Entrepreneur Association of Tokyo
Seminar Summary - Bob Eberhart

"Taking on the Competition Against All Odds"
Mr. Robert Eberhart, CEO, SanSonoma Wine Company
February 2005

Being a little guy competing in a market as big as Japan's is a daunting task at the best of times. But is it impossible to challenge a long established competitor and snare market share? SanSonoma Wine Company's CEO Robert Eberhart has withstood a competitive broadside and explained at the EA-Tokyo meeting on February 1, 2005 that it is not as difficult as it seems…

SanSonoma can count Costco and Wal-Mart/Seiyu among their many customers and remarkably, their stunningly simple business model has produced an environment where customers in Japan can purchase a premium bottle of Californian wine for less than they can in California. And he is beating the big boys at their game.

How did it all begin?
“We started this company in 1999 with the intention of doing something new and interesting in Japan,” Eberhart said. “We wanted to be part of a consumer revolution and we knew at the time that we were going to take on some large players in the market. We knew that some people whose interests were not really focused on the consumer but rather were focused on their relationships with their competitors were not going to be too awfully happy that a company founded by a stupid American was going to come to this country and make some money.”

First, Eberhart described the buying power of 25,000 Yen in Japan. That amount can buy:

• Dinner for 2 at the Park Hyatt Hotel
• A trip to the airport
• One day of a 2-bedroom apartment rented somewhere in Tokyo, or
• two melons

How far does $250 (about the same amount) go in California?

• Five trips to the airport
• Dinner for 6 at Spago
• Four days in a 4-bedroom house rental, or
• 200 melons

“Another thing you can buy with $250 in California is 150 goldfish, a bowl to put them in, some equipment to keep them alive, and a really nice bottle of wine to enjoy drinking while watching your fish,” Eberhart says. He pointed out that this cost structure illustrates a real problem that existed in Japan before SanSonoma entered the market because for the price of one bottle of wine in Japan, you could buy about three bottles of U.S. wine.

To see that dynamic, one has to understand a little about the history of Japanese economics. Eberhart explained that post war, Japanese companies organized themselves along the lines of merchant guilds. “The result was that if you belonged to a merchant guild, it was important that you have good relationships with other companies, that you have a great relationship with what in America would be called ‘competitors' but in Japan are called ‘colleagues', and that if you are selling wine in this market, you pay attention to your colleague who is selling wine in a different market and you make sure you don't challenge each other.”

“Any economist will tell you that if you don't challenge a price, prices will increase,” Eberhart says. Emphasizing that the presence of competition is incredibly important, he says that if you have a system that pays attention to producers then it's the system of working with other producers that becomes important and there is no big constraint on prices except where the top income is. “And what we are seeing today is the per capita incomes in Japan and America are just about the same. But the standard of living in Japan is about half as high because the price of living is about twice as high.”

Selling For Less, Making More Profit
Next, Eberhart pointed out the often long and complex chains of ‘trading companies' in Japan that pass products between each other − each taking their 10−15% commission − while the consumer pays the bill. The SanSonoma model is radically different. “There's a guy making wine, there's a guy selling wine and there's a guy drinking wine. That's it. We don't deal with trading companies,” he says.

Foreign business are often urged to form partnerships with Japanese companies, but that is not a good move, Eberhart says. “The common advice foreign businessmen receive when they come to Japan is ‘find a great partner,' which is the dumbest advice you are ever going to get because the partner is going to put you in a box,” he says. “That's not a growth strategy. Now we are seeing a lot of markets being deregulated. In particular, what we found was the liquor laws were relaxed about eight years ago so SanSonoma decided to take advantage of that. The good thing about our business model is that now you can go into a store like Costco and buy premium bottles of Californian wine for less than you can buy them in California, and that was unheard of five years ago.”

But that's not all. “What is most interesting about this situation is that we are making more profit per bottle than any other wholesaler in the market,” Eberhart says. “We are selling them for lower prices by far and making more profit than anybody, and that's what we call a better mousetrap.”

Competitors Under Pressure Turn Up The Heat
After closing the second round of venture capital financing in June 2001, SanSonoma began to feel the heat. “As venture capital came in, competitors became aware of our existence and things became a lot more difficult,” Eberhart recalls. “A lot of things started happening to us − some large importers started paying our accounts big money to stop doing business with us. We found our price tags being removed from the shelves, we saw a lot of industry rumors - that we were dumping wine at a loss, that we were a gray market unofficial distributor, and our computers were hacked into. Someone even called United Airlines and changed my reservations!”

But SanSonoma management knew where the attacks were coming from, they knew they had attracted attention and they knew they wouldn't be getting this pressure if they weren't threatening somebody.

So what was the attack strategy?
“What we had to do was decide what was going on and decide how to react,” Eberhart says. “We knew fundamentally there was no difference between a Japanese and an American consumer − both want a basket of goods at a decent price. We stayed alive by keeping focus not on what the producers were doing to us, but focusing on the customer. And as we did the opportunities opened up. First Costco Japan started working with us, then Costco Taiwan, then China came on line, Seiyu, Family Mart, Mine Mart, Amway…..it started to snowball. We didn't make appointments with Suntory to explain what we were gong to do - we kept communicating with customers and said we've got great wines at a great price.”

SanSonoma is defeating the vested competition by focusing on what their rivals are not focusing on. “We focused on providing wine and value to their customers, and it turned out that by doing that, by just keeping the wine going, and continuing to provide value and not worrying about the competition, things started happening for us,” Eberhart says.

KEY THINGS AN ENTREPRENUER MUST DO TO STAY THE COURSE AND DEFEAT VESTED COMPETITION:

• You have to be able to take it mentally − it can be really tough.
• You will have to work harder than you can possibly imagine. “If you cannot work 20 hours a day, you won't survive this.”
• Use a free network of executive support staff. “We have always had about 10 people outside the company who were paid either very little or nothing at all who were basically executives in the company who were giving me advice and telling me what to do.”
• We had a good bank

So what's the secret to taking the big boys on?
It's really simple - don't pay attention to them. “Know your market, know your product and just sell to your customer,” Eberhart says. “Pay attention to who your customer is. If you serve your customer and your customer is going to pay you, you're going to grow.”

Eberhart finished his presentation with a favorite quote from Bertrand Russell:
“The world is made up of two kinds of people. One kind tries hard to reconcile with his fellow man, seek the reasonable ground and spread warmth and good feeling. The other kind is unreasonable, does not accommodate others' opinions and challenges everything.

We owe everything to the second kind.”

Text: Jonathon Walsh

Jonathon Walsh is a professional Editor and Writer, and Director of Business Grow, an innovative company specializing in providing a wide range of top quality Editorial and Advertising services to Japanese and foreign organizations.

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