Business Strategy Blog

Spirit Successfully Pulls Off a "Ryanair" in the US

According to the  WSJ, (download pdf here: Download Spirit) Spirit Airlines, the ultra-low-cost carrier that derives its inspiration from Ryanair in Europe, is now the most profitable airline in the U.S. (on a per-plane basis). In fact, Spirit's market valuation is nearly the same as that of US Airways, an airline that is nine times the size of Spirit! How does Spirit achieve this? A combination of low costs + high fees!

Over 30% of Spirit's revenue comes in from fees for baggage and other services (even water is not served for free aboard Spirit), compared to 6% on average for the industry.  In fact, Spirit recently announced that it would start charging $100 for a gate-checked carry-on bag (you read that right!). I would think that initiative would probably help them by providing an incentive for passengers to pay the check-in bag fee early, and thus avoid having to gate-check their bags, which would end up speeding up the boarding process, and reducing turnaround times for their aircraft.

PS: I made the mistake of flying them once - never again!

Image courtesy: www.politicalcartoons.com

Zip It!

Many of you may have noticed the term "YKK" on the zippers used in many of our clothes. I have often wondered what this term stands for, and also who exactly is the firm that makes these zippers. Turns out that YKK, which stands for Yoshida Kogyo Kabushikikaisha, has more than 50% market share in the zipper industry (annual volumes of more than 7 billion zippers!). One would think that zippers are largely commodities, so there should be rampant price competition (with buyers asking for a base level of quality).

According to this piece in Slate, YKK has managed to maintain dominance of this market by providing very high levels of consistent quality and quick turnaround times - how does it achieve this? It is not really clear! They are fully vertically integrated and their "secret sauce" seems to be well protected. 

The buyers (usually production managers at apparel firms) are not that price-sensitive - the cost of a zipper (30 cents) is miniscule compared to the cost (and esp the retail price) of an average garment but it is crucial that it works reliably (you dont want your zipper to break down at work, or at home for that matter!). While the market has a lot of cheaper options available, none of them offer the same reliability that YKK offers. I suspect this enormous scale implies YKK has a cost advantage as well (possibly scale economies in purchasing and maybe manufacturing), but clearly the firm is able to charge a premium due to its differentiation based on quality and reliability. 

Is YKK a "vertical architect" like Coke or Intel? Probably not - end-buyers dont base their apparel buying decisions on the brand of the zipper, so there is little "demand pull" (pun unintended!). However, YKK clearly captures value owing to its reputation of being able to produce reliable, high-quality zippers. 

An interesting read throughout.

Barriers to entry for online businesses: is it time for Pets.com 2.0?

Pets.com is one of the pet (!) case studies of b-school profs looking to illustrate the (failed) economics of online businesses started during the initial years of the dot-com boom. Why then are folks trying to resurrect this business model and looking to get back into selling pet food online? This article (download pdf here: Download Pets.com 2.0) argues that one of the reasons why such businesses are seeing a rebirth is that the barriers to entry (in the form of fixed costs) have gone down substantially. 

For example, firms are now able to use Amazon's cloud services rather than set up servers of their own. The cost of marketing has gone down with the increased effectiveness of internet based marketing. Plus, with the increased penetration of broadband internet in the US, the PIE for this industry (and other online businesses) has likely gone up. 

All that being said, some of the critical limitations of this business (selling pet food online) persist - like the high cost of shipping - so the amount of value capture presented by this industry might be somewhat limited.