🔑 How Dr Pepper won by not competing
Welcome to The Business Academy. Here's what we have in store for you today:
- Why you shouldn't always compete - The Story of Dr Pepper
- How to acquire $70 billion worth of software companies
- A towing business that nets $375k a year
🔑 My interview with cleaning business expert Johnny Robinson
He helped his Mom go from making $3k/month as a full-time Uber driver to netting $150k/year running a remote cleaning business. Johnny knows the home cleaning business inside and out, and luckily for us he broke down the economics of the business in this week's podcast.
How Dr Pepper Became Number 2 (Steal This Strategy)
Dr Pepper recently became the number 2 best-selling soft drink in the United States, thanks to an underrated strategy that you can use, too.
When we look at a chart like this, we might assume that Dr Pepper was in a fierce competition with the other soft drink brands on here.
But actually, they weren't.
Dr Pepper became number 2 by not competing. Let me explain.
If you've ever ordered soda at a restaurant, you know that they always have Coke or Pepsi.
Never both,
Why is that?
Each company enforces non-competes when they can. They don't want places to serve their soda and their main competitor.
Throughout the second half of the 20th century, Dr Pepper was a distant fourth place in soft drink sales behind Pepsi and Coke, even falling to fifth occasionally behind Sprite.
How do you beat out powerful incumbents like Coke, Diet Coke, and Pepsi?
Well, you don't compete with them. You find a way to complement them.
And that's the genius of Dr Pepper.
It's a dark soda that doesn't compete directly with Coke and Pepsi. That means restaurants, bars, and retailers can carry Coke or Pepsi, and Dr Pepper.
Thanks to a 1963 court decision that said Dr Pepper wasn't a cola, Dr Pepper buyers could position themselves as a complement to both Coke and Pepsi, as buyers wouldn't have to break any non-competes when buying Dr Pepper.
Therefore, Dr Pepper avoided the battle of competing with Coke and Pepsi. Instead, Dr Pepper is now everyone's second choice; Pepsi sellers can have Dr Pepper as their 2nd option, as can Coke sellers. Dr Pepper avoided competing, and is now the perfect complement for both. And it's even passed Pepsi and Diet Coke as the 2nd best-selling soda brand.
What can you learn from this?
Here's my main takeaway:
You don't always have to compete.
Sometimes your biggest competitor can actually be your greatest ally.
A perfect example: My friend Eric owns a successful M&A law firm. He left his job at a massive law firm doing M&A work to strike out on his own and do M&A work for people buying SMBs. Many might think he was competing with his old firm, but Eric didn't see it that way. Instead, he filled a gap in the market that the large law firm wasn't paying much attention to: Sub-$50 million transactions.
He picked his niche and became the best at it. His old co-workers started sending him referrals for deals that were too small for the large firm to handle, turning what could have been a competition into a mutually beneficial relationship. Had he tried to compete directly on huge billion-dollar deals, he would have been out of his depth without the resources of a huge firm.
By the way, I interviewed Eric about his business a few weeks ago. Check out the interview here.
🔑 One interesting read: The Operating Manual for the Greatest Software HoldCo
Constellation Software owns 600+ software businesses, which they plan to hold forever.
I absolutely love studying Constellation's story and the strategy that helped their stock appreciate by 15,000% over the last 15 years, turning an initial $20 million into $70 billion over the ~30 year life of the company.
I found a document I thought you would love: The Constellation Operating Manual.
It goes over the history of the company, its criteria for making acquisitions, and how they structure the business.
This website also has operating manuals for some of the other greatest HoldCo's, so check it out. You can also check out the author, Collin, on X (I follow him there and enjoy his content).
🔑 One interesting deal: Towing Business with 75+ Calls Per Day
I've always thought of towing as one of the best boring local businesses to own. You can cash flow like crazy, you don't have a ton of overhead costs, and there's always demand.
Let's take a look at this towing business in Maryland selling for about 4x cash flow.
What I like
I love the message in the green box at the top left of the image: Seller financing available. Easily the best way to finance a business for a variety of reasons (can lower your risk if the business fails, interest rate is usually lower, incentivizes the seller to help you in the transition). I also think the valuation seems reasonable, and the listing has some positive signs: 75+ calls per 12 hour shift, several long-tenured employees who work on commission (they get paid per car towed), and their fleet of trucks have low mileage.
What I don't like + things to explore
The listing has several errors, which makes me skeptical about what information in the listing I can trust. It says the company was established in 2022, but the description says that they have many long-tenured employees. Also, they may have mixed up inventory and FF&E; the company's 7 tow trucks are probably worth closer to $650k, and not the $3,750 listed for equipment.
Also, one line sticks out as a red flag: Owner is selling to focus on a different business. I'd definitely want to figure out why they'd prefer to focus on a different business if this one is supposedly doing well.
I don't know much about the tow truck business, but I've always been curious...
Have a great week,
Sieva
Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning.
