#014 - The cost of scaling too quickly

In episode 14 of The OvercomeHer Podcast, host Samantha Noelle breaks down the hidden costs of scaling too quickly—why rapid growth often strains systems, HR, cash flow, and quality, and why many businesses don’t survive beyond five to ten years after scaling. 

Using Aritzia as a case study, she shares her prediction of a potential decline driven by Gen Z fickleness, visible quality deterioration, lack of innovation, and expansion-focused strategy, alongside examples like Boston Market and The Body Shop to show how cash flow issues and brand identity loss can derail growth. 

Samantha then walks through key questions to ask before scaling, plus practical strategies: document and stress-test your lifecycle, map growth, hire for where you’re going, protect what made you great, scale based on conditions (not dates), and focus on repeatability, predictability, and profitability.

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Transcript

SPEAKER_00 0:00

Lately, I have been reflecting on the growth of Aritzia and it got me to thinking, what are the costs of scaling too quickly? With publicly traded companies, often the CEO has something to prove to the shareholders. Our company is worth investing in. So rapid growth and expansion is an easy solution to this. What about privately owned corporations though? What drives them to grow? Oftentimes it's the owner's own desire for capturing more of the market and increasing revenue. But time and time again, I've seen companies grow quickly only to frustrate their internal systems and HR while seeing a decline in the quality of output. Hey everyone, I'm your host, Samantha Noel, and you're listening to the Overcome Her podcast. This is episode number 14, where I'll be getting into scaling a business. In today's episode, I'm going to discuss the dangers of scaling too quickly, giving examples of companies that failed this. And then I'll get into signs that you're ready to scale your business and strategies for doing this successfully so that you don't become another statistic. Because most companies that rapidly scale don't survive beyond five years. Here are some stats for you. Roughly 20% of businesses fail within the first year of scaling, and 50% fail within five years, and 65 to 70% fail within 10 years. So by the end of 10 years, more than half of businesses that have scaled rapidly tend to fail. Now, not all of those failures are caused by scaling, but rapid growth is one of the major contributors to business failure because of the impact that it has on the business and the business's systems and structure. Someone once said something that really stuck with me. They said that CEOs are the cause of businesses failing. And upon first hearing this, you could think that that was an overly broad statement. But when you understand what this person was saying, I actually agree. Most times CEOs have an ego and they need to prove that they deserve to have the seat that they do, which is often why you see a new CEO coming in with big changes instead of expounding upon what already works and making it better. Now, let's just continue looking at Aritzia for a bit because my prediction is that while their stock price today is worth the highest it's ever been at $163.11 per share, we will see them drastically decline in about three years' time. That's my prediction. And five, if they are lucky. Aritzia, if you don't know, is an everyday luxury retail company that was once a Canadian gem. However, when their now CEO Jennifer Wong came in in 2022, the company initially saw a 74% growth in revenue, which was the result of a few things at play. First thing, the hashtag Aritzia had exploded among the Gen Z TikTok market, and a few of Aritzia's key staple items are what took off. Things like the effortless pan, the super puff, and the sweatpants and hoodies. 2022 was also unique in that it saw an increase in retail spending overall due to being a post-COVID period where the world was now free to move about again. More people were spending money that they had saved and wanting to buy things as they got back into the world and office on a more frequent basis. Another key thing is that Jennifer Wong has stated explicitly that she wants a Ritzia to be famous in the US. However, fame is often like a shooting star. It's bright and looks great when it's floating across the sky, but it dies out quickly. And when given the choice to choose between fame and success, one should always choose success. Success stays and fame lasts for a season. Here's why I am personally predicting the downfall of Aritzia unless they massively overhaul the direction that they're going. One, their number one market right now is Gen Z, and Gen Z is fickle. They have no brand loyalty like older generations, millennials, and Gen X. So while success can explode overnight through TikTok and Gen Z sharing their new fonts, it can also disappear just as quickly. Gen Z tends to pay attention to what people are saying and they jump shib based on that. So the second that people start to clock that the quality of Aritzia clothing is declining, Gen Z will listen. And that's the majority of Aritzia's market base. And the lack of quality has already started to decline. It would be one thing if their pricing reflected their cheaper quality materials, but it doesn't. And their wool coats have gotten thinner over the years. The other huge thing that I see Aritzia not doing, which will lead to their decline, is their lack of innovation. Aritzia's brands like Babatin, Sunday's Best, Wilfrid, used to constantly update their styles, and it truly felt like everyday luxury. However, for three years in a row now, I have noticed the same styles being repeated and recycled. I also noticed that they're continuing to bank on Gen Z's style of comfy luxury, aka nicer sweatpants, and hoodies. That's short-sighted thinking. And as soon as the wind blows with Gen Z, will Aritzia be able to meet them where they're at and what they're demanding? I personally doubt it. In short, here's why I think Aritzia will decline in about three years' time. If we look at Aritzia's year-over-year growth, in 2022, they had grown 132%. 2023, 48%, 2024, 12%, 2025, 30%, and 2026, 37%. Businesses cannot sustain 20% plus year-over-year growth for long periods of time. Things start to fracture and things start to break down. In terms of revenue, Aritzia went from 268 million in 2021 to 1.83 billion in 2026. And then in 2024, they had opened up nine stores in the US. 2025, they'd opened up 12. And in 2026, they opened up 14. For 2027, the plan is 12 to 13 stores in the United States for Aritzia will be open. So here's why, in short, I think that Aritzia will decline in about three years' time. One, they chose fame over brand preservation. Two, quality deterioration is already visible. Three, customer sentiment is turning and Aritzia has not been listening. Four, the current strategy is driven by growth and expansion rather than the stewardship of the brand itself. And the fifth reason is the market has not yet priced in those risks. Most business owners want growth until they get it. Then suddenly they are forced to meet the influx of demand, which causes a constraint, and they usually need to source whatever supply that they can from wherever they can get it. And that often translates to cheaper, mass-produced output, not just in terms of product, but also in people. Cash flow also tightens as businesses deal with the increased needs of purchasing more capital. Human resource issues increase as existing employees feel the internal pressure to take on more responsibility, often leading to burnout and learning new systems and processes that didn't have the proper time to implement. Growth is healthy. Rapid growth comes with a constraint and a cost. And today I want to teach you how to scale without breaking everything that you've worked so hard to build. In the first section here, I want to talk about the questions that you should really be asking when you're thinking about scaling and growth and expansion. Because most people think about all of the positives of scaling, which usually is recognition and money. But with more success comes more responsibility. So first ask yourself, what evidence do I have that there is a demand for this growth? Are there clients that are demanding more of your product or your service? Do you see similar businesses in your area that are experiencing growth? And why are they experiencing it? Find out what evidence that you actually have that demand is there for your product or service. Because your ability to discern whether the opportunity is actually there or not is the first thing that you should be looking at when even considering expanding. Because if you're looking at a company that's doing really well, that's in a very similar market to you in terms of its product or service. And the reason that they're doing well is because they've differentiated themselves and they're giving the customers something that the customers want that you don't actually offer, then that's not necessarily an opportunity for you. It's an opportunity for them. So you have to figure out am I offering what customers are actually demanding? The second question is what is constrained the most when we grow? Meaning, what is going to feel the pressure of the company growing the absolute most once that demand starts to hit and you have double the amount of demand coming to your business? Are there current constraints that have not been addressed? Because those constraints will start to hurt the most. If they're fractured at all right now, the fractures will be incredibly apparent when you actually scale and grow. The third question is what am I hoping to achieve through growth? Is this a vanity project? Or is this I want to grow because I want to actually have my business be something that can outgrow me? And I know that there's enough of a demand there and I want to be able to supply and meet that demand because I know that if I don't, I'm going to essentially extinct my own business, which can definitely happen. Sometimes opportunities begin to present themselves. And if we don't rise up to the challenge of meeting those opportunities, we actually put ourselves out of business. There's kind of a fine line between expanding and growing and scaling too much and not at all and missing out on opportunities that are actually right in front of us. The fourth question that you want to ask is who is affected by the growth? What stakeholders are affected by the growth? Now, stakeholders are not the same as shareholders. Stakeholders could be your employees, it could be your family, if you're a mom and pop business, it could be shareholders. So who's going to be affected the most by the growth? Because you want to be able to discern what needs to be in place so that they are not negatively impacted or that the impact on them is as frictionless as possible. Fifth question is what will I have to sacrifice for this growth? And am I willing to sacrifice it? If you're going to have to sacrifice quality because the suppliers that you currently have cannot meet the demand that you'll be requesting of them, are you willing to sacrifice that quality? If quality is something that's incredibly important to your customer base, they'll notice when you switch suppliers. I think of Lululemon before they offered their IPO had really great quality workout clothes. And they charged a premium for their clothes, but they lasted, they didn't pill, they didn't fade, they fit really well, and they were quality. The material was thicker. And as soon as Lululemon issued their IPO, the quality drastically went down. And Lululemon is an example of another failed company because they failed to keep up with the changing demands and the changing tastes of their customers. And now look at Aloe, who has actually outperformed and beat Lululemon and taken Lululemon's customer base. So that's another example of a company that expanded and grew, but then they failed to keep up and meet the changing demands and needs of their customer base. And now they've lost a huge share of the market and they might not be able to recover from that. Before scaling your business, look at your foundation. If your foundation as it is cannot hold growth, then you scaling your business will not succeed. Imagine the service-based business that starts taking on more clients and starts missing deadlines. Customers will have something to say about that. The production company that faces a supplier shortage because they fail to make sure supply could meet demand. Companies fail to realize that the problems when they were small were much more easily managed than when they grew. Because when you grow, those problems are just amplified. Now your shortage for one item becomes a shortage for hundreds of items. And failing to plan is planning to fail with scaling and growth. If you have an overly complicated setup with the different softwares, systems, and onboarding, scaling will only reveal how unscalable those systems and processes actually were. If you have an overly complicated setup with different softwares, systems, and onboarding, then scaling will only reveal how unscalable and how discombobulated those systems and processes actually were. They may have worked before, likely with some degree of frustration by your staff and HR, but they worked. They will not work when you scale. One thing that people often don't realize about scaling is that even though the demand might currently be there, cash flow ends up getting constrained when you begin to scale. The reason that cash flow ends up being constrained is because you're often injecting it into asset purchases. You need to buy more equipment, you need to invest more in advertising and marketing. You need to spend more on your human capital, your onboarding, your training. You need new systems in place that cost more money than when you were small. You might need more inventory. You might have to pay a lot in import duties that maybe you were not paying before. So cash flow in the beginning stages of scaling until the sales have caught up often will be constrained. And this is why it would be incredibly important if you are considering scaling and growing that you have a really good accounting team and CFO, or at the very least, a fractional CFO in place to help you scale. Because Boston Market is a perfect example of what happens when you scale too quickly and on the outside everything looks great, but your cash flow is poor and it ends up causing you to fail at scaling your business. Boston Market was a fast restaurant chain that had exploded in the 1990s. They were opening restaurants at a rapid pace, hundreds of locations. Wall Street loved them, but the growth consumed cash faster than the company could generate in sales, and their infrastructure wasn't keeping up. Their systems weren't able to keep up, and the debt eventually piled up, causing them to file for bankruptcy. Sometimes growth hides operational weaknesses and cash flow problems. So how do you scale without becoming another statistic? How do you scale without becoming another body shop? The body shop, if you remember, they're still around, but they used to actually stand for something. Customers had felt connected to their mission. As the company expanded globally, though, they changed ownership over time, and many customers felt it lost part of its identity. Growth wasn't the only factor. The larger it came, the harder it became to maintain what made it special in the beginning. The brand gradually became less distinctive because the body shop used to actually stand for something. They stood for ethical sourcing, environmental awareness, and social responsibility. Customers had identified with the brand. That was their flagship. And that identity became lost when they began to expand and change ownership. I think of Costco as being a really successful example of a company that scaled strategically, intelligently, and without costing them the success of their whole entire business model. Think about Costco for a second. They only carry one or two different brands of each item that they have. They're not trying to provide customers with a million different choices. They focus on bringing in what is backed by customer satisfaction. Scale based on what your customers love about your business. Less is more when it comes to scaling. The more options that you have and provide to your customers, the more overhead costs that you incur to maintain those options. The harder it becomes to source all of those different options, and the more risk that you have for having supply chain issues. The more that you can mitigate risk for having different bottlenecks supply chain demands, frustrating your stakeholders and shareholders, constraining your human resource capital, having to spend exponentially on capital infrastructure and investment in order to support the scaling, the less that you can do that, the better. The fewer fracture points that you have when scaling, the better. Because if your business is only as strong as your weakest link, then the more weak links that you introduce, the harder it becomes to maintain success in your business. It might happen for a while. And on the outside, it might look like you're doing really well initially. But remember the statistics I gave you in the beginning. By the end of 10 years, up to 70% of businesses that it scaled rapidly are no longer in business. So how do you actually scale without becoming a statistic? First thing, the beginning to end of your entire product or service lifecycle and sales cycle needs to be documented. You want to make sure that you're really clear on what happens at every step of your business. This is the evaluation stage. You're looking for where you're strong and where things will burst and break the second that any tension is put on those systems. You need to fully understand your business and not just from a high 30,000-foot level from really deep in the weeds. You need to have really good systems in place that allow you to talk to your people and get feedback where the cracks currently are, where the tension currently is, because as you grow, that tension will only become more pronounced. The second thing you want to do is map out your growth. What needs to be improved and maximized so that the company itself can sustain the growth and the scaling without fracturing. Who needs to be hired and what will it cost? How will your cash flow be affected? Cash flow, as I mentioned, is often constrained in growth. The third thing, hire for where you're going, not where you are. I think of Wayne Grexky, who said that he would always go to where the puck was going, not where the puck was at. And that's the same with when you're going to hire for scaling. You also need to know that a percentage of existing employees will not stay with you in the scale and the growth. They will jump ship. It's natural. A percentage always does. In rapid growth, companies can lose up to 70 to 90% of their original staff. That's not overnight necessarily. That's usually over months, maybe years. So start building to be able to hire before it's too late and you're in a bind, meaning you don't have to hire people now, but you need to have really solid systems and processes in place so that you can easily hire them and then you can easily onboard them. The fourth thing: do whatever you can to protect the thing that made you known for being great. Think about my body shop example. They lost a great deal of what made their customer base loyal and love their products and love buying from them. They lost those customers. And the reason that they lost those customers was because they failed to talk to their customers in the first place before they decided to scale and grow and figure out what their customers really actually value from them. Because had they done that, they would have figured out that that was a really important piece to a large percentage of their customers. Base and then they would have been really ignorant if even after knowing that, that they still went ahead and scaled the way that they did. Remember, I asked, what are you willing to sacrifice? Don't let your flagship be the thing that you are willing to sacrifice, because that's the surest way to not succeed in scaling. And some business owners think that being boutique is their flagship. Size is never the flagship, it's what was offered at the size that mattered, the value that was given. So if that's it for you, find ways to keep that as you scale. Five, define the conditions for when to scale, not a date. Meaning, don't say that we're going to scale in three months or six months or a year. Make sure that the conditions are in place that are really important for your company to be able to scale without breaking the business model itself. Say, for example, when customer service and quality are consistently at X stated value, or when you have enough of a cash reservoir built up to cover operational costs for two to three months, knowing that there is often a timing lag between growth and sales, because again, cash flow often gets tight when you begin to scale and grow. Six, hire based on revenue. If the growth isn't there yet, then don't hire. There is a sweet spot to hiring. And I did just record an episode on how to hire like a boss. And the worst time that you can hire, I said in this episode that there's never really a great time to hire. You kind of just have to make the decision. But there are bad times that you can hire. One, when you're already thick in the weeds and you're in over your head. That's a bad time, but it's still better than you continuing to wait another one, two, three, four months. It's also not a good time to hire when you don't have the revenue and the work there to actually support the hire. But you do want to prepare to be able to hire quickly and efficiently and effectively. Scaling successfully requires three things: repeatability. Can our entire business model, our systems and our processes be done the same way consistently without causing collapse or fracture? Predictability. Can you reasonably predict the outcome? Profitability. Does more volume actually make more money? Oftentimes people chase sales. You don't want to chase sales. It's better to chase profit over sales because if your profit goes down but your sales go up, you just with added stress worked harder for less money. That's not a smart business model, and it's not one that's sustainable long term. If one of those are missing, you're not scaling, you're just expanding. An expansion without structure creates chaos. Okay, so here's a little takeaway time for you before we close out this episode. Think about the biggest decision that you're thinking of making right now in your business. Maybe it's a hire, maybe it's in software implementation, maybe it's an offer, maybe it's a new partnership, or maybe it's a new advertising and marketing campaign. And ask the questions that I told you to ask. What evidence do I have that there's a demand for this? That there is a need for this change, this thing? What evidence do I have? That's the first question. The second question, what will be constrained the most when I actually implement this thing? Are there current constraints that haven't been addressed that relate to this specific change that I'm thinking of making? The third question is, what am I hoping to achieve through this bigger business decision or change? Fourth, who will be affected by this change? And the fifth question is, what will I have to sacrifice for the implementation of this? Most business owners never ask those questions. Leaders do. And that's why some businesses grow stronger as they scale, while others collapse under the weight of their own success. So I hope that that's really helpful for you, especially as you decide to go and grow and scale your own business. And I know that it can be really daunting when you're looking at different systems and you're looking at different processes, but always keep in mind that things should flow as easily and smoothly as possible. If something starts to feel complicated in your business, it's a sign that you don't have the right process or the right system in place. And I'm big on having good systems and processes in place. If you have several departments in your company that are all operating on very different systems and there's no overlap between any of those systems, that's a sign that you have a lot of bottlenecks and a lot of room for fractures when you go to grow and expand because you need systems that talk to each other. You need systems that seem to be smooth and seamless. I just think about how in our medical world, we have the cardiologist that deals with the heart. We have the brain surgeon that deals with the brain. We have the urologist that deals with anything bladder. We have the ENT specialist that deals with your eyes, your nose, and your throat. We have all these different specialties. And yet none of them ever actually talk to each other about when somebody's health is off, which is why sometimes in our healthcare system, it can feel so much like you're just being tossed around. And it can be really hard if you actually have some underlying issue with your immune system, say, and it's causing all these different issues in different areas, and you go to all these specialists and none of them are talking to each other. I think about systems in a business that don't speak to each other, similar to that. Your business is one entity, so you really do want it to move as smooth as possible, even when you're small. When you're small, it's less likely that you're going to notice. But as you grow, you're really going to notice where things aren't communicating and connecting well with each other. And you want it to, because that's going to allow you to scale and grow your business. It's going to allow you to hire easier. It'll allow you to take on new marketing and advertising campaigns, whatever it is that you want to do to help grow your business, having things that work well together within your business and having all the different systems working and all of the different departments working well together, that's going to help minimize the fractures that might happen if you go to scale. Okay, that is it for today's episode. I hope that was really helpful to you. You've been listening to the Overcome Her podcast, and I'm your host, Samantha Noel. If you have any questions or suggestions for the show, please send them my way to the overcomeher podcast at gmail.com. Again, it's the overcomeherpodcast at gmail.com. And it's been so great to be here with you guys. Also, I've got a Facebook group that you can come and join where it's all things business to help you grow and succeed as a female entrepreneur. It's called Built for Profit. Also, I'm over on Instagram at Samantha Noel Co. And stay tuned because I have a course that I'm working on right now, getting ready to launch to you guys to help you grow your business successfully. So I'm looking forward to talking about that a little bit more in future episodes and sharing that with you. Thanks again for tuning in. So happy to hang out with you guys. I hope you have an amazing day, wishing you a ton of success in your business, and I look forward to seeing you guys soon.

SPEAKER_01 29:48

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