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December 03, 2008

What A Small Business Can Learn From Tobasco Sauce

What A Small Business Can Learn From Tobasco Sauce

Mike Masnick

Techdirt

Summary

I’ve been reading Jeffrey Rothfeder’s book  McIlhenny’s Gold , which details the history of the family and company behind th

 I’ve been reading Jeffrey Rothfeder’s book McIlhenny’s Gold, which details the history of the family and company behind the well known Tabasco Sauce you’ve probably used many times in your life.  It’s a fascinating book for business buffs, in part because the McIlhenny family seems to do almost everything wrong based on traditional business planning, and yet continues to succeed at a level beyond pretty much anyone’s expectations.

What may be most interesting is how certain events early in the life of McIlhenny’s company seem to parallel the financial crisis of today.  In 1873, just a few years after the Tabasco sauce business had been started (and was still, by any definition, a “small business”), there was an economic collapse. 

It started when banking giant Jay Cooke and Company, one of the major financiers of the Civil War, went bankrupt after over leveraging itself in support of a transcontinental railroad.  Following that, there was a severe economic contraction, where one quarter of all of the country’s railroads failed.  18,000 companies who had built their businesses by relying on railroads also went out of business.

One of McIlhenny’s biggest competitors, a name you most likely recognize, H. J. Heinz, makers of pickles and ketchup, among other things went bankrupt during this time as well (it was later restarted).  Heinz, like so many other companies during the “boom era” that preceded the crash, had structured its business on the expectation that consumer purchasing could not and would not slow down.  Yet, as the economy went bad, consumers didn’t buy as many pickles.

But Heinz had still grown its biggest crop of cucumbers and other vegetables, and needed his factories working at full production levels to bottle and can them — which then left his warehouses over-stuffed.  On top of that, shipping costs shot up, due to the railroad failures.  Obviously, businesses want to be able to grow with their customer base, but that commitment can make life difficult during slow economic times.

In contrast, Edmund McIlhenny had actively resisted letting the company grow out of control.  Instead, hefocused on growth he could manage.  He had avoided large capital expenditure on automation, which many others in the business had bet on, and then wasn’t saddled with huge debt from those projects that often didn’t really add much to productivity.  He didn’t expand product lines, despite the early and rapid success of his Tabasco sauce, preferring instead to focus on perfecting the Tabasco sauce business in a reasonable manner.

Yes, the company might not have grown as quickly as it could have during its first few years, but when the economic crisis came, he was much more well positioned than most other companies to weather the storm, and thrive once the economy came back.

Of course, not all businesses were so shrewd during the boom years, but there are important lessons for any small business in these financial times: Focus on what you can do right now to build your business in a reasonable manner.  Don’t over-invest in risky ventures where the outcomes are dependent on others.  Instead, invest wisely in perfecting your products and processes, serving your customers better and better, and building up a strong, revenue-producing client base.

Be aware of good opportunities but enter into them in ways that are focused on revenue production, rather than big bets.  Edmund McIlhenny did just that, as he was approached with an opportunity to use Avery Island for a salt mine (the island, it turns out, is actually a mountain of salt, larger than Mt. Everest if you follow the salt all the way down).  But rather than taking on the whole project himself, he partnered with another firm to build the salt mines, and set up a revenue share (and salt share — salt is an important ingredient in the sauce) agreement that helped generate much needed cash.  Years later, McIlhenny was in position to take over the salt mines entirely.

Overall, lean economic times give your business an opportunity to focus on perfecting your offerings and processes and building out revenue, rather than shooting for the moon with big bet projects dependent on a variety of outside factors.  Embrace that opportunity and maybe 150 years from now people will be reading books about how your small business became one of the biggest brand sensations of the previous century.