part of many, many newspapers was the classified ads. I remember being a portfolio manager and looking at one company called Torstar, it was a big newspaper group here in Canada. And yeah, literally, 25% of their revenue was classified ads. Massive part, massive, massive part of the business. But if you think about a classified ad, you’ve got to call up the newspaper, you’ve got to create the ad, you’ve got to send the ad over, and then somebody’s got to phone you, and then you’ve got to back-and-forth on price. There’s lots of friction there. There’s lots of touchpoints. Dave Young: Well, and you have to go pay the newspaper even before you could pay them online, right? Stephen Semple: Oh, right, you had to go … Yeah. Dave Young: You had to pay for that ad. I think most of those were probably in. Stephen Semple: Yeah. Dave Young: Unless the newspapers take a payment over the phone. Stephen Semple: So he looked at it and he went, “Not only is there all these touchpoints to creating the ad and paying for the ad, there’s all these touchpoints in terms of the selling process.” And he looked at it and he went, “I think there’s a way for technology to eliminate all of that, and it’s clearly a big business because people spend lots of money-“ Dave Young: Sure. Stephen Semple: “… on classified ads.” So this was the seed, this was the seed of the idea. How do I make this easier, frictionless, and all this other stuff for customers? So he decided, “Well, I’ve got this consulting webpage, I’ll just do a page on my consulting site. On Echo Bay Consulting Services, I’m just going to put a page in there and I’m going to play around with it.” Because what he wanted to do was eliminate the need to contact the newspaper, make it easy to write the ad, and then basically make it easier to make the sale, and he really felt the internet could do this. Dave Young: Sure. Stephen Semple: And he also wanted to facilitate the price negotiation because he felt like people don’t really want to do that whole back-and-forth. Dave Young: Yeah. Stephen Semple: And the model he looked at was auctions. He went, “Wow, what if I could do an online auction site?” Because now, now the buyer and seller don’t have to have this conversation. Dave Young: Yeah. Stephen Semple: And the marketplace will just set the price. Dave Young: And you know that they’re going to be paying attention as the time wears down. Stephen Semple: Yeah, all sorts of things with that. So he launches it with a really simple design, there’s no pictures or anything like that, which we look at that today. But then I thought about and I went, “Well, wait a minute, that’s not really a disadvantage,” because there was no pictures in the newspaper one either. Dave Young: Yeah. Stephen Semple: So the whole idea of requiring a picture, we were used to doing this stuff without pictures through the newspaper classifieds. Dave Young: Yeah. Stephen Semple: Yeah. So he sets up the site and he calls it Auction Web. And he launches it on September 3rd, 1995. Dave Young: Okay. Auction Web. Stephen Semple: Sorry, I said the wrong date. I said the wrong date earlier, the date was when it really started making sales. But Auction Web launches September 3rd, 1995, not March ’96. He decides to do a test, and this is people of … This has test has been written up a whole pile of times. He’s looking around, he’s got this broken laser pointer. Dave Young: A broken laser pointer. Stephen Semple: It’s broken. Dave Young: Okay. Stephen Semple: And on the ad he even says, “This is broken.” And he puts it up and it sells after a few weeks for $14.83. Dave Young: Sweet. Better than throwing it away. Stephen Semple: He even calls the bidder because he’s like, “I got to make sure this guy know it’s broken. I don’t want to send this to him and have him ticked off.” And he goes, “Yeah, I know it’s broken, but I know how to fix these things and it’s cheaper to fix it.” So h

Lucious Lowe never saw his empire, but his son and son-in-law figured out how to give the customer what they needed. Dave Young: Welcome to the Empire Builders Podcast, teaching business owners the not-so-secret techniques that took famous businesses from mom-and-pop to major brands. Stephen Semple is a marketing consultant, story collector, and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode, a word from our sponsor, which is… Well, it’s us, but we’re highlighting ads we’ve written and produced for our clients, so here’s one of those. [OG Law Ad] Dave Young: Welcome back to the Empire Builders Podcast. I’m Dave Young, Steve Semple’s here, and we’re going to talk about another empire. Stephen Semple: Another one. Imagine that. Dave Young: And it’s another one of these big boxes. Stephen Semple: Yes. Dave Young: So this is brick and mortar big box store. And so there’s two things. One thing I love, one thing I hate about big box stores in this category. I used to love going down to my local hardware store and just tooling around. Stephen Semple: Yeah. Dave Young: And I guess you can still do that, but there’s something about some old guy walking up and chatting with you about what you could maybe buy or not. Stephen Semple: Yeah. Dave Young: And so Lowe’s is our subject today. Stephen Semple: Yes. Dave Young: I’m interested to see how they started. And again, I love shopping at Lowe’s, I hate shopping at Lowe’s, for two different reasons, right? Stephen Semple: Yeah. Dave Young: The variety. It’s all there. Stephen Semple: Yes. Dave Young: The old guy that knows every piece of hardware in the store. Good luck finding that person. I mean, they may be there, they may not. It’s hit and miss. Stephen Semple: Yes. So the first Lowe’s, of course, started as one of those old-timey hardware stores. Dave Young: Sure. Stephen Semple: It was a 3000-foot store in 1921 in North Wilkesboro in North Carolina by Lucius Smith Lowe. That’s basically the first Lowe’s was way back in 1921. Dave Young: Lucius Smith Lowe. Okay. Stephen Semple: But the success of Lowe’s actually did not come from Lowe, but rather an in-law named Carl Buchan, who came on the scene in 1943. Dave Young: Okay. Stephen Semple: So when Lucius died in 1940, the business was inherited by his daughter, Ruth Buchan, who then… Now, I was not able to find the family story on this, because I find this interesting. It was inherited by the daughter, who then sold the company to her brother, and I always thought, “Why’d the brother not inherit the business?” Dave Young: Right? Stephen Semple: Now, I also get why she probably sold it, because as we know, one of the really big problems, especially back in the 1940s, was women couldn’t get credit, and it was very, very, very hard in the forties for a woman to actually run a business. So I also understand why she sold. Dave Young: Yeah. Yeah, and weird estate planning goes on that you don’t know why they did what they did. Right? Maybe the son had an insurance policy. Right? Stephen Semple: Who knows? Who knows? Dave Young: I don’t know, but maybe he got… Who knows? Stephen Semple: Now, at the same time, when she sold it to her brother, her husband, Carl, ended up becoming a partner in the business. Dave Young: Okay. Stephen Semple: So it was this really weird, father dies, it goes to the daughter, the daughter sells it to the brother, and the husband ends up becoming a partner. Dave Young: Who knows about the transactions inside family businesses, right? That’s a… Stephen Semple: Right? All I’m just saying is, if it sounds weird, it was. Dave Young: Yeah. Stephen Semple: That’s all I’m saying. But moving forward, what’s really incredible is today, Lowe’s is 1700 locations doing 80 billion in sales. So it is- Dave Young: That’s not nothing. Stephen Semple: That’s not nothing. That’s not nothing. But back in the early forties, hardware stores did not have building supplies. They didn’t have plywood, they didn’t have… They didn’t have building supplies. Dave Young: Yeah, yeah. You went across to the lumber yard to get that stuff. Stephen Semple: Correct. Correct. Dave Young: Yeah. Stephen Semple: And so one day Carl gets this deal on toilets, and he decides to buy a whole pile of toilets. When I say a whole pile, the whole truckload, which was 400 toilets. Dave Young: Okay. Stephen Semple: And James? James Lowe comes in the office one day and he’s like, “Toilets in the office.” And he says, “Carl, why is there toilets in the office?” He goes, “Well, I bought 400 of them and I ran out of space, so they’re sitting in here.” And he’s like, “We don’t sell toilets.” He goes, “Well, we are now, because we got 400 of them.” Dave Young: “Yeah, we sell toilets. Sell them or else.” Stephen Semple: “[inaudible 00:05:20] now!” So, “Yes we are.” And what turns out is that they sell out really quickly. And Carl looks into this a little bit more and he sees this trend. Right? Think about it. It’s 1946. What’s happening in the United States? There’s a building boom. Right? The number of homes being built has grown 10 times over the last three years, because we got the baby boom happening. We got the return of the soldiers, we got the baby boom, we got the sprouting up of the suburbs. That part is growing. So they sell out these toilets in like a week, and so he wants to open a second store. He goes, “Look, here’s what I want to do. I want to open a second store and we’re going to sell everything for building and fixing a home. Everything. We’re going to turn specialty stores into one shop.” So in other words, you don’t have to go to the plumber… you know. Look, this is another variation on the department store and the convenience store. Dave Young: Absolutely. Stephen Semple: So Lowe agrees, and they invest a hundred and sixty thousand dollars in the second store, and it’s a 10,000 square foot, so they’ve gone from 3000 square feet to a 10,000 square foot store in Spartan, North Carolina. Dave Young: And so yeah, we tripled the size. It’s all the space we’ll ever need. 10,000 feet. Stephen Semple: Right. So it’s 1949, and literally customers are coming. Yeah, that’s right. It’s 10,000 square feet. I missed that for a minute. Yeah, yeah. Hold that thought. Dave Young: “Hang on.” Stephen Semple: Hold that thought. So it’s so popular, they’re actually finding customers are coming from states away from, outside of North Carolina. So Carl wants to open a third store, and Lowe doesn’t want to. He doesn’t want to grow this thing. Dave Young: Isn’t it amazing that the whole company’s not called Carl’s instead of Lowe’s? Stephen Semple: Well, here’s what ends up happening. Lowe says, “Look, I don’t want to do this. Why don’t you just buy me out?” Carl buys out Lowe, but says, “Well, let’s keep the name.” Dave Young: Yeah. Stephen Semple: “Let’s keep the name.” Dave Young: Yeah, that’s smart. You got equity there. Stephen Semple: Yeah. So in 1952, Lowe is bought out, but they keep the name. And it expands rapidly. They quickly open 13 more stores. [inaudible 00:07:27] Dave Young: Oh, wow. See, I did not know they were this old. Stephen Semple: Yeah. So it starts growing like crazy, but then they hit a problem. After six years, profits stall. Dave Young: Oh, okay. Stephen Semple: What he notices is, he’s been focusing on opening stores, but not focusing on the buying experience. And if you went into a Lowe’s at that time, it was super disorganized. Stuff was just all over the place. Dave Young: Okay. Stephen Semple: And so it was not appealing. So he hires Bob Strickland, marketing guy. Bob points out that people come in to get what they need, but what if we were able to make them to stay and buy other things? Like instead of an oven, how about a whole kitchen? Dave Young: Sure. Stephen Semple: So he says, “Let’s be like a department store.” They looked at how Sears was laid out, right? There was these departments. Dave Young: Yeah. Stephen Semple: And basically this is the model that they created, which is really the template that all these big box home improvement stores are built on. Here’s the appliance section, here’s the flooring section. Dave Young: Yeah. Stephen Semple: But it didn’t just have flooring. It had, okay, along with the flooring, the caulking and the this and the… Dave Young: Yeah. Stephen Semple: All the things that you need with it. Dave Young: So take those toilets out of the power tool section and put them where they belong. Yeah. Stephen Semple: Yeah. So they create this template that they’re going to roll out, and before they’re ready to roll it out, Buchan passes away. Dave Young: Oh no. Stephen Semple: And so now it’s up to Strickland to open with the new idea. So Strickland takes the ideas. He opens five stores on it. They’re super successful. In two decades they got a hundred and eighty stores, 1978 they’re the largest in the region, 1979 they’re 200 stores, and they just grow and grow and grow and become what they are today. But Lowe’s basically built this idea. The two innovations Lowe’s did was built this idea of, “We should have a store that’s dedicated to home improvement,” because they saw the trend on it. And then they created this whole idea of looking at department stores and saying, “This is how a home improvement store should be organized.” Dave Young: Yeah. Stephen Semple: That template? That template, that idea that every one of these big box home improvement stores is built on, was created by Lowe’s. Dave Young: Stay tuned. We’re going to wrap up this story and tell you how to apply this lesson to your business right after this. [Using Stories to Sell Ad] Dave Young: Let’s pick up our story where we left off, and trust me, you haven’t missed a thing. Stephen Semple: … that idea that every one of these big box home improvement stores is built on, was created by Lowe’s. Dave Young: Well, and so the reason I didn’t know about them when I was younger

From Jeffy’s Online Books to everything from A to Z, Amazon.com is an empire amongst empires. Bezos created something remarkable. Dave Young: Welcome to the Empire Builders Podcast, teaching business owners the not-so-secret techniques that took famous businesses from mom-and-pop to major brands. Stephen Semple is a marketing consultant, story collector, and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode, a word from our sponsor, which is… Well, it’s us, but we’re highlighting ads we’ve written and produced for our clients. So here’s one of those. [Pinpoint Payments Ad] Dave Young: Ding-dong. Okay. Well, I was making noises there as we started. Welcome to the Empire Builders Podcast. Dave Young here alongside Stephen Semple, and we’re talking about empires. I mean, businesses that started tiny and grew into behemoths, in this case, and often… Well, every time what we do is we let the countdown to the recording start, and then Stephen whispers in my ear today’s topic, and we see if I recognize it. Maybe perhaps I’ve heard of them. And today, he just said one word, Amazon. And I’m like, “Is that a river?” I mean, that’s what we all said back in the day when Jeff Bezos started it- Stephen Semple: Yes. Dave Young: … was, “Really, you named it after a river in South America? What are you thinking? What’s wrong with you?” But I guess he proved them wrong. Stephen Semple: What you’re going to discover, wasn’t actually the first name. Dave Young: Oh, cool. They started with a different name and then switched to Amazon. Stephen Semple: Jeffy’s Online Books? Dave Young: Well, and here’s the thing. We’re 200-and-some-odd episodes in, and we’ve managed to hold off not covering Amazon. That’s a good point. Yeah. Stephen Semple: And I resisted myself, because basically everything that’s to be said about Amazon has probably been said, but I did come across a couple of interesting little tidbits that we’re going to focus on- Dave Young: Oh, cool. Stephen Semple: … that I hope gives a little bit different picture to Amazon than the other things, people. Look, Amazon is a massive success, has changed the way the world is, was unbelievably innovative and forward-thinking. And today, Amazon does like 8,000 orders a minute. Dave Young: A minute? Stephen Semple: A minute. Dave Young: Unbelievable. Stephen Semple: Crazy, isn’t it? Dave Young: Mm-hmm. Stephen Semple: And Jeff Bezos is one of the richest men in the world, and Amazon is just a monster out there. But here’s the thing that’s also really interesting. Jeff Bezos did not come from technology or retail. And how often have we seen this over and over and over again, that these businesses are built by people from outside the industry? That is like 9 out of 10, or probably even more like 99 out of 100. He was an investment guy that was working in the early ’90s on Wall Street. That’s what he was doing. And he was making big bucks doing research in the technology space. So he was working in the space, but he wasn’t a tech guy or a retail guy. And he comes across this report about growth in the internet space. And he literally… It boggles his mind. He’s working away in Wall Street, comes across this report, and it says, the space is growing at 2300%. And he literally, as the story goes, picks up the phone, calls the analyst, and said, “There’s a typo here.” And they were like, “No, this is how it’s growing.” And he was like, “Oh my God.” Now, let’s think about this for a moment, because it’s easy to forget this. 1989 is when the first online transaction on the World Wide Web happened. Dave Young: I wouldn’t have thought it was even that long ago, but yeah. Stephen Semple: Yeah, yeah, but it was, like, one- Dave Young: Yeah. It’s ancient history now, but… Stephen Semple: We forget, we forget how much the growth is. And if you really want to go back, probably the best documentation of the growth we’ve had is episode 227 on AOL. Because AOL was really a driver of internet growth. It really was. It was really one of the pioneers that took people online. So to be looking at these things in the early ’90s and go, “Hey, I see growth in online retail,” that’s really forward-thinking. I’ve got to give Bezos credit. Not a lot of people were thinking that way. So he looks at this growth and he says, “There’s got to be potential to do a business in this space.” And that’s where he starts off. We’ve got to do a business in this space. So he does brainstorming ideas with his wife at the time, McKinsey, and they look at investment sites, they look at advice sites, but he decides it needs to be a store, because people shop every day. Everyone. It’s mass- Dave Young: An online store, yeah. Stephen Semple: It’s mass, it’s something we do all the time, it’s habitual, and he doesn’t want to do something that’s a niche. And it has no boundaries, and ideally you could remove a lot of the friction in shopping. But he realizes he can’t start that way. This is the other part where I thought he was brilliant. His vision was always online store, but he knew you can’t start as an online store. You can’t become known for being an online store. It’s too big. You need to pick one thing. Dave Young: But he had that vision long before he started selling books. Stephen Semple: The goal was to sell everything. Dave Young: Everything. Stephen Semple: But he knew that’s not where you start. And this is what I find interesting. It’s amazing how many startups I talk about have these massive visions, and it’s too big. You can have that massive vision, but you got to still start with something smaller. And that starting something smaller doesn’t limit you. Jeff Bezos has proven that. So he steps back in this point. He’s trying to figure out, “Well, what’s the one thing I want to do?” And he ordered a book called Cyberdreams by Asimov, and it took two weeks to arrive and arrived damaged. And the ordering process was a bit of a pain in the neck. And he went, “You know what? There’s an opportunity to do better here.” And at the time, the book business is very fragmented. There’s two big players, Barnes & Noble, and Borders. But they combined are only 25% of book sales. So still, most book sales are being done by little retailers. So it’s dominated by all sorts of little players, and they don’t do a good job of shipping books. So he says, “There’s the opportunity. Books is the opportunity.” He quits Wall Street where he is making like a million bucks a year, moves to Seattle to start the business, and he moves to Seattle because University of Washington at the time has got basically the top computer engineering school, Microsoft is there, so there’s lots of good engineers available. Dave Young: Gotcha. Stephen Semple: Hires a programmer, Shel Kaphan. And the first name of the company was not Amazon. It was Cadabra, as in- Dave Young: Cadabra. Abra. Stephen Semple: As in “Abracadabra, your book arrives.” Dave Young: Yeah. Stephen Semple: Name didn’t work well. People thought it was… Dave Young: Magic supplies, or- Stephen Semple: No. Well, they actually mistake it, Cadabra for cadaver. Dave Young: Yeah, that’s not good either, now that I think about it. Stephen Semple: So they needed a new name, and they had very much still the phone book mentality. Remember how everybody wanted to be listed first in the phone book? Dave Young: Sure. You start with an A. Stephen Semple: So you start with an A, and the first name that kind of came along that they thought they could do anything with was Amazon. Okay, yeah. You know, it’s [inaudible 00:08:32] a river, all this other stuff. So they just went, “Sure, let’s do Amazon. We can make that work.” Dave Young: Well, and the smart thing is he picked a… unless I’m wrong, he picked one word as the name. Stephen Semple: Yes. Dave Young: It wasn’t Amazon Booksellers. Stephen Semple: No, Amazon. Dave Young: Amazon Online Booksellers. Stephen Semple: Right, because he still had the vision — Dave Young: That’s limiting. Yeah. Stephen Semple: Right, because he still had the vision, “I’m going to do more than this, but I need to start with one thing.” So Amazon. Dave Young: So that vision dictates you find a name that is big enough to handle the vision. Stephen Semple: Yes. World’s biggest river, right? So it’s June 16th, 1995, Amazon goes live. They wanted to make it simple and easy to order books, and what would happen is they will get the sale, then they turn around and buy the book from the wholesaler, repackage the book, and ship it out to you. So they basically had no inventory. Dave Young: I was going to say, you could test the whole idea by just setting up your office near a brick and mortar bookstore and walking over and buying the book. Stephen Semple: Instead, they were buying the wholesale. Dave Young: Drop it in the mail. But they’re buying from wholesale, so there’s a little profit in it for them. That’s good. Stephen Semple: Yep. So the book would come in, they would repack it, ship it to the customer. So really, at first they had no physical inventory, but they had a list of a million books. They could basically sell any book that they could get from a wholesaler. And Amazon rolls out with this claim. They have the Earth’s biggest bookstore, which is really crazy. Any book store could claim that, because they all had access to the same million books. But I also love… There was a little bit of an unusual wording here. Dave Young: Stay tuned. We’re going to wrap up this story and tell you how to apply this lesson to your business right after this. [Using Stories To Sell Ad] Dave Young: Let’s pick up our story where we left off, and trust me, you haven’t missed a thing. Stephen Semple: I also love, there was a little bit of an unusual wording here, because you sort of expect it to be the world’s biggest bookstore, rather than the Earth’s biggest bookstore. Dave Young: Oh yeah, that’s a good point. Yeah. Stephen Semple: Right

Cynthia Tice started Lily’s Sweets at the age of 60 and sold it to Hersey’s 11 years later for $400 Million. Wow! Dave Young: Welcome to The Empire Builders Podcast, teaching business owners the not-so-secret techniques that took famous businesses from mom-and-pop to major brands. Stephen Semple is a marketing consultant, story collector, and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode, a word from our sponsor, which is, well, it’s us, but we’re highlighting ads we’ve written and produced for our clients. So, here’s one of those. [Seaside Plumbing Ad] Dave Young: Welcome to The Empire Builders Podcast. I’m Dave Young, that guy next to me is Stephen Semple, and we’re talking about empires. We’re talking about businesses that started with nothing and grew to be huge, as we say. And today, Stephen whispered in my ear the topic and I’ve never heard of it. No idea. Stephen Semple: Yay, finally stumped. It doesn’t stump Dave very often. Dave Young: Thanks for listening to The Empire Builders Podcast. That’s all we’ve got for you today. Oh, no, wait. Stephen Semple: Because clearly if Dave- Dave Young: Oh, wait. Stephen Semple: Because clearly if Dave’s not heard about it, it’s not interesting. Dave Young: Wait a minute. I forgot to have you tell me about them, so go ahead. Go ahead with your little story there, Stephen. Stephen Semple: Yeah, so it’s a company called Lily’s Sweets. Now, they’re a chocolate company and they make sugar-free chocolate. And I’m not surprised that you haven’t heard of them, but here’s the reason why I think they’re worth talking about, is 11 years after the business started by Cynthia Tice, it was sold to Hershey’s for $400 million. Dave Young: That’s a nice little getaway. Stephen Semple: Yeah, that’s worth talking about. Don’t you think? Dave Young: So it’s owned by Hershey’s now. Stephen Semple: It’s owned by Hershey’s now. Dave Young: Do they still operate under the name Lily’s Sweets or is it all just a- Stephen Semple: Yes, they do. Dave Young: … Hershey’s conglomerated candy corporation. Stephen Semple: The bar is called Lily’s Sweets, so you can still get Lily’s Sweets bars. They’re made by Hershey’s. And as I said, Cynthia sold it to the company after 11 years for- Dave Young: 11 years? Stephen Semple: … $400 million. Yes. Dave Young: That’s brilliant. Stephen Semple: Now, here’s the other thing is she started the company at the fine young age of 60. Dave Young: I love this story. Stephen Semple: Right? Now you understand why I wanted to share this story. Dave Young: There may yet be hope. Stephen Semple: And so they do these sugar-free chocolates, and the goal for her was always to make a good, enjoyable chocolate product. Because we go back to early days of the sugar-free products, they were marketed to people who are diabetic and who are trying to lose weight, and they really didn’t taste good. But the anti-sugar movement triggered something that was bigger because people started to discover that sugar’s tied in inflammation, and there’s been this explosion in these products. To give you an idea, in 2024, the no-sugar chocolate area as a category doubled. That’s how much the growth is. Dave Young: 2004? Stephen Semple: 2024. So still even today- Dave Young: 2024. Doubled in ’24? Stephen Semple: Still even today, yes, the growth is really rapid. But this is what Cynthia saw, so let’s go back to 2008 in Philadelphia. Cynthia Tice is a food consultant and a graduate of Temple University. And Temple University is actually a big presence in Philadelphia. I had a chance to speak at Temple and it’s in downtown Philly, and downtown Philly’s pretty neat. And look, if you’re ever in Philadelphia, you have to go do the Rocky statue, right? Dave Young: Oh, yeah. Stephen Semple: And it’s amazing today that there’s still a lineup to take a picture at that statue. Dave Young: My dad went to Temple. Stephen Semple: Oh, did he really? Cool. Dave Young: He didn’t go to college there. After World War II, he had dropped out to join the Navy. And so after World War II, he got his GED at Temple before heading off to University of Wyoming. Stephen Semple: Oh, that’s cool. Dave Young: He’s a South Jersey guy, so Temple’s just a few miles away. Stephen Semple: Yeah, that’s cool. Dave Young: Yeah. Stephen Semple: Cool. Dave Young: So I love that personal connection to Temple. Stephen Semple: There you are. So back to Cynthia. So around this time, Stevia got approved and she had set up this consulting business to help companies find organic products because she had always had an interest in more organic foods. And growing up, she felt sick all the time. One day when she was eating lunch, a random person told her, “Look, if you’re not feeling well, it’s probably what you’re eating and how you’re eating.” And this hit her to the bone. So in the last year of college, she graduated in ’74, she got into natural foods and she became a real zealot to the degree where she would take her own food to family dinners. And she wanted to do a natural food store, and her dad lent her the money. She found a location. She started up this 400-square-foot store. And her dad helping her out was a big deal because growing up, her dad had some clothing stores in the area, and her younger brother went into the business, but the belief in the family was women should not do business. And she was also the first woman in her family to get an education, so this was a big deal. Dave Young: This is. Stephen Semple: So she opens a store, and then a friend has a store, they join, they make this bigger store, and they never really made any money. She was single. She lived in a little place in the bad part of town, but she didn’t really care about money. She was on this mission. She was happy. She was able to support herself. She loved helping other people because she really wanted to bring this idea of healthier food. Then in 1989, there was a real turning point in the food space, but still it was very, very niche. And it was this whole idea of Alar on apples. It became a big deal. Meryl Streep spoke about it. Dave Young: Yeah, I remember that. Stephen Semple: Right. And when Meryl Streep spoke about it, all of a sudden it put things very much more mainstream. And this drove a lot of first timers into organic stores, and this created an opportunity to turn people. And what started to happen is more larger format, organic stores started to pop up and traditional stores started to take a look at organics. But while this growth was happening, she was starting to get burned out. She had been at this for 20 years and not really making- Dave Young: Oh, wow. Stephen Semple: … a lot of money at it. And at the same time that she started to see consumers looking for organic products, she was at a conference at the Food Marketing Institute, and presenting was Whole Foods. Dave Young: Oh, wow. Okay. Stephen Semple: Now, this was in the infancy of Whole Foods. Now, the supermarket retailers in the audience asked Whole Foods this question. “Is your customer base large enough?” Whole Foods’ reply was, “We’re after your customers.” This was a light bulb moment for Cynthia. Traditional retailers are now worried, and she realized there was an opportunity to help stores make the transition. And now, she made a lot of money. She opened up this consulting business that helped traditional stores do the transition to organics- Dave Young: Oh, wow. Stephen Semple: … and all this other stuff. And lots of people approached her saying, “Hey, you should create a brand around this.” And she didn’t want to do it because she understood what it would actually take to build a brand, even though she had all these relationships with these buyers. But she met this woman, Elizabeth Fisher, and they started to work on a product together, and the idea was a natural soda in 2007. Now, right around the time they’re ready to launch the soda, Coke and Pepsi announced they’re entering the space with a natural soda and they went, “Oh my god, there’s no way we can compete with Coke and Pepsi.” So they decide to do chocolate because, again, they were wanting to avoid sugar and they wanted to build a product, because what they’re finding is companies were using used momenta, variations of it, and the chocolate did not taste good. Then Stevia entered and it was approved. Now, Stevia is natural. It’s from a leaf. It doesn’t spike blood sugar. And they tried several recipes and nothing worked. And they even tried contacting some chocolatiers and it didn’t work, and it was terrible in chocolate. And during that time, they had a falling out, so Cynthia went out on her own. But Cynthia then discovered someone who had developed a bulk chocolate that actually worked, that actually tasted good, and it came in these wafers and it tasted great. And what they did was they used other sweeteners to mitigate the flavor issues. So she reached out, asked for some modifications, and started to build a chocolate bar. And also around 2011, diets like paleo were becoming a vogue, and there was still no chocolate in this space. And she really wanted to believe that there was people who would want a sugar-free chocolate and would want something that tasted good. So, she ended up bringing on a partner, Chuck Gennardi, who also owned a little store and hated it. And he shut his store and he had a little bit of money that he could finance the development of this chocolate. And they worked together, developing it and creating the packaging. They found a manufacturer, because here’s things she was good at. She was good at pricing. She was good at sales strategy. And what I love is when they came up with the name Lily’s Sweets. Dave Young: Stay tuned. We’re going to wrap up this story and tell you how to apply this lesson to your business right after this. [Empire Builders Ad] Dave Young: Let’s pick up our story where we left off. And trust me, y

Stephen Continues his discussion with Michael Jacobson about how he help save and ultimately revive his uncle’s business. Dave Young: Welcome to The Empire Builders Podcast, teaching business owners the not-so-secret techniques that took famous businesses from mom and pop to major brands. Stephen Semple is a marketing consultant, story collector, and storyteller. I’m Stephen’s sidekick and business partner Dave Young. Before we get into today’s episode, a word from our sponsor, which is, well, it’s us, but we’re highlighting ads we’ve written and produced for our clients. So here’s one of those. [Travis Crawford Ad] Rick: Told you, Brian. Brian: Told me what? Rick: This is part two of last week’s episode. Brian: Oh yeah. And it was getting good. Rick: And if you missed it, you can always listen to the first one. Just back up to last week’s episode. Take it away fellas. Stephen Semple: In my TEDx Talk that I did, the very, very first slide, the very first slide is win the heart and the mind will follow. Michael Jacobson: That’s exactly right. We’re humans. We’re emotion lead. That’s exactly right. Stephen Semple: Even engineers make decisions emotionally. We are wired to make decisions emotionally and connect with things emotionally. So you’re 1,000% correct on this. Michael Jacobson: Thank you. Yeah, I mean, so far so good. So ultimately, the market will decide if that’s true or not, but I tend to believe that that is true. Stephen Semple: Well, it’s already voted that way with you so far. Michael Jacobson: Yeah, I mean, it’s coming that way. And so we really focus our brand on making the client feel like the hero because they are. Buying flowers from us should feel as good as receiving the flowers. It is a remarkable act to send flowers to somebody. You are literally creating a more loving world. Stephen Semple: Yes. Michael Jacobson: And I don’t know what the meaning of life is, Kay, but when I ask people, a lot of times the response is it’s human connection. Or if they want to go even deeper, the meaning of life is love. And so that’s the business we’re in. And if you’re leveraging flowers, the most meaningful gift you can give to tell somebody that you love them, you should be praised for that. And so we make our centers feel very good about that as they should be. Stephen Semple: Well, if you think about it, your business is very, very similar. Let’s just look at the emotional part. Your is very similar on the emotional level as engagement rings. The person who gives an engagement ring, yes, they want the person that they’re giving the ring to feel good, but it’s that I give this beautiful ring to this person. They feel good. I feel good in return. So you’re absolutely right. The gift of giving when it’s done right both end up getting positive emotional feelings about it. The receiver feels great. And when it’s done right, the giver feels great as well. Here’s the other thing that people discount in gift giving, it now actually creates a shared narrative. Michael Jacobson: That’s right. Stephen Semple: Because we’ve actually shared in that gift, even if it’s thousands of miles away, even if I never talk to the person, even if the person’s in a coma and it goes to the hospital, I still have a shared experience now with that individual through emotionally taking that act. You’re absolutely 1,000% correct on these things. Michael Jacobson: Yeah, thanks. It bothers me because we would not be doing what we’re doing if somebody else was. We never had the ambition. So I want to answer your question on my franchise. We wouldn’t franchise, we wouldn’t even expand corporate locations if there was somebody in our industry that was doing it as well as we thought it should be done. But nobody is. Our market leader is 1-800-FLOWERS, and my job is not to bash the competitors. We shine our own lamp. But pragmatically speaking, we think somebody can do a better job than 1-800. Stephen Semple: For them, it’s a commodity that’s being moved. I want to share a thought with you, and you may have considered this thought, but you’re in an interesting situation because as soon as I hear somebody say, “Hey, we want to educate the consumer on doing this thing, and I want to change the consumer behavior,” I always look at that from a marketing perspective as being a really… Michael Jacobson: Very expensive. Stephen Semple: Well, it’s expensive and it’s a difficult challenge. However, you’ve got an interesting strategy that you can do. So if I was working with you based upon a 20-minute conversation, so this strategy is worth the amount of time and effort of money that’s been put towards it. Michael Jacobson: I know. You can do this for however many years to get to this answer. Stephen Semple: Right. But if you think about it, there is a bit of a thin edge of the wedge strategy here, especially where you’ve optimized and worked hard to make sure the customer becomes a repeat customer. So anytime I’m in a situation where I go, I’ve got a good long-term value of this customer, and I’ve got good stickiness, and I’ve got good return, and I’ve got to educate them on a behavior that they’re not doing today, I can do a kind of interesting thin edge of the wedge type approach. So in other words, okay, my acquisition strategy is not give a gift you’ve never thought about giving. My acquisition strategy is lean into the gift you’re already giving, but then make it so amazing and make it so incredible, and now that I’ve got a relationship with you, I can start to talk to you about gifting in other ways. It’s almost like that I can use the one to acquire and then I can pivot that customer into a different relationship now that they’re a customer. Michael Jacobson: Totally. Stephen Semple: Is that kind of the strategy you’re employing? Michael Jacobson: It is. Yeah, no, I mean, I think that it’s… I’ll add onto that because I agree and to add an additional perspective there as well because I agree with you. On the surface, it looks like we’re trying to shift consumer behavior to purchase flowers more frequently and purchase for non-occasions. If our culture right now is to buy for happy birthday and we’re trying to say, “No, buy for a random Tuesday,” that is a difficult thing to do. What we’re trying to do instead is a little bit more like inspire, educate, motivate the buyer into… It’s not educating them on something new. It’s something they already know very deep down. Giving flowers, it incredibly goes back to our ancestors. I mean, it’s been around for thousands of years that act of giving flowers. It’s in us. Stephen Semple: It’s not a new thing. Michael Jacobson: We view our job as reminding people of that. And so it’s not necessarily shifting. It’s resurfacing something that people already know very deep down, I think. And maybe not deep down, maybe people already really do know that. Stephen Semple: Yeah, it’s rekindling that, but the interesting place is the easiest place to rekindle that is with the customer who’s already had the great experience. Michael Jacobson: Yes, exactly. Stephen Semple: With you. Michael Jacobson: Yes. Stephen Semple: Because they’ve also now experienced how wonderful it is and how superior your product is and how great the experience was is that, okay, well, now I want to do that again. And you’re able to communicate them about, well, you don’t need an occasion to make somebody feel good. Michael Jacobson: Totally. Stephen Semple: Right? Michael Jacobson: Yeah. Stephen Semple: But the interesting thing with that is that type of messaging is a different type of aspirational messaging, and as you were saying, is expensive. Look, it doesn’t fit into where the traditional florist marketing is, which is web-based pay-per-click style advertising, because what you’re speaking to is doing something that a person isn’t searching for but kindling that idea. Michael Jacobson: That’s right. That’s exactly right. Stephen Semple: There’s lots of really cool ways that you can do it. Look, and this is also how a lot of lux… And I know you’re not a luxury good, but you are a luxury good, but it’s a lot of how those goods are sold because they’re sold around an aspirational emotional idea. Michael Jacobson: So I agree with you. I think the perception is that we’re a luxury company. Okay, I challenge the floral industry. I challenge the franchise industry. I think most franchises suck. Can I say that? Stephen Semple: Absolutely. Michael Jacobson: Most franchises suck. Stephen Semple: Sure. Michael Jacobson: There are a couple of good franchises. I think Chick-fil-A does it okay. I think Orangetheory does it okay. We’re following a model like when we say we’re franchising, we don’t have to get into it. Just know we’re trying to flip the franchise model on its head and actually run a great franchise system that puts the franchise on first. And even more than the franchise on first, puts the end consumer first. Anyways, that’s one thing. So we flipped the floral industry on its head. We’ve flipped the franchise model on its head. And now from the consumer perspective, what does a luxury company mean? We need to design some apparel for our team members to wear. Apparel that’s high quality, make them feel really good, really special. I went Rodeo Drive to get some inspiration. Look at Louis Vuitton and Hermes and all these companies, right? Stephen Semple: Thank you. Michael Jacobson: Okay. This is what I found. Remarkable craftsmanship, I will say. An unbelievable amount of thought goes into those designs. Then you look at the price tag and it’s $4,000 for a cotton t-shirt. Stephen Semple: Yes. Michael Jacobson: My mind is like, is there a way, and this is a very difficult thing to do, but this is our current challenge where we continue to push the brand we have and we continue to, can we create an experience that feels like a $4,000 experience, but we can charge $40 for it? If somebody can’t take their whole entire paycheck and bu

Michael Jacobson wanted to help his uncle sell his flower shop, but now it is growing like a weed. Dave Young: Welcome to The Empire Builders Podcast, teaching business owners the not-so-secret techniques that took famous businesses from mom and pop to major brands. Stephen Semple is a marketing consultant, story collector, and storyteller. I’m Stephen’s sidekick in business partner, Dave Young. Before we get into today’s episode, a word from our sponsor, which is, well, it’s us, but we’re highlighting ads we’ve written and produced for our clients, so here’s one of those. [Seaside Plumbing Ad} Stephen Semple: Hey, it’s Stephen Semple here and we are without Dave Young today because we have an opportunity for a really, really special interview. I have with me Michael Jacobson from French Florist and we had a conversation, it was probably about a month and a half ago, and I just thought some of the things that you shared was amazing and I was like, “I got to get Michael onto the podcast.” Now, the first question I asked Michael is, what’s your title? “We don’t believe in titles.” I said, “Are you the founder?” “Well, sort of.” That’s where we’ll start. That’s where we’ll start the story about French Florist in terms of how you came to be the owner and what’s happened in the time that the business has been with you. Michael Jacabson: Awesome. Thanks Stephen. This is a generous introduction. I appreciate that. Thank you. When I say we don’t believe in titles, we really don’t. As we get to be a bigger organization, we brought on a chief operating officer who’s a lot smarter in operations than I am. And that’s become my job is hire people that are smarter than you and give them the reins, so maybe, I don’t know what title that is, but whatever that job is, and she tells me we do need titles because it helps with accountability and that kind of important stuff. I thought it was a little boring, but she did convince me. Stephen Semple: Before we go on, what size are you at today? You’re large enough that you brought in a chief operating officer, so how many employees do you have now? Michael Jacabson: We’ve got just over 100 employees now. Stephen Semple: How many locations? Michael Jacabson: We have 10 locations now and we’ll have 17 open by the end of the year. We’ll have 60 open by the end of next, so a lot of our employees- Stephen Semple: Awesome. Michael Jacabson: … right now aren’t necessarily for the immediate now, but we’re building the infrastructure to support tomorrow. Stephen Semple: That’s cool. That’s cool. That’s amazing. That’s amazing growth, so 100 people now, but you’re really looking to go to that… You’re at 17, going to 60 locations. That’s awesome. Going back to the early days of how you found yourself owning French Florist. Michael Jacabson: Oh, gosh. Okay, so I don’t know if this will resonate with the audience. Hopefully it does. I’ve graduated college… You hear the statistics of how many startups fail, whatever it is, 90, 95% of startups. I did- Stephen Semple: Most. Michael Jacabson: Most. And I actually joined a few startups in college that I didn’t found but kind of joined their team. All of them, but one failed, so I saw firsthand too. And I took a job in super boring corporate consulting right out of college, paid super well, great opportunity. I could work alongside awesome executives at really awesome companies. That was the pitch. I didn’t make it even a year. I made it about one year and it just didn’t feed that fire in my belly. That was the wall that my ladder was leaned against and I could sit there and climb that ladder or if I’m not happy, do something about it. And so I had my ear to the ground with different opportunities and I got a call from my uncle one day and he says, “Mike, I’ve been running my flower shop for 38 years. I’m working six days a week, 60 hours a week or more, and I’m losing money. I’m tired. I don’t want to run the business anymore.” I studied finance, so he said, “Can you help me sell the business?” I said, “Sure, happy to take a look at it.” That’s how I got in and it evolved. I originally joined French Florist to help my family out and sell the business. Stephen Semple: You’re initially there to help with the exit? Michael Jacabson: That’s right. Stephen Semple: Okay, cool. Michael Jacabson: From there I went around and did what any normal exit would look like, where you go and you look at comparables, what are other florists doing well, what are they not doing well? How much are they selling for? Looking inside the business, let’s clean it up a little bit. Let’s get some proper bookkeeping and accounting in place so we have some numbers that we can share with prospective buyers. You know what I realized really quickly though was there’s such an incredible systemic issue in the floral industry. It wasn’t just my uncle struggling, it was all florists are struggling with the same exact issues, if not the same exact, very, very similar issues. You have the dominant market player… And Stephen, I’ll ask you, this’ll be interesting, if I say french fries, what company do you think of? Stephen Semple: It’s McDonald’s. McDonald’s, Wendy’s. Michael Jacabson: And you’re in Canada too, so I’d be curious to get your answers here. If I say coffee, what company do you think of? Stephen Semple: Starbucks would be top of that list. Michael Jacabson: Probably the top one for me too. Stephen Semple: Well, for us it would be Starbucks and Tim Hortons, those are the two. Michael Jacabson: That’s what I was expecting. Every once in a while you’ll get Dunkin’ for somebody on the East Coast too, but generally there’s a clear player that comes to mind. Stephen Semple: Yes. Michael Jacabson: If I say flowers, do you have a company that comes to mind? Stephen Semple: For me, it’d be like FTD or Teleflora or one of those, but certainly not anybody local. Michael Jacabson: You’re right. The top three players in our market, 1-800-Flowers, FTD, Teleflora, those are the three players. All of them have the same exact model and what that model is, they take an order online and they syndicate it to a local florist, fine. The problem they take up to a 40% commission after all of their fees on that order, so you’re paying $100 for the order, the florist is getting 60 or $65 on that. They’re getting hit so hard and a lot of florists are super reliant on the order aggregators for their orders. And then obviously most importantly, more than anything, that bleeds into the client experience and the client experience, you order… That’s where you get the memes on the internet where it’s like what you ordered versus what you got. And it’s just this massive discrepancy, that’s how that happens. Go to your local florist, that’s my pitch. That’s one systemic issue, but also the lack of technology. The downside of the supply chain, how we’re importing from the farm is unbelievably antiquated as well. And there are tens of thousands of flower shops in the Americas and 99% of them are single unit owner operator, mom and pop, so it’s terribly fragmented. Nobody has the economy of scales, nobody has a brand. Anyways, all of those amalgamation, lots of issues there. Where do you even start? But that was interesting to me because I was like, this is a very real problem where ultimately the consumer experience… People, they have such high expectations with Amazon and two-day delivery and now it’s two hour delivery. But when it comes to the floral industry, I don’t know how consumers have been so okay with how the flowers are getting delivered. They become complacent. And when I saw my uncle’s business and I saw what a good delivery could and should look like and that was not the norm for our industry, that’s a really cool opportunity to build a brand that’s creating very real value in the world. And we’ll get into why flowers as well. Stephen Semple: And you bring up something though very interesting, and this is ongoing theme from the podcast, it is amazing how we’re over 200 episodes in, and I’m going to say that the vast majority, probably 200, almost all, I can only think of one or two exceptions, these businesses and these ideas have been started by outsiders. And I think the reason why often it works with outsiders, an outsider comes along and looks at it and says, “This makes no sense.” But the industry goes, “But this is how we’ve always done it and there’s these long list of reasons why we need to do it this way.” Where an outsider says, “I know if we do this differently, consumers will love it and if consumers will love it, they will buy from me.” And I think that complacency not from the consumer, I actually think the complacency comes from the industry because the consumer’s not been given any other choice. Michael Jacabson: You’re right. You’re 100% right. Stephen Semple: And then when they’re given that choice, they’re like, “Oh, my God. This is amazing. Give me more.” And that comes from that outside perspective, so good for you. Michael Jacabson: Nice. And I’ll share one of the things that could be interesting too. The business’s name was French Florist, and I said, “Why are we called French Florist?” And my uncle didn’t have a good answer, but I was like, “We need to have some intentionality about the business. We’re in flowers too. We’re delivering emotions and really powerful emotions too.” It’s like we’re not necessarily saving people’s lives, but we are delivering love pretty much. That’s it. I’m yet to be convinced that there’s a more powerful emotion that exists than love, so we feel the weight of what we do and we value what we do and we don’t want to mess it up. When somebody is telling somebody that they love them and we’re the vehicle to help them do that, that’s an important task. We do carry that with weight. And so I said, “We need to have intentionality about what we do. We’re an American brand. We’re called French Florist. How does that make sense?” I really sat down for

From almost going out of business in 2000 to becoming the biggest toy manufacturer in the world. This is an empire! Dave Young: Welcome to the Empire Builders Podcast, teaching business owners the not-so-secret techniques that took famous businesses from mom-and-pop to major brands. Stephen Semple is a marketing consultant, story collector and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode, a word from our sponsor, which is… well, it’s us. But we’re highlighting ads we’ve written and produced for our clients. So here’s one of those. [OG Law Ad) Dave Young: Welcome back to the Empire Builders Podcast. Dave Young here, along with Stephen Semple. What Steve told me is that it’s a little bit different episode today. We’re not talking about the building of an empire, but the saving of the LEGO Empire, right? It was already an empire, and as empires sometimes do, I guess starting to collapse. Stephen Semple: Yep, yeah. Dave Young: And then something happened. Stephen Semple: Here’s the thing that’s remarkable. According to studies I’ve come across, when companies go through the type of challenge that LEGO faced, only literally one in 10 survive it. Most businesses do not survive it. And they not only survived, they went from being, I think they were the third-largest toy manufacturer to after facing this crisis, they became the largest toy manufacturer in the world. Dave Young: Wow. Okay. Stephen Semple: So not only did they survive, they thrived. And today they employ over 30,000 people, they have over 1,000 stores. And you can learn more about the early days of LEGO by going back to another episode, episode 28. Can you believe it was 28? We did it in the first year- Dave Young: Wow. Yeah. Stephen Semple: … of the podcast. But in early 2000, they literally almost went out of business. They were facing a moment where it was unclear whether they were going to survive and they were even in conversations to sell to other toy manufacturers. They were even in conversations with Mattel. Dave Young: Because I don’t know exactly how this went, but I can hazard a guess that the pivot they were able to make was to just start prepackaging kits and licensing things from movies and other things, other toys. Because when I was a kid, I had LEGOs, but man, if you wanted to build something specific, you had to come up with that yourself, right? There was no kit that made a battleship or a Star Wars fighter or anything like that. You were lucky if you had a couple of the little window things and maybe one or two little figures, but that was about it. Stephen Semple: Ironically, it’s part of what saved them, but also part of what almost killed them. Dave Young: Oh, okay. Stephen Semple: So it’s interesting. Dave Young: Right, I’m leaning in. Stephen Semple: Yeah. So we go back to 1997, and basically sales had started to stall in ’93, and so they were looking for other ways to grow the business because video games were coming in, all these other things were going on. And in 1997, Peter Eio is an executive with LEGO, and what he’s noticed, because he’s working in the US market, he’s seen a trend in the toy business where half of the toys in the US are being sold under licensing deals. So he puts together a deal with Lucasfilms to do Star Wars. And at first, LEGO’s really hesitant because they’ve never, first of all, done the licensing. Their real hesitation is the Lightsaber and blasters and the fact that it involves weapons. Because LEGO was always committed to, “There would never be any violent use of the toys.” Dave Young: They’re peaceful Scandinavians. Stephen Semple: Companies being run by Kjeld Kirk Kristiansen, who’s a family member, and the grandson of the founder, they do some focus groups and they come around to it, because the evidence is that parents don’t associate Star Wars with violence. So this wins over the execs. And while it’s a departure from the past, they decide to do this licensing deal. And LEGO Star Wars is born because they wanted to do this. Now, 1998 was actually their first ever loss. And Kristiansen steps down, and Poul Plougmann comes on the board because he did a big turnaround in Bang & Olufsen, and he does an analysis of the decline. What they believe at this point is children are playing with things differently. They want computer games. They don’t want to build toys, they just want to open up a box and play. His belief is the strength is no longer in the brick; it’s in the name, the LEGO brand. And he wants to extend the brand to other things, go beyond the brick. Now, what’s really funny is whenever companies want to do this expansion of the brand, it’s amazing how often it doesn’t work. There’s a really famous book, 22 Immutable Laws of Branding, and several of the chapters are, “Don’t extend the brand.” It’s like when Gerber wanted to make adult food. Dave Young: Nobody wants that. Stephen Semple: Right. It’s like, “Well, we make food, we can make it for adults, right?” It’s like, “No, you can’t. It’s baby food.” So anyway, they come up with lots of new ideas, they want to do a LEGO parkland in California, which is $130 million investment, and they plan on doing parks every two years. They want to do a chain of stores, mimic Disney. Now, the Star Wars tie-in is a huge success. It sells 200 million and it exceeds expectations by 500%, and it takes them almost back to profit. The problem is it’s not quite as profitable because of all the licensing fees, but they want to build on that success. They do a Harry Potter, they develop another tie-in with a Spielberg Moviemaker Set, which comes with the camera and does stop-motion. What’s really incredible with that is one of our business partners, Gary Bernier, his two boys, Dylan. Dylan, who’s now a partner. When they were kids, they had that and they did a ton of these stop-motion animation things that they posted all over YouTube and whatnot. But anyway. And they decide to open up design labs around the world to come up because they’re looking for these blue ocean opportunities. Now, one of the things they kill was Duplo, which is big bricks for little kids because they fear kids aren’t going to be interested in that, electronics is going to take over. They rework LEGO Explore to not be based upon bricks. They buy a tech startup because they want to tie bricks into what’s happening on the screen that they shut down after three years. So basically, in 2001, they developed all these new products and sales are up 17%, but they’re losing hundreds of millions of dollars because all this money that’s being spent on innovation. Now, the best revenue are products with tie-ins, because kids love playing with things with stories. So your point, I bet it has to do with these tie-ins, which they did have sales success from that, but they’re low on revenue because of all the licensing things. So here’s what LEGO decides to do, and this is where the problem starts. They decide to create their own stories. So they create an action figure, Jack Stone. He’s larger and it’s a simpler set. This belief that kids into video games don’t want to build complicated worlds, that’s the belief of LEGO. Now, here’s the mistake. You know who they never spoke to? Was someone who freaking designs games. If they talked to a game designer, what they would’ve actually learned is no, people do want complicated things. So they also create this other world, Galidor, which has no bricks and snaps together body parts, but feels more like Transformers. And they decide to market using a TV show. Now, marketing a game using a TV show is not a new idea. It was done by Transformers, was done by He-Man. But you know what Transformers and He-Man did, is they brought in comic book folks like Marvel to help them with it. Instead, LEGO hires a Hollywood producer. They create this live-action show. It’s fall 2002, they release it. But there’s this problem. First of all, the show’s not very exciting, but secondly, retailers are not sure where to put the toy. Is it an action figure? Or is it a building toy? And kids don’t like Jack Stone because for kids who like building, it’s too simple. And for kids who like action figures, there’s not enough action. It’s that classic, “I’m going to try to appeal to both of these people and go into the middle.” And what always happens when we go into the middle, Dave? Never works. Dave Young: Nothing usually, yeah. Stephen Semple: Right. So then they launched Galidor, which has got these big special effects, and it’s high cost, and it’s a poor story. It’s mainly an ad. And they were so convinced it was going to be a hit that they flood the shelves with this stuff, and both struggle. The warehouse was full of stock, Christmas 2002 is terrible. The theme parks are losing money. They bring in this consultant Knudstorp, who is a consultant from McKinsey, and he digs into the state of LEGO. And in June of 2003, basically, he reports things are worse than everybody expects. LEGO may not survive the next two years. Dave Young: Stay tuned. We’re going to wrap up this story and tell you how to apply this lesson to your business right after this. [Empire Builders Ad] Dave Young: Let’s pick up our story where we left off. And trust me, you haven’t missed a thing. Stephen Semple: And in June of 2003, basically, Knudstorp reports things are worse than everybody expects. LEGO may not survive the next two years because there’s also no new movies. One of the things they did not anticipate when they did the movie tie-ins, sales drop when there’s no new movie. And they had been losing money even when sales were good. It’s now November 2003. It’s a critical Christmas coming up. They’re on the verge of bankruptcy. They’re losing a million dollars a day, and they do not even know what products make money. They’ve been doing so much innovation, the finances are a mess. Dave Young: Wow. Losing a million a day. Stephen Semple: