Reflections on the failure of Flybe offer insights for your startup strategy

If 007 is taking cover for the next few months, what hope is there for us mortals left exposed to the economic ravages of the spreading coronavirus? The release of the next James Bond film, No Time To Die, has been postponed until November. There will be better profits made then, and film distributors can afford to wait.

Others can’t, though, they have to battle through some tough times ahead, and airline Flybe collapsed on Thursday, the first to fall because it had underlying financial health problems in the most exposed sector to the economic impact of coronavirus. This has been underlined with an announcement by Lufthansa that it plans to cut up to half its capacity in the next few weeks, while grounding its biggest aircraft.

There will likely be big differences in vulnerability and impact between sectors. There will be a shift to online shopping, but while household income is uncertain, big ticket expenditure could stop abruptly. But let’s look at Flybe, because in reality the sharp downturn in revenue in response to the global infection was the final straw that broke their business model, and offers insights to startups intent on an aggressive, high growth strategy.

Flybe carried 8m passengers a year between 56 airports in the UK and Europe, with over 210 routes across 15 countries, but had a very unstable fragile strategy, operating model and ownership history. The Flybe brand originated in July 2002, positioning itself as a full-service, low-fare airline. Various pricing and product introductions were made in line with this position, such as discounted one-way tickets, the abolition of overbooking practices, a customer charter of the airline’s service standards, as well as compensation for delays.

The company acquired BA Connect in 2007, increasing its route network in both the UK and continental Europe, making Flybe Europe’s largest regional airline. But there were turbulent times, and fast forward to 2013, and Flybe sold its slots at Gatwick for £20m – out of 158 routes flown, 64 did not cover the operating expenses of crew and aircraft.

Despite this downsizing, in April 2014, Flybe announced that it would launch domestic and international flights from London City Airport, signing a five-year deal. Into 2015, Flybe announced new routes from Cardiff and Sheffield Airport starting nine new European city routes, and twelve months later opened a hub at Dussledorf.

Despite this growth strategy, November 2018 saw a 75% collapse in the share price as Flybe announced that it was talking about a potential sale. Subsequently, the Connect Airways consortium acquired the business, which included Virgin Atlantic and Stobart Aviation, with £100m of new funding provided to support the business.

Flybe announced plans to be rebranded as Virgin Connect, but in January 2020, it emerged that Flybe was again in difficulties, and a deal was reached on 15 January, entailing a deferred payment for Flybe’s Air Passenger Duty debts and increased funding from Connect Airways.

As of 28 January 2020, Flybe operated 36% of all UK domestic flights, but on 5 March, they filed for administration and ceased all operations with immediate effect after the Government failed to grant a proposed £100m bailout loan. Virgin Atlantic refused to continue financial support despite its investment of £135m, and placed part of the blame on the negative impact of the coronavirus outbreak on Flybe’s trading.

Was Flybe too ambitious? For the past fifteen years Flybe has been trying to join the big boys of aviation and failing. The serious push came when it raised money with an IPO, and set out a plan to become Europe’s biggest regional airline, flying mid-sized planes between secondary cities. The model works brilliantly in America, where regional airlines, often flying as franchises of the larger network carriers, are a large and thriving business.

It did not work – or at least Flybe did not make it work. It retrenched, and was left in the farcical situation of paying for a fleet of aircraft that it could not fly. The remaining network was still too big, and cash resources dwindled.

So what are the elements of the Flybe business model that ultimately caused its failure, and what can startups learn from their mistakes?

1. Operating a market niche made it vulnerable Flybe dominated the regional UK market, so it was particularly exposed to anything that went wrong in this market – the recent fall in demand prompted by the coronavirus outbreak just added to its list of woes. It already had to contend with storms disrupting travel and the effects of Brexit creating sluggish UK consumer spending. The weak pound following the Referendum also worsened the impact of increased fuel and aircraft leasing costs.

Lesson: don’t put all your eggs in one basket; don’t get complacent when you have dominant market share, take a counter view of inherent vulnerability to apparent strength.

2. It operated in a highly competitive market Aviation is a highly competitive industry at the best of times, saddled with high-cost assets, and key costs that fluctuate uncontrollably – mainly fuel, which accounts for around a third of total airline costs. On top of that, they face high regulatory costs. The UK is particularly competitive, with Flybe squeezed between major airlines such as British Airways and the big low-cost carriers like Ryanair and EasyJet.

Lesson: Always keep a keen eye on your cost base when focused on a high-growth strategy, revenues can often not hit targets or market share be impacted by external margin pressures out of your control.

3. Flybe paid more tax than other airlines Airlines have to pay Air Passenger Duty (APD), a tax per passenger on flights taking off in the UK. For international flights, APD only has to be paid on the route out of the country, but for journeys within the UK, APD is paid both on departure and arrival. The levy is thought to have cost Flybe more than £100m a year, something it had long complained about. The government was considering adjusting the APD and helping Flybe.

Lesson: There are often specific compliance costs or costs of entry into a market, which should be recognised as a harsh burden on the business model, hitting your competitive agility, and factored into your day-to-day thinking.

4. It had too many planes A decade ago, Flybe had ambitious pan-European plan, placing an £850m order for 35 Embraer 175 jets to underpin its expansion. But for years after that it struggled with overcapacity. Flybe ended up putting planes on routes to use the planes, rather than buying a fleet to fly routes effectively. It was a burden, in reality it really was too big for what it’s trying to do.

Flybe’s overcapacity showed it needed to operate smaller aircraft over a slimmer network, and maybe switch its focus to concentrate on the corporate market and forget about endless retail seat sales at peppercorn prices. This would mean higher fares but hopefully a better quality, repeatable customer model.

Lesson: A relentless focus on charging forward can blindside the downside risks and adverse long-term impact of short-term errors. Don’t be blinkered by growth-for-growth’s sake, take a balanced view of opportunity versus risk.

5. There were conflicting shareholder objectives The takeover by the Connect Airways consortium failed because the partners had conflicting objectives and were strange bedfellows. Virgin was eager to feed its long-haul flights at Heathrow, and perhaps snaffle along the way some of Flybe’s valuable Heathrow slots, whilst Stobart was eager to keep regional flights at its main asset, Southend Airport.  The third partner, Cyrus, was a VC and thought it might make money if the business was resuscitated. None of these were compatible with each other

Lesson: Ensure there is genuine compatibility and alignment of vision, purpose and strategy with your co-founders. Never let financial metrics convince you a long-term arrangement has merit, it simply masks the underlying paradoxes.

6. The pricing strategy must support the business model Coronavirus hastened its collapse, but Flybe’s pricing policy was flawed. For any form of travel, the operator with the fastest service generally charges the most. That used to be the case before the arrival of low-cost airlines, when domestic flying was considered a luxury. In Flybe’s case, although it held a monopoly over most of its mainland domestic routes, it was undercutting rail fares sometimes by as much as 50% – because the travelling public compared the cost of flying with surface transport.

However, at the same time as average fares have fallen, squeezing margins and leaving no room for mistakes, Flybe was posting annual losses of £20m.

Lesson: Price on purpose, and price for profit. After a period of entry pricing to gain new market share in a new segment, your value proposition has to fit around the competition and your business model. Don’t kid yourself demand v supply rules don’t apply.

7. Poor customer experience They had a mad hand baggage policy. I had a bag that was 5mm bigger than their cabin baggage guide at the gate. They charged £30 to check it in and, of course, I had to wait 45 minutes to get it back at the other end. The published dimensions of my hardsided case were within the Flybe size limits. I resolved never to fly it Flybe again and never did.

Lesson: Think about the critical non-essentials that can have an out-size adverse impact on the customer experience. Convenience, simplicity and ease-of-use are great customer experience virtues – introduce friction and it all unravels.

8. Dysfunctional culture Flybe acquired many rival’s routes, aircraft and staff and took many franchises into its brand, but wasn’t successful at integrating firms with different work cultures. Even though they were successful at operational integration of small companies, it failed to merge different work cultures.

High attrition rate in its work force compared to other organisations in the industry resulted in it having to spend a lot more than its competitors on training and development of its employees.

Lesson: Creating a diverse and inclusive workplace culture is vital as you scale a startup, ensuring there is a vibrant underlying set of values and philosophy that enables your business to build internally, besides fuelling external growth.

All of the above were factors before coronavirus came along, combining to trigger Flybe’s demise. They were not even able to maintain good revenues on unique routes. Flybe failed because it forgot what its core business was and an over ambitious strategy expanded it beyond it viable economic model.

Startups beware. The adrenalin of growth and soaring ambition can cloud your judgement and blindside some key signs that your model isn’t as unique as you expect.

Failure. We’re hypocrites about it. You find scores of pleasant aphorisms celebrating the inevitability of failure of underdogs and entrepreneurs, their determination to come fighting back and the importance of learning from it, but in real life failure is painful.

Optimism is key, as Friedrich Nietzsche said, That which does not kill us makes us stronger. A willingness to stumble during a quest gives the motivation to spur us onto success against all odds in the first place, so don’t let failure remove your spark, but embracing failure to encourage entrepreneurship is misguided. Keep an open mind as you build your startup strategy, and always be agile, alert and vigilante – euphoria, ego and complacency are virus-like killers to your startup business model.

Greggs: an agile approach to strategy & business model thinking

John Gregg founded his bakery business in 1939, selling eggs and yeast from his bicycle in Newcastle. The business grew, and his son Ian joined his father and mother, selling pies from his van to miners’ wives. They opened their first shop in Gosforth in 1951.

When John died in 1964, the bakery was taken over by Ian, and major expansion began, including the acquisitions of other bakeries such as the Bakers Oven chain from Allied Bakeries in 1994.

Greggs grew to be the largest bakery chain in the UK, home of the bacon sandwich and a coffee for two quid special offer which, disappointingly, is now £2.10 (a friend told me, honestly), famous for pies and pasties and everything you firmly resolved on December 31 would never touch your lips again.

A couple of years ago, Greggs fell victim to adverse PR about its product range and customer base. Oh how the Prêt crowd sniggered into their avocado and crayfish salads. Yet plucky old Greggs just got its head down and kept growing. ‘It’s a northern thing’ no longer serves as an explanation. The patronising notion that Greggs’s popularity is inversely proportional to the nation’s economic fortunes also fails to explain its steady expansion.

Today Greggs generate £1m a week from sales of coffee. It has repositioned the brand from an ordinary bakery-to-take-home to a high growth food-on-the-go entity, meeting changing customer demands and evolving food culture.

A new strategy was introduced in 2013 under CEO Roger Whitehouse, formerly Head of M&S Food, which focused on four pillars: Great tasting freshly prepared food; best customer experience; competitive supply chain; first class support teams.

Whitehouse introduced a ‘restless dissatisfaction’ approach to compliment the traditional business values, ensuring the business would never stand still after recovering from a period of stagnation. He implemented some radical changes, including closing the in-store bakeries, and introducing the ‘Balanced Choice’ range of products with less than four hundred calories, healthier options to the traditional product range.

And it’s worked. Having launched the first vegan sausage roll in January, last week the company announced a 50% rise in profits to £40.6m in the first half of 2019. The business is handing shareholders a £35m special dividend after total sales rose 14.7% to £546m.

In 2016, Greggs weren’t in the takeaway breakfast market but now only McDonalds sells more takeaway breakfasts. With a Fairtrade Expresso, it has overtaken Starbucks to become the third-largest takeaway coffee seller, behind Costa and McDonalds, while only Tesco sells more sandwiches.

So what are the lessons from the success of Greggs changing its business strategy and model that we take into our startup thinking?

1.     Be agile in how you connect with customers

Greggs expects to pass 2,000 outlets this year, 65% are on high streets, with the remaining 35% located in retail and office parks and in travel locations such as railway stations and petrol forecourts. The aim is to change the emphasis of the business so that it is 60% non-high street by the time it has 2,500 shops.

Part of this is having many of its stores open earlier and close later, in order to target those going to and coming back from work, expanding its breakfast menu to suit, and with ‘Greggs à la carte’ stores to open late to 9pm to lure evening takeaway diners.

As well as its new drive-through locations, the company is trialing a click-and-collect service, as well home and office delivery by Just Eat and Deliveroo. They aim to integrate click-and-collect and delivery services with the company’s Greggs Rewards app, which offers free drinks and birthday treats.

Greggs has previously failed with new ideas such as Greggs Moment, a coffee shop-style outlet with seating, and the Greggs Delivered service, which is only available in Newcastle and Manchester city centres, three years after it launched. However, the business is now at a scale where it can experiment without too much risk.

Takeaway: Greggs route to market strategy is to based on expanding their reach to enhance customer convenience, a ‘fish where they swim’ strategy, reducing the barriers between themselves and their customers, uplifting the customer experience and making the ability to connect and purchase convenient.

2.     Build your brand to face your market

Greggs has in recent years persistently bucked the wider trend on UK high streets, where most retailers are struggling to compete as sales shift online and the cost of running stores rises.

In 2013, Greggs began to transition out of the bakery market with the reasoning that it couldn’t compete with supermarkets, switching to focusing solely on the ‘food on the go’ market after discovering that 80% of its business was with that market. They stopped selling bread in 2015.

Greggs has worked hard at getting consumers to think about it as a food-on-the-go chain, developing ideas such as online ordering for collection and home delivery, developing strategic partnerships with their supply chain to focus on the four key pillars of their strategy.

They are more in touch with where the customers are today. It has managed to cater to new markets without being overly ambitious. The builder can still come off the building site and get a hot pasty, but there are also salads. The decor is still recognisable even if it has been upgraded and the older traditional customers still feel comfortable.

Takeaway: Many businesses want profit as their objective. But if you only focus on short-term wins and results, you get distracted from doing the work required to build the skills you need to grow and scale, and it’s the ability to scale that matters. The process is more important than the outcome at early stages of a change of strategy. Focus on getting good before you worry about getting big.

3.     Look forwards, not backwards with your product offering

Greggs sells 1.5 million sausage rolls a week but created the new vegan option due to public demand after an online petition signed by 20,000 people. In recent years Greggs has been innovating within its product range to appeal to a broader range of customers. Its ‘Balanced Choice’ healthy eating range, introduced in 2014, offers options including wraps and salads, all below 400 calories. It also sells gluten-free and several vegan lines.

The company also believes it can take advantage of rising demand for food ‘customisation’, driven by allergies and ‘food avoidance’ preferences, and its stores now make sandwiches to request.

One in eight new customers have bought a vegan sausage roll in 2019, which has overtaken doughnuts and other pastries to become a bestseller. The traditional sausage rolls remain at number one – with its 96 layers of light, crisp puff pastry – but there are more vegan products in development, including a vegan doughnut. It’s worked, such that Ginsters released their own vegan product for the first time in its 52-year history.

Takeaway: Greggs has been bold in its response to the adverse publicity on its offering and changing food culture. Aligning your product strategy with a focused brand image and route to market is core to any business model.

4.     Be clear about your marketing message & tone of voice

Before the Greggs vegan sausage rolls went on sale, TV presenter Piers Morgan sent out a tweet: Nobody was waiting for a vegan bloody sausage, you PC-ravaged clowns. The tone of the company’s response: Oh hello Piers, we’ve been expecting you – friendly but with a slight edge, was perfectly attuned to the ironic, self-confident marketing Greggs has adopted, a James Bond-inspired, droll putdown that was the perfect riposte.

Their hilariously portentous launch video – part of a build-up that parodied the release of a new iPhone model with journalists sent vegan rolls in mock iPhone packaging and stores sold sausage roll phone cases – meant that for days Twitter was engulfed with people talking about a £1 bakery product.

The vegan sausage roll campaign, officially launched to support the Veganuary campaign that encouraged people to give up animal products for a month, followed other memorable promotions include a Valentine’s Day campaign offering ‘romantic’ £15 candlelit dinners in Greggs shops, and a spoof ‘Gregory and Gregory’ event, and one faux pas: a 2017 advent calendar tableau of a sausage roll in a manger. After complaints Greggs apologised and reprinted with a different scene featuring Christmas muffins.

Takeaway: Greggs found its distinctive marketing style in 2012, when it saw off then-chancellor George Osborne’s proposed ‘pasty tax’ on hot takeaway food. Since then it has been consistent in its purposeful, structured and memorable content driven communication strategy, making the brand relevant to its target audience and differentiating its offering in an increasingly competitive market to reposition the brand.

5.     Don’t let your business model become stale

Innovation can be about efficiency. Look at Ikea, and The Billy bookcase. It’s a bare-bones, functional bookshelf if that is all you want from it. The Billy isn’t innovative in the way that the iPhone is innovative. The Billy innovations are about working within the limits of production and logistics, finding tiny ways to shave more off the cost, all while producing something that does the job. It demonstrates that innovation in the modern economy is not just about snazzy new technologies, but also boringly efficient systems.

The Greggs shop environment has been improved and significant investments made in logistics and delivery systems to make them more efficient and scalable. In-store ordering moved to a centralised forecast and replenishment system rather than relying on shop teams filling in manual order forms, which resulted in order accuracy and improved availability for customers.

All shops are on a refurbishment programme (every seven years) to ensure they stay looking bright and welcoming. In-store point of sale and window displays remain key to Greggs’ marketing strategy, however, a loyalty app was also introduced.

Takeaway: innovation in Greggs is about efficiency, economy and effectiveness, searching for ways to make their products even better and affordable for their target market. A ‘back to basics’ focus on the business model reflects the culture and humility of the brand. Combined with brave decision making to implement change and execution in a consistent, simple and continuous manner has delivered the results.

6.     Ensure your folks keep clear heads

Amidst the hullaballoo and the fury of the frantic activity in the coming and going of customers at busy times, staff have to keep a clear head. In the heat of the moment, they cannot get caught up in the intensity and frenzy. Resilience in times of peak demand is needed to keep the customer experience as fresh and stimulating as the steak bakes.

When you go to a Greggs, the staff are so engaged in what they do its untrue, they are like whirling octopus serving customers, and they do it with good humour, bantering with regulars, enjoying the success of seeing returning customers, before going again.

With 10% of profits going to the Greggs Foundation to help fund Breakfast Clubs for children and over £1m raised annually for Children in Need, the vegan pastry has helped change the perception of Greggs, but fundamentally it’s a people business, about delivering service, experience and the community it operates.

Takeaway: So, focused on a simple, core value proposition – reasonable quality food at reasonable prices, consistently produced and scaled – but the fundamental premise is to make customer experience the brand differentiator.

Many takeout food companies are head-on competition to Greggs, but due to its focused marketing strategies highlighting choice, quality, nutrition & easy access, the company is able to create sustainable advantage.

Changing lifestyles, changing eating habits and increasing health awareness factors are affecting the growth of the companies in this industry. Greggs has set its strategy from a customer’s point of view and with customer-based insights, to ensure the business model is as robust as it can be.

Adopt Greggs’ agile approach to strategy and business model thinking, to focus on the horizon and hold your vision. Do something everyday to move your business forward, and that makes you stand out from the crowd. A sheep has never stood out from another sheep, so don’t follow the herd blindly. People will take notice.

High growth anatomy: your startup’s dna

Remember the conversation that Alice had with the Cheshire cat?  Alice didn’t have a clear idea of where she wanted to go, or where she wanted to be, and asked the Cheshire cat Would you tell me, please, which way I ought to walk from here? The Cheshire cat responded You’re sure to get somewhere if you walk long enough.

This is often a question startup founders find themselves asking. Seeking to increase customers, they experiment with strategies aiming for straight-up, hockey-stick growth. Few startup ideas are perfect right out of the gate. That’s why it’s important to recognise when you might need a course correction and iteration in your idea, pitch, product or execution, but you need a clear sense of direction as a route map.

From performance metrics and market feedback, to the general mood of the team, there are several signs entrepreneurs should assess when deciding whether to stay the course or head in a new direction.

For many startups, knowing when to pivot can be more important than having the perfect idea from the start. Ideas are cheap, but execution is hard. As you listen to customers and their experience of your product, it’s not uncommon to have to consider that you may not have nailed it on the first go, and be open-minded to a pivot.

Often it’s about standing back. Whilst the customer metrics may be encouraging, the best startups make a distinction by applying a bigger-picture, strategic perspective to the detailed performance metrics they developed on their dashboard, such as unique customers and engagement.

It’s not about having failed to get in front of potential users, it’s often that the value proposition doesn’t resonate enough with the target audience to generate sufficient interest for regular, repeat users.

Understanding your sales cycle is also important to assessing whether you are on the right track. You should know whether the sales cycle for your target customers is four to six months, or whether sales typically come in the form of a quick ‘yes or no’ in four to six weeks. If you’re finding that you’re not getting that within the sector time frames, that’s a pretty good red flag that you’re going to get kicked into the cold water of reality.

However. Amazon was not the first online bookseller. Google was the 21st search engine to launch. eBay was not the first auction site. They just did it better than their predecessors. So if you are in the trough of despondency, maybe there is a re-think as an alternative to simply throwing in the towel.

Having arrived at the check-in desk with bags filled with uncertainty and self-doubt, from Uber to Zoopla, every ambitious startup reaches a point where they have to reflect and figure out what to do next, and in what direction to grow, and which door to storm through. Sustained growth is achieved by not only having a key, but picking the right door to go through.

Even startups equipped with staff with solid experience and track records can come unstuck. Boots on the ground are an imperative, and while the short-term turbulence may seem unappealing, even hazardous, making the right decision now cannot be understated. It’s not an issue of not knowing ‘where to?’ and ‘what’s next?’, it’s knowing how to make the decision and what questions to ask to decide between the choices.

Research highlights that 50% of startups fail, and those that survive typically only realise about 60% of their potential value – because of defects and breakdowns in execution. It’s a fault in their dna, vision without execution is hallucination! Fortunately, unlike biological dna, startup dna can be reengineered by the purposeful rewiring of the genes making up the core of the startup model.

Let’s assume you’ve achieved customer validation and a business model shaped. You’re sure to get somewhere if you walk long enough simply isn’t the answer now. Based on research, intuition and my own experience, you need to build what I call your High Growth Anatomy, a blueprint of your dna. This is what makes you unique, gives a scalable and innovative business model, and provides an effective route map for the direction of growth.

Here’s a list of fourteen ‘dna’ elements you need in your High Growth Anatomy, to give clarity on your future direction, readiness and potential to be a high growth business at the pivot. They are structured as to ‘Go’ and ‘No Go’. Evaluate yourself, what’s your ‘Good To Go’ score?

Foresight or Hallucination?

  • We have clear and articulated goals based on our purpose, of where we want to be in the next 6, 12, 18 and 24 months;
  • We have some thoughts on where we are aiming to be, but it’s more of a wish list than a ‘lets make it happen’ plan.

Front-foot or Back-foot?

  • As a team we are moving forward all of the time;
  • As a team we are fire-fighting most of the time.

Clued-up or Clueless?

  • We are clear about how we make a difference in our market;
  • We are unclear about how to get ahead in our market.

Dexterous or Clumsy?

  • We are agile in our business, we can ‘seize’ the moment with alacrity;
  • We are quite blundering, unable to move quickly.

Leaning-forward or Leaning-back?

  • We are restless thinkers, learning, imaging the future, eager to grow;
  • We are thinking about our future, but focused on today really.

Web-enabled or Webbed-feet?

  • We have a clearly articulated digital strategy in our business model;
  • We use the Internet and social media, but have no digital vision.

Harmonious or Mutinous?

  • We are all wearing the same jersey, pushing together in the same direction, one heart and one voice;
  • We’re a collection of tribes and opinions, connected but not united.

Curious or Cautious?

  • We develop lots of new things, some of them work, some don’t, but we’re always ready to experiment;
  • We generally keep trying things until they don’t work, then think of something new to have a go at.

Heads-up or Head-down?

  • When faced with a threat we respond rapidly and decisively;
  • When faced with a threat, we often step back and wheel-spin.

Fresh thinkers or Copy cats?

  • We are creative and restless, innovation is a core behaviour;
  • We don’t have a point of difference in our business model.

Stickability or Bendability?

  • When something is not going to plan, we reflect, adjust and kick on with renewed enthusiasm;
  • When initiatives do not work, we tend to give up and go back to what we know.

Kinship or Coldfish?

  • We actively pay attention to building our culture, values and spirit;
  • We do not pay attention to our internal culture – it just happens.

Connectivity or Disconnected?

  • We are hot wired, we’re all linked-in and linked-up;
  • Our organisation is not well co-ordinated – we’re disconnected and decoupled.

Insights or Blindspots?

  • We have a very good knowledge of our customers, their customers and our competitors;
  • We have an ad-hoc knowledge of our customers, their customers and our competitors.

High Growth Anatomy is a simple set of questions to ask yourself, share, listen, reflect and learn as a team, about your ‘startup dna’. Startups have to create their futures, things don’t just happen. You’re sure to get somewhere if you walk long enough isn’t the answer. Hope isn’t a strategy. It’s about strategic readiness and agility, clarity, direction and velocity and then execution. Have you got these in your dna?