Sometimes the obvious money-maker isn’t the biggest one. Do you have another business hiding in plain sight?
McDonald’s founder Ray Kroc was known for asking MBA students what business they thought he was in. Hmmm. Let’s see. Fast food, maybe, or hamburgers? Yes, Kroc explained, but that’s not all. Kroc knew that the real money was the real estate business portion of his restaurant empire. How so?
Kroc created a separate real estate company that acquired land and leased it to franchise partners, which make up about 85 percent of the nearly 40,000 stores in 100 countries. In 2020, the company reported $41 billion in property and equipment assets before depreciation.* The hamburger business was, at one point, a way to pay for real estate that appreciated tremendously over time.
Sometimes companies, like McDonald’s, appear to be in one business, but there is really a hidden company within the main business, or at least a hidden reason for being in business. How many businesses are you in, or could you be in? It might be worth thinking about.
Here are some more examples.
Kitty Litter creator Ed Lowe once thought he was in the “pet business.” After all, he had become famous for “bringing the cat indoors.” (Before Kitty Litter, would you believe sand, newspapers, and sawdust?) But when he plunged into retail as a pet store owner, he quickly realized that he was a cat in a dog-eat-dog world. Even the personal flair for which he was also famous didn’t help. He was really in the manufacturing business, at which he did in fact excel. To say the least, not all second, or hidden, businesses are successful.
One of our clients attached additional value to a commodity, a chemical, by adding a warranty. That value enabled the company to grow significantly for 20 years with strong margins. Even though creative, however, that’s not the hidden business. Because of the warranty, our client went one step further and set up a captive insurance firm to hedge the risk of paying out claims on the warranty. Since claims are low—bordering on non-existent—the captive is now worth more than the operating company. They’re in the insurance business as well as the chemical business.
Car dealerships are well known as financing operations, albeit with help from the companies whose cars they sell. But a jewelry store? Yes, we know one whose customers often can’t pay full price up front. Helping them celebrate engagements, anniversaries, birthdays, and other meaningful events in meaningful ways has become the most important part of what they do. You could say that this retailer’s hidden business is a truly unusual one. It’s financing joy.
Sometimes, the second business isn’t hidden but the motivation for launching it is—or at least isn’t obvious.
For example, a private equity firm client that specializes in real estate has seen annual double-digit returns for a decade. The founder invites co-investors to invest on the same basis. He explains that his motivation for this invitation is to enable the company to develop larger, more profitable properties. In this case, as in others, it’s the motivation that’s hidden, not the business.
Another client is a developer of hotel and motel properties. To control the risk of being overcharged by construction firms, he created a partnership with a construction expert, and together they formed a new construction company. The construction company benefits from the development work, and the development company benefits from controlling the cost of construction.
We also know of a privately owned manufacturing company that employs several family members. The owner wanted to insulate his family from the ups and downs of the manufacturing sector over time. To do that, he capitalized on the talents and real estate knowledge of one of his children. He began buying property unrelated to the primary business and formed a second company. The goal was to create a revenue stream independent of the manufacturing business and ensure his family’s financial security.
One way to define what businesses a company is in—and to imagine how you can expand your business footprint—is to look at how the company earns much of its income. Tesla is of course in the business of making automobiles, but, as reported in The Wall Street Journal, that isn’t how it currently makes money: “Tesla is making a fortune selling its surplus regulatory credits to traditional automakers struggling to comply with fuel-economy rules. Last year it pocketed $1.58 billion on [selling] credits, more than its $862 million in net profits.”
And Tesla is nothing if not imaginative. Founder Elon Musk also envisions turning “every home into a distributed power plant” to generate, store, and deliver energy to the power grid, reports TechCrunch+. In theory, the risks of the current power grid structure would diminish and the U.S. would be more likely to reach its “carbonless” future more quickly. It’s an example of not just creating a new business but an entirely new category.
Do you have a hidden business or a motivation that inspired a business either established or just developing? We’d love to hear your story.
We can help in any number of ways: brainstorming business ideas, additional revenue streams, and ways to reduce risk. We also offer consultative sales training, calling campaigns, marketing communications, and sales and marketing alignment.
Even better, we’re not hiding anything. You won’t have trouble finding us—we’re always front and center at 847-446-0008 Ext. 1 or email@example.com.
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Productive Strategies, Inc., is a management and marketing consulting firm based in Northfield, Illinois, that creates and implements business-to-business sales and growth strategies.