Russia is a prominent center of macrocreative thinking
In 2015, Garrett created his own business, macroscope consulting, with offices in Dublin, Ireland, Zürich, Switzerland and Moscow, Russia. His company’s mission is to help his consulting clients grow faster and more sustainably by delighting, (as opposed to merely satisfying) their customers. His clients are primarily business owners as well as private equity and venture capital investors across 38 industry verticals, both B2B and B2C, across 22 countries in both Eastern and Western Europe. In an exclusive interview with Capital Ideas, Garrett Johnston talked about why companies that focus too much on technology and digitalization are doomed to failure and how to use, generate and leverage customer delight and loyalty as the main driver of enterprise financial value.
Garrett Martin Johnston, originally from Ireland, has been working in strategic marketing for almost 30 years in 15 different countries around the world. Before setting up his own consulting firm in 2015, Garrett had been working in senior C-level roles for major Russian corporations for the previous 10 years including MTS, RosnanoMedInvest and X5 Retail Group.
Garrett, you’ve worked in 15 different countries. In your opinion, do differences in mentality still exist in business, or have the lines been blurred?
When it comes to consumers, there is very little difference: everybody wants an ideal combination of low price, high quality service, as well care and respect from the company they trust their money and time with. I’m not saying that there are no differences at all; merely that these distinctions are primarily cosmetic.
Where there are, however, major differences is between entrepreneurs (as opposed to consumers) from different countries. For example, Russian entrepreneurs exhibit highly distinctive and differentiated behavioural traits. Of course this is a generalization, but entrepreneurs in Russia, by and large, are interested in fast money that they can earn today, and not tomorrow or the day after tomorrow. Even though it would be logical for Russian entrepreneurs to plan for the long term. The reason is that the cost of capital in Russia for entrepreneurs is constantly falling. Today, if a Russian small entrepreneur wants to take a loan, even unsecured from a bank to expand their business, you are looking at a ruble interest rate 15-20% per annum. If we extrapolate this figure, then we will reach 100% after about 4 years. This means that the Russian small entrepreneur planning horizon should be at least 4 years to see the return on this investment. But many Russian businessmen plan for no longer than a year. For bigger Russian corporations, whose WACC (weighted average cost of capital) would be much lower than for a small entrepreneur, those minimal strategic planning horizons would be much longer again, more like 7 years. However, even these big players rarely plan more than 12 months ahead.
This mindset has severe repercussions for Russian corporation valuation multipliers; the average forward p/e ratio for Russian stocks comes in at a rather dismal 5:1, versus a global benchmark roughly 3x higher. When you regress a standardised DCF valuation algorithm you can see why; the primary valuation drivers are steadily increasing free cash flows over the coming 5+ years. And this is where the Russians fall down.
Most Russian companies cannot show this kind of growth in future cashflows because they fail to delight their customers. This failure results either in minimal repeat purchases from expensively acquired customers, or in repeat orders obtained only by offering massive price discounts. Either way, the future free cashflow streams are either stunted or non-existent. In other words; huge customer acquisition costs (CAC) and minimal customer lifetime value (LTV). In fact, most Russian companies do not even have LTV KPIs!!
Maybe this is related to our economic and political system. We often have crises, a lot of unforeseen events happen, people lose money and business.
There are crises in other countries as well. For example, right now the UK is exiting from the European Union. It’s not clear how restrictive the final Brexit trading environment is going to be – it might mean customs duties appear overnight in places that were previously tax-free. For entrepreneurs from Ireland or Great Britain who export to Europe, this is a big shock – 45% of all British exports go to EU countries. In Ireland’s case, it’s even higher, more like 55%. Imagine you are a business owner in Ireland or Britain trying to make investment decisions. Impossible. So Russia has no monopoly on crisis situations. Equally, business is poorly protected by governments in Brazil, in South Africa. But even there entrepreneurs plan 2-4 years ahead.
My personal opinion is that a lot of today’s Russian entrepreneurs made their fortunes in the 1990s, when you could only borrow at 60-70% and there were criminals everywhere. Their business instincts and way of thinking were shaped under these conditions, and they can’t get used to the fact that we live in a different time now.
You’re probably right. Is that the only difference?
Another very Russian cultural trait I’ve noticed is an absolutely manic interest in technology – digitalization, blockchain, artificial intelligence, you name it. Entrepreneurs, strategists and investors in Russia count on technology to save and power their business. I explain to them that technology is only useful if it helps the customer to get a radically superior outcome – for the customer and the business. I explain that 100% digitalization is an unmitigated disaster, because the customers, the people who pay you money – these people are analogue, not digital. A 100% digital business will die very fast. Yet the Russians are absolutely crazy about technologies of any kind, but much less interested in talking about customer delight. I explain that the technologies are just instruments and that the primary decision making criteria are emotional. In other words, a bank that helps its customers to become wealthier and more successful is going to be a much better business than a bank with completely digital platforms, products, services and processes. But the Russians are still, by and large, all about the technologies, not about the customers. To be a “digital business” by 2025 would be the same as to be an “electric business” in 1925. All businesses were electric back then, and electricity was easy to connect. The same thing is happening now with digital. I want to say that business digitalization is just hygiene, and not at all something that will give you a long-term competitive advantage. The important thing is how a company helps the client get real value.
Another thing that sets Russian business apart is a focus on their own product, not on the client. If you open a website or a Facebook page for 99% of Russian companies, you can see how the company describes itself: its products, its size, its history……but very little about the benefits for the customer. Leading businesses in the West are much less self-centred, product-centred and technology-centred and much more customer-centred`. They will talk not about themselves but much more about “your delicious dinner,” “your fantastic birthday party,” “your diet.” You, the customer, are the most important thing, and our products or services are secondary. Obviously I’m generalizing, but the generalization holds true.
Business always has a goal and a strategy for accomplishing this goal. If the goal isn’t right, not even the best strategy will save you. If your goal isn’t to delight the client, then your customer service automatically suffers. For example, if you’re a mobile operator you need to not only be selling the best tariff plan with unlimited internet, but also the right phone, tablet, accessories, the right software, applications, value added services. But mobile operators in Russia want to sell as many SIM cards as possible. They should have a completely different goal: how to make their customers successful in the era of information.
Have you been able to implement this idea that the most important thing is service and customer care in Russia? Do you partners accept it or are they skeptical for now?
They accept the idea and agree with it, but they don’t think it’s the most important thing. This attitude can lead to serious financial consequences. If a business is not focused on delighting the client, they will have a lot fewer return customers. Whether the client comes back or leave you good reviews online is a secondary, sometimes even tertiary, concern. Clients only come back if you give them a discount. But this kills your margins in the future, and your business will have low margins.
Almost every company has a loyalty program now.
The problem here is that loyalty programs are misunderstood. Real loyalty will happen once the company is loyal to its customers. Only then will the customers be loyal to the company. For example, in 2012 I worked with a chain of gas stations. The owner opened convenience stores right next to his gas stations, but couldn’t understand why his convenience stores got such little customer traffic. I took a look and realized why. They had a prepayment system where you first had to go and pay for your gas, and only then fill up your tank with it. This is stressful, inconvenient and time=consuming, which leaves no time for shopping. I said that they need to change the system: first the client fills up the tank, then goes to the store and pays for everything at the same time. More than 80% of gas station profits come from store purchases. But the client didn’t change their approach, they asked me to think of a loyalty program instead. I explained that the biggest loyalty program that they could do would be simply to move from prepayment to postpayment.
Why do you remain engaged with Russia?
I’m interested in Russia because 140 million people live here. If you add Kazakhstan and Belarus, it’s almost 200 million – that’s in purchasing power parity terms the sixth largest economy in the world. And I think it can do far, far better than that.
This country for example was able to create a genuine competitor to google despite the global resources of the latter. Only a very few countries could do that and only 2 – Russia (Yandex) and Czech Republic (seznam.cz) have free markets with no major restrictions for foreign competitors. And only Yandex is left. They were able to build a much better model of the Russian language in order to evaluate deep search intent. Arkady Volzh is now trying to export these linguistic precognition models to other countries with big economies, complex agglutinative languages and no google competition, for example Turkey.
Russia has a lot of potential, but so far only a small percent of it is being used. But the Russians also have other strategic cultural advantages. For example, the Russians are exceptionally well educated and exceptionally creative. They are ideas people. This is not something new: St Petersburg was designed specifically in the 18th century as a place where ideas and concepts, as opposed to merely physical goods, would be shared, synergised and mixed/recombined. I would go as far as to say that St Petersburg was the first city of the information age, where information and concepts (the “source code”, so to speak) are of greater value than mere products. This all happened 200 years before the telephone.
There are two ways to add value in today’s economy. One is through generating new ideas, innovation, and creativity. The other is to implement these ideas. Russia is a macrocreative country, where people generate very original, interdisciplinary and advanced ideas. In the past, it used to be that implementation and execution of ideas used to be the primary value driver, not the ideas themselves. However this is now changing radically. Increasingly execution or implementation and even “management” of anything is just an algorithm that has been relegated to and made less costly by artificial intelligence. And the ideas themselves are increasingly more valuable. There is internet now as well, which gives any Russian idea global implementation opportunities at a low cost in any country. Russia has always had problems with implementation, but never with generating ideas. I think the reason I believe in Russia the most is because it’s a prominent center of macrocreative thinking, and this is a product of Russian culture.
Unfortunately, a lot of Russian entrepreneurs curb their own creativity, this spiritual potential. But this is the best talent to have, and I hope that the next generation of entrepreneurs will incorporate the vast Russian soul into their business practices.