Understand Growth Stalls So You Can Avoid GM, JCPenney and Chipotle

Understand Growth Stalls So You Can Avoid GM, JCPenney and Chipotle

Companies, like aircraft, stall when they don’t have enough “power” to continue to climb.
Everybody wants to be part of a winning company.  As investors, winners maximize portfolio returns.  As employees winners offer job stability and career growth.  As communities winners create real estate value growth and money to maintain infrastructure.  So if we can understand how to avoid the losers, we can be better at picking winners.
It has been 20 years since we recognized the predictive power of Growth Stalls.  Growth Stalls are very easy to identify.  A company enters a Growth Stall when it has 2 consecutive quarters, or 2 successive quarters vs the prior year, of lower revenues or profits.  What’s powerful is how this simple measure indicates the inability of a company to ever grow again.

Only 7% of the time will a company that has a Growth Stall  ever grow at greater than 2%/year.  93% of these companies will never achieve even this minimal growth rate.  38% will trudge along with -2% to 2% growth, losing relevancy as it develops no growth opportunities.  But worse, 55% of companies will go into decline, with sales dropping at 2% or more per year.  In fact 20% will see sales drop at 6% or more per year.  In other words, 93% of companies that have a Growth Stall simply will not grow, and 55% will go into immediate decline.

Growth Stalls happen because the company is somehow “out of step” with its marketplace.  Often this is a problem with the product line becoming less desirable.  Or it can be an increase in new competitors.  Or a change in technology either within the products or in how they are manufactured.  The point is, something has changed making the company less competitive, thus losing sales and/or profits.

Unfortunately, leadership of most companies react to a Growth Stall by doubling down on what they already do.  They vow to cut costs in order to regain lost margin, but this rarely works because the market has shifted.  They also vow to make better products, but this rarely matters because the market is moving toward a more competitive product.  So the company in a Growth Stall keeps doing more of the same, and fortunes worsen.

 But, inevitably, this means someone else, some company who is better aligned with market forces, starts doing considerably better.

This week analysts at Goldman Sachs lowered GM to a sell rating.  This killed a recent rally, and the stock is headed back to $40/share, or lower, values it has not maintained since recovering from bankruptcy after the Great Recession.  GM is an example of a company that had a Growth Stall, was saved by a government bailout, and now just trudges along, doing little for employees, investors or the communities where it has plants in Michigan.

tesla going up a hill

Tesla- enough market power to gain share “uphill”?

By understanding that GM, Ford and Chrysler (now owned by Fiat) all hit Growth Stalls we can start to understand why they have simply been a poor place to invest one’s resources.  They have tried to make cars cheaper, and marginally better.  But who has seen their fortunes skyrocket?  Tesla.  While GM keeps trying to make a lot of cars using outdated processes and technologies Tesla has connected with the customer desire for a different auto experience, selling out its capacity of Model S sedans and creating an enormous backlog for Model 3.  Understanding GM’s Growth Stall would have encouraged you to put your money, career, or community resources into the newer competitor far earlier, rather than the no growth General Motors.

This week, JCPenney’s stock fell to under $3/share.  As JCPenney keeps selling real estate and clearing out inventory to generate cash, analysts now say JCPenney is the next Sears, expecting it to eventually run out of assets and fail. Since 2012 JCP has lost 93% of its market value amidst closing stores, laying off people and leaving more retail real estate empty in its communities.

In 2010 JCPenney entered a Growth Stall.  Hoping to turn around the board hired Ron Johnson, leader of Apple’s retail stores, as CEO.  But Mr. Johnson cut his teeth at Target, and he set out to cut costs and restructure JCPenney in traditional retail fashion.  This met great fanfare at first, but within months the turnaround wasn’t happening, Johnson was ousted and the returning CEO dramatically upped the cost cutting.

The problem was that retail had already started changing dramatically, due to the rapid growth of e-commerce.  Looking around one could see Growth Stalls not only at JCPenney, but at Sears and Radio Shack.  The smart thing to do was exit those traditional brick-and-mortar retailers and move one’s career, or investment, to the huge leader in on-line sales, Amazon.com.  Understanding Growth Stalls would have helped you make a good decision much earlier.

This recent quarter Chipotle Mexican Grill saw analysts downgrade the company, and the stock took another hit, now trading at a value not seen since the end of 2012.  Chipotle leadership blamed bad results on higher avocado prices, temporary store closings due to hurricanes, paying out damages due to a “one time event” of hacking, and public relations nightmares from rats falling out of a store ceiling in Texas and a norovirus outbreak in Virginia.  But this is the typical “things will all be OK soon” sorts of explanations from a leadership team that failed to recognize Chipotle’s Growth Stall.

chipotle employeesPrior to 2015, Chipotle was on a hot streak.  It poured all its cash into new store openings, and the share price went from $50 from the 2006 IPO to over $700 by end of 2015; a 14x improvement in 9 years.  But when it was discovered that ecoli was in Chipotle’s food the company’s sales dropped like a stone.  It turned out that runaway growth had not been supported by effective food safety processes, nor effective store operations processes that would meet the demands of a very large national chain.

But ever since that problem was discovered, management has failed to recognize its Growth Stall required a significant set of changes at Chipotle.  They have attacked each problem like it was something needing individualized attention, and could be rectified quickly so they could “get back to normal.”  And they hoped to turn around public opinion by launching nationwide a new cheese dip product in 2017, despite less than good social media feedback on the product from early customers. They kept attempting piecemeal solutions when the Growth Stall indicated something much bigger was engulfing the company.

What’s needed at Chipotle is a recognition of the wholesale change required to meet customer demands amidst a shift to more growth in independent restaurants, and changing millennial tastes.  From the menu options, to app ordering and immediate delivery, to the importance of social media branding programs and customer testimonials as well as demonstrating commitment to social causes and healthier food Chipotle has fallen out-of-step with its marketplace.  The stock has now lost 66% of its value in just 2 years amidst sales declines and growth stagnation.

We don’t like to study losers.  But understanding the importance of Growth Stalls can be very helpful for your career and investments.  If you identify who is likely to do poorly you can avoid big negatives.  And understanding why the market shifted can lead you to finding a job, or investing, where leadership is headed in the right direction.

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The Three Steps GE Should Take Now – And The Lessons For Your Business

The Three Steps GE Should Take Now – And The Lessons For Your Business

Monitor displays General Electric Co. (GE) at the New York Stock Exchange (NYSE) October, 2017. Photographer: Michael Nagle/Bloomberg

For years I have been negative on GE’s leadership.  CEO Immelt led the dismantling of the once-great GE, making it a smaller company and one worth quite a bit less.  The process has been devastating to many employees who lost their jobs, pensioners who have seen their benefits shrivel, communities with GE facilities that have suffered from investment atrophy, suppliers that have been squeezed out or displaced and investors that have seen the value of GE shares plummet.

But now there is a new CEO, a new leadership team and even some new faces on the Board of Directors.  Some readers have informed me that it is easier to attack a weak leader than recommend a solution, and they have inquired as to what I think GE should do now.  I do not see the GE situation as hopeless.  The company still has an enormous revenue base, and vast assets it can use to fund a directional shift.  And that’s what GE must do – make a serious shift in how it allocates resources.

Step 1 – Apply the First Rule of Holes

The first rule of holes is “when you find yourself in a hole, stop digging.”  (Will Rogers, 1911) This seems simple.  But far too many companies have their resourcing process on auto-pilot.  Businesses that have not been growing, and often are not producing good returns on investment, continue to receive funding.  Possibly because they are a legacy business that nobody wants to stop.  Or possibly because leadership remains ever hopeful that tomorrow will somehow look like yesterday and the next round of money, or hiring, will change things to the way they were.

In fact, these businesses are in a hole, and spending more on them is continuing to dig.  The investment hole just keeps getting bigger.  The smart thing to do is just stop.  Quit adding resources to a business that’s not adding value to the market capitalization.  Just stop investing.

Will rogers, american humorist

When Steve Jobs took over Apple he discontinued several Macintosh models, and cut funding for Macintosh development.  The Mac was not going to save Apple’s declining fortunes.  Apple needed new products for new markets, and the only way to make that happen was to stop putting so much money into the Mac business.

When streaming emerged CEO Reed Hastings of Netflix quit spending money on the traditional DVD/Video distribution business even though Netflix dominated it.  He even raised the price.   Only by stopping investments in traditional distribution could he turn the company toward streaming.

Step 2 – Identify the Trend that will Guide Your Strategy

All growth strategies build on trends.  After receiving funding from Microsoft to avoid bankruptcy in 2000, Apple spent a year deciding its future lied in building on the trend to mobile.  Once the trend was identified, all product development, and new product introductions, were targeted at being a leader in the mobile trend.

When the internet emerged GE CEO Jack Welch required all business units to create “DestroyYourBusiness.com” teams.  This forced every business to look at the impact the internet would have on their business, including business model changes and emergence of new competitors.  By focusing on the internet trend GE kept growing even in businesses not inherently thought of as “internet” businesses.

GE has to decide what trend it will leverage to guide all new growth projects.  Given its large positions in manufacturing and health care it would make sense to at least start with IoT opportunities, and new opportunities to restructure America’s health care system.  But even if not these trends, GE needs to identify the trend that it can build upon to guide its investments and grow.

Step 3 – Place Your Bets and Monetize

When Facebook CEO Mark Zuckerberg realized the trend in communications was toward pictures and video he took action to keep users on the company platform.  First he bought Instagram for $1 billion, even though it had no revenues.  Two years later he paid $19 billion for WhatsApp, gaining many new users as well as significant OTT technology.  Both seemed very expensive acquisitions, but Facebook rapidly moved to increase their growth

chess pieces and cash

and monetize their markets.  Leaders of the acquired companies were given important roles in Facebook to help guide growth in users, revenues and profits.

Netflix leads the streaming war, but it has tough competition.  So Netflix has committed spending over $6billion on new original content to keep customers from going to Amazon Prime, Hulu and others.  This large expenditure is intended to allow ongoing subscriber growth domestically and internationally, as well as raise subscription prices.

This week CVS announced it is planning to acquire Aetna Health for $66 billion.  On the surface it is easy to ask “why?” But quickly analysts offered support for the deal, ranging from fighting off Amazon in prescription sales to restructuring how health care costs are paid and how care is delivered.  The fact that analysts see this acquisition as building on industry trends gives support to the deal and expectations for better future returns for CVS.

During the Immelt era, there were attempts to grow, such as in the “water business.”  But the investments were not consistent, and there was insufficient effort placed on understanding how to monetize the business short- and long-term.  Leadership did not offer a compelling vision for how the trends would turn into revenues and profits.  Acquisitions were made, but lacking a strong vision of how to grow revenues, and an outsider’s perspective on how to lead the trend, very quickly short-term financial metrics built into GE’s review process led to bad decisions crippling these opportunities for growth.  And today the consensus is that GE will likely sell its healthcare businessrather than make the necessary investments to grow it as CVS is doing.

Successful leadership means moving beyond traditional financial management to invest for growth

In the Welch era, GE made dozens of acquisitions.  These were driven by a desire to build on trends.  Welch did not fear investing in growth businesses, and he held leaders’ feet to the fire to produce successful results.  If they didn’t achieve goals he let the people and/or the business go.  Hence his nickname “Neutron Jack.”

For example, although GE had no background in entertainment, GE bought NBC at a time when viewership was growing and ad prices were growing even faster.  This led to higher revenues and market cap for GE.  On the other hand, when leaders at CALMA did not anticipate the shift in CAD/CAM from dedicated workstations to PCs, Welch saw them overly tied to old technology and unable to recognize the trend, so he immediately sold the business.  He invested in businesses that added to valuation, and sold businesses that lacked a clear path to building on trends for higher value.

Being a caretaker, or steward, is no longer sufficient for business leadership.  Competitors, and markets, shift too quickly.  Leaders must anticipate trends, reduce investments in products, services and projects that are off the trend, and put resources to work where growth can create higher returns.

This is all possible at GE – if the new leadership has a vision for the future and starts allocating resources effectively.  For now, all we can do is wait and see……
will rogers quote: Even if you're on the right track you'll get run over if you just sit there.

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The Only Surprise At GE Was That Anyone Was Surprised

The Only Surprise At GE Was That Anyone Was Surprised

GE Sign in Schenectady, NY- Hearst Newspapers

General Electric announced quarterly results this week, and and they were pretty bad.  Profits were nowhere near expectations, and the company lowered expectations for the year.  Cash flow was also disappointing, not even strong enough to cover the dividend.  Now analysts are really negative on company prospects, and most expect the dividend to be cut.

Meanwhile the new CEO, John Flannery, is admitting to horrible results as he removes most of the previous CEO’s top execs in a leadership housecleaning.  He is promising to cut costs dramatically, and sell off an additional $20billion of businesses in order to restore a higher level cash flow.  And according to the AP, Flannery will make faster progress toward “returning GE to its industrial roots.”

In other words, CEO Flannery continues the strategy of making GE smaller, and a less hospitable workplace, that his predecessor Immelt started implementing 16 years ago.  That’s the strategy that has seen GE lose ~45% of its value since Immelt took the top job, and lose over 60% of its value since peaking at $60 in 2000.  So far, GE just keeps shrinking in size, and value, and leadership gives no indication it has a plan to grow GE revenues and profits in future markets building on major market trends.

GE logo at plant in Hungary, 2017, Bloomberg

In other words, CEO Flannery continues the strategy of making GE smaller, and a less hospitable workplace, that his predecessor Immelt started implementing 16 years ago.  That’s the strategy that has seen GE lose ~45% of its value since Immelt took the top job, and lose over 60% of its value since peaking at $60 in 2000.  So far, GE just keeps shrinking in size, and value, and leadership gives no indication it has a plan to grow GE revenues and profits in future markets building on major market trends.

 What’s most surprising is that people seem surprised by the horrible current performance, and surprised that GE is in such terrible condition.  All the way back in December, 2010 this column highlighted selections for CEO of the year, and CEO of the decade, and in doing so pointed out that GE’s Immelt was on nobody’s list.  Even though his predecessor, Jack Welch, was widely lauded.

Immelt inherited one of America’s strongest, fastest growing and most valuable companies.  But in the first few years of his leadership the company completely failed to maintain Welch’s gains, and under Immelt’s mismanagement nearly went bankrupt by not preparing for the near-collapse of financial services in the Great Recession. It was obvious then that Immelt was trying to be a “caretaker” of GE, a “steward” of its history.  But he was not an effective leader with plans for a growing future, and competitors were beating up GE in all markets.  Even upstarts like Facebook, and its CEO Mark Zuckerberg, were far outperforming the stagnating, declining GE.

 By May, 2012 it was impossible to miss the mismanagement at GE.  This column selected CEO Immelt as the 4th worst CEO of all publicly traded American companies (beaten in badness by Mike Duke of WalMart who was pushed out during allegations of international bribery and fraud, Ed Lampert of Sears who has now completely destroyed the once great retailer, and Steve Ballmer of Microsoft who over-invested in Windows and Office while missing every major tech development of the last 15 years before being forced out by the board.)  By 2012 it was time for the Board of Directors to take action and replace Immelt.  But few investors amplified this column’s cries for change, and quiet complacency set in as people simply expected GE to perform better.  Just because it was GE, it appeared, as there were no signs the company understood market trends and how to ignite growth.

Of course, performance did not improve at GE.  By April, 2015 GE was the victim of a total leadership failure.  The company was not developing any major new trends, and Immelt’s focus was on unraveling old businesses, mostly via sales to external parties, in order to increase cash.   And the cash was used for share buybacks and dividends, rather than investing in growth. A slow, and badly implemented, liquidation of one of America’s oldest, and greatest, companies was underway.

Which made GE a target for activist investors, and Trian Funds took up the challenge, investing $1.5B in GE stock and taking a seat on the GE board.  Finally, it was time for action. Immelt was pushed out and Flannery was put in, and dramatic cuts and re-organizations led the discussions. Current appearances indicate GE will be significantly dismantled, assets will be sold, and in short order GE will look nothing like the great company it once was.

But, the question remains, why did things have to become so bad before the board took action? Why were people surprised?  Why didn’t Jim Cramer scream for a leadership housecleaning 7, 5 or 3 years ago?  Why didn’t shareholders vote against CEO compensation plans on the “say-on-pay” measures, exerting their voice to change a lackluster board that was allowing an incompetent CEO to remain in the job? Why wasn’t the pension fund, constantly whittling away at retiree benefits, forcing change?  Why were so many people, so many leaders, so quiet about what was an obvious business failure? A failure that needed to be addressed, first and foremost, by replacing the CEO?

So GE’s stock value has taken a big hit of late. And now people seem surprised by the admission of how bad things really are.  What’s really surprising is that people are surprised. This was not hard to see coming.

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The Waltons Are Cashing Out Of Walmart — And You Should Be, Too

The Waltons Are Cashing Out Of Walmart — And You Should Be, Too

Employees restock shelves of school supplies at a Walmart Stores Inc. location in Burbank, CA.  Bloomberg

Last week there was a lot of stock market excitement regarding WalMart. After a “favorable” earnings report analysts turned bullish and the stock jumped 4% in one day, WMT’s biggest rally in over a year, making it a big short-term winner.  But the leadership signals indicate WalMart is probably not the best place to put your money.

WalMart has limited growth plans

WalMart is growing about 3%/year.  But leadership acknowledged it was not growing its traditional business in the USA, and only has plans to open 25 stores in the next year.  It hopes to add about 225 internationally, predominantly in Mexico and China, but unfortunately those markets have been tough places for WalMart to grow share and make profits.  And the company has been plagued with bribery scandals, particularly in Mexico.

And, while WalMart touts its 40%+ growth rate on-line, margins online (including the free delivery offer) are even lower than in the traditional Wal-Mart stores, causing the company’s gross margin percentage to decline.  The $11.5 billion on-line revenue projection for next year is up, but it is 2.5% of Walmart’s total, and a mere 7-8% of Amazon’s retail sales.  Amazon remains the clear leader, with 62% of U.S. households having visited the company in the second quarter.  And it is not a good sign that WalMart’s greatest on-line growth is in groceries, which amount to 26% of on-line salesalready.  WalMart is investing in 1,000 additional at-store curb-side grocery pick-uplocations, but this effort to defend traditional store sales is in the products where margins are clearly the lowest, and possibly nonexistent.

It is not clear that WalMart has a strategy for competing in a shrinking traditional brick-and-mortar market where Costco, Target, Dollar General, et.al. are fighting for every dollar.  And it is not clear WalMart can make much difference in Amazon’s giant on-line market lead.  Meanwhile, Amazon continues to grow in valuation with very low profits, even as it grows its presence in groceries with the Whole Foods acquisition.  In the 17 months from May 10, 2016 through October 10, 2017 WalMart’s market cap grew by $24 billion (10%,) while Amazon’s grew by $174 billion (57%.)

Even after recent gains for WalMart, its market capitalization remains only 53% of its much smaller on-line competitor.  This creates a very difficult pricing problem for WalMart if it has to make traditional margins in order to keep analysts, and investors, happy.

Leadership is not investing to compete, but rather cashing out the business

To understand just how bad this growth problem is, investors should take a look at where WalMart has been spending its cash.  It has not been investing in growing stores, growing sales per store, nor really even growing the on-line business.  From 2007-2016 WalMart spent a whopping $67.3 billion in share buybacks.  That is over 20 times what it spent on Jet.com.  And it was 45% of total profits during that timeframe.  Additionally WalMart paid out $51.2 billion in dividends, which amounted to 34% of profits.  Altogether that is $118.5 billion returned to shareholders in the last decade.  And a staggering 79% of profits.  It shows that WalMart is really not investing in its future, but rather cashing out the company by returning money to shareholders.

 “Say on pay” votes are often seen as a measure of how happy investors are with a company.  The average disapproval level on executive pay is 4.3%.  At Target, Macy’s and Kroger the disapproval is 6.1%, 6.3% and 6.9%.  Investors, however, disapprove of the compensation for WalMart’s leaders at a whopping 16.7%; nearly 4x the average and 2.5x its competition.
So very large investors, who control huge voting blocks, recognize that things are not going well at WalMart.  But, because of the enormity of the share buybacks, the Walton family now controls over half of WalMart stock.  That makes it tough for an activist to threaten shaking up the company, and lets the Waltons determine the company’s future.

Buybacks signal Strategy

Walmart annual meeting 2014, walmart.com

With WalMart’s announcement last week that it intends to spend another $20 billion on additional share repurchases, the Walton family’s strategy is clear.  They are cashing out the business.  As money comes in they are going to continue spending little on the traditional business, and in no way do they intend to invest at a level to really chase Amazon on-line.

There will be marginal enhancements.  But the vast majority of the money is being returned to them, via $20 billion in share repurchases and $1.5 billion in cash dividends annually.

Amazon spends nothing on share repurchases.  Nor does it distribute cash to shareholders via dividends.  Amazon’s largest shareholder, Jeff Bezos, invests all the company money in new growth opportunities.  These nearly cover the retail landscape, and increasingly are in other growth markets like cloud services, software-as-a-service and entertainment.  Comparing the owners of these companies, quite clearly Bezos has faith in Amazon’s ability to invest money for profitable future growth.  But the Waltons are far less certain about the future success of WalMart, so they are pulling their money off the table, allowing investors to put their money in ventures outside WalMart.

Investing your money, do you think it is better to invest where the owner believes in the future of his company?

Or where the owners are cashing out?

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Starbucks Closing Teavana Is A Long-Term Troubling Sign For Investors

Starbucks Closing Teavana Is A Long-Term Troubling Sign For Investors

Amid all the political news last week it was easy to miss announcements in the business world.  Especially one that was relatively small, like Starbucks announcement on Thursday July 27, 2017 that it was closing all 379 of its Teavana stores.  While these will be missed by some product fanatics, the decision is almost immaterial given that these units represent only about 3% of Starbucks US stores, and about 1.5% of the 25,000 Starbucks globally.

Yet, closing Teavana is a telltale sign of concern for Starbucks investors.

Starbucks founding CEO Howard Schultz returned to the top job in January, 2008,  promising to get out of distractions such as music production, movie production, internet sales, grocery products, liquor products and even in-store food sales in order to return the company to its “core” coffee business.  Since then Starbucks valuation has risen some 5.5-6 fold, from $9.45/share to the recent range of $54 to $60 per share.  A much better return than the roughly doubling of the Dow Jones Industrial Average over the same timeframe.

Yet, one should take time to evaluate what this closing means for the long-term future of Starbucks.  This is the second time Starbucks made an acquisition only to shut it down.  In 2015 Starbucks closed all 23 La Boulange bakery cafes, with little fanfare.  Now, after paying $620M to buy Teavana in 2012, they are closing all those stores.  While leadership blamed its decision on declining mall visits (undoubtedly a fact) for the closures, Teavana is not missing goals due to the Amazon Effect.  There are multiple options for how to market Teavana’s fresh and packaged products far beyond mall store locations.  Choosing to close all stores indicates leadership has minimal interest in the brand.

Starbucks’ focus leaves little opportunity for new growth

Starbucks under construction. Photo by Jamie Lytle

It increasingly appears that today’s Starbucks literally isn’t interested, or able, to do anything other than build, and operate, more Starbucks stores.  And Starbucks is clearly doubling down on its plans to be Starbucks store-centric.  The company opened 575 new units in the last year, and announced plans to open more stores creating 68,000 additional US jobs in the next 5 years.  Further, Starbucks is paying $1.3B to buy the half of its China business previously owned by a partner.  Clearly, leadership continues to tighten company focus on the “core” coffee store business for the future.

This sounds great short-term, given how well things have gone the last 8 years.  But there are concerns.  Sales are up 4% last quarter, but that is wholly based upon higher prices.  Customer counts are flat, indicating that stores are not attracting new customers from competitors.  Sales gains are due to average ticket prices increasing 5%, which is marginal and likely refers to higher priced products.  Starbucks is now relying completely on new stores to create incremental growth, since bringing in new customers to existing stores is not happening.

Frequently this stagnant store sales metric indicates store saturation.  A bad sign.  Does the US, or international markets, really need more, new Starbucks stores?  It was 2010 when comedian Lewis Black had a successful viral rant (PG version) claiming that when he observed a Starbucks across the street from another Starbucks he knew it was the end of civilization.

Lewis Black and Starbucks, end of universe rant

What happens when the market doesn’t need new Starbucks stores?

One does have to wonder when the maximum number of Starbucks will be reached.  Especially given the ever growing number of competitors in all markets. Direct competitors such as Caribou Coffee, The Coffee Bean, Seattle’s Best, Gloria Jean’s, Costa, Lavazza, Tully’s, Peet’s and literally dozens of chain and independent coffee shops are competing for Starbucks’ customers.  Simultaneously competition from low priced alternatives is emerging from brands like Dunkin Donuts and McDonald’s, now catering more to coffee lovers.  And non-coffee fast casual shops are seeking to attract more people for congregating, such as Panera, Fuddruckers, Pei Wei, TGI Friday’s and others.  All of these are competitors, either directly or indirectly, for the customer dollars sought by Starbucks.  Are more Starbucks stores going to succeed?

As McDonald’s, Pizza Hut and other fast food chains learned the hard way, there comes a time when a brand has built all the market needs.  Then leadership has to figure out how to do something else.  McDonald’s invested heavily in Boston Market and Chipotle’s, but let those high growth operations go when it decided to refocus on its “core” hamburger business – leading to heavy valuation declines.  Starbucks is closing Teavana, but should it?  When will Starbucks saturate?  And what will Starbucks do to grow when that happens?

Starbucks has had a great run.  And that run appears not fully over.  But long-term investors have reason to worry.

Is it smart to make such a huge bet on China?
Will store growth successfully continue, with all the stores that already exist?
Will direct and indirect competitors eat away at market share?

What will Starbucks do when it has reached it market maximum, and it doesn’t seem to have any emerging new store concepts to build upon?

Why Amazon Echo Is Killing It While Windows Phone Is Dead — Developers Are What Matters

Why Amazon Echo Is Killing It While Windows Phone Is Dead — Developers Are What Matters

Amazon just had another record Prime Day, with sales up 60%.  And the #1 product sold was Amazon’s Echo Dot speaker. At $34.99 it surpassed last year’s unit sales by seven-fold.  And the traditional Echo speaker, marked down 50% to $90, broke all previous sales records.

Amazon just took a commanding lead in the voice assistant platform market

These Echo sales most likely sealed Amazon’s long-term leadership in the war to be the #1 voice assistant.  Amazon already has 70% market share in voice activated speakers, nearly 3 times #2 provider Google.  And all other vendors in total barely have 5% share.

While it may seem like digital speakers are no big deal, speaker sales are analogous to iPhone sales when evaluating the emergence of smartphones and apps.  The iPhone seemed like a small segment until it became clear smartphones were the new personal technology platform. Apple’s early lead allowed iOS to dominate the growth cycle, making the company intensely profitable.

Echo and Echo Dot aren’t just speakers, but interfaces to voice activated virtual assistants.  For Echo the platform is Amazon’s Alexa.  Alexa is to voice activated devices and applications what iOS was to Smartphones.  By talking to Alexa customers are able to do many things, such as shopping, altering their thermostats, opening and closing doors, raising and lowering blinds, recording people in their homes — the list is endless.  And as that list grows customers are buying more Alexa devices to gain greater productivity and enhanced lifestyle.  Echos are entering more homes, and multiplying across rooms in these homes.

Do you remember when early iPhone ads touted “there’s an app for that?” That tagline told customers if they changed from a standard mobile phone to a smartphone there were a lot of advantages, measured by the number of available apps.  Just like iOS apps gave an advantage to owning an iPhone, Alexa skills give an advantage to owning Echo products. In the last year the number of skills available for Alexa has exploded, growing from 135 to 15,000.   Quite obviously developers are building on Alexa much faster than any other voice assistant.

By radically cutting the price of both Echo Dot and Echo, and promoting sales, Amazon is creating an installed base of units which encourages developers to write even more skills/apps.

The more Alexa devices are installed, the more likely developers will write additional skills for Alexa. As more devices lead to more skills, skills leads to more Alexa/Echo capability, which encourages more people to buy Alexa activated devices, which further encourages even more skills development.  It’s a virtuous circle of goodness, all leading to more Amazon growth.

For marketers it is important to realize that success really doesn’t correlate with how “good” Alexa works.  Google’s Assistant and Microsoft’s Cortana perform better at voice recognition and providing appropriate responses than Alexa and Siri.  But there are relatively few (almost no) devices in the marketplace built with Assistant or Cortana as the interface.  Developers need their skills/apps to be on platforms customers use.  If customers are buying speakers, thermostats and televisions that are embedded with Alexa, then developers will write for Alexa.  Even if it has shortcomings. It’s not the product quality that determines the winner, but rather the ability to create a base of users.

It is genius for Amazon to promote Echo and Echo Dot, selling both cheaper than any other voice activated speaker.  Even if Amazon is making almost no profit on device sales.  By using their retail clout to build an Alexa base they make the decision to create skills for Alexa easy for developers.

amazon echo

 

It is genius for Amazon to promote Echo and Echo Dot, selling both cheaper than any other voice activated speaker.  Even if Amazon is making almost no profit on device sales.  By using their retail clout to build an Alexa base they make the decision to create skills for Alexa easy for developers.

This is a horrible problem for Google, #2 in this market, because Google does not have the retail clout to place millions of their speakers (and other devices) in the market.  Google is not a device company, nor a powerful retailer of Android devices.  The Android device makers need to profit from their devices, so they cannot afford to sell devices unprofitably in order to build an installed base for Google.  And because Android’s platform is not applied consistently across device manufacturers, Google Assistant skills cannot be assured of operating on every Android phone.  All of which makes the decision to build Google Assistant skills problematic for developers.

Can Apple Stop the Alexa juggernaut?

The game is not over.  Apple would like customers to use Siri on their iPhones to accomplish what Amazon and Alexa do with Echo.  Apple has an enormous iPhone base, and all have Siri embedded.  Perhaps Apple can encourage developers to create Siri-integrated apps which will beat back the Amazon onslaught?

Today, Apple customers still cannot use Siri to control their Apple TV (Though as of August, 2017, it’s been improved.), or make payments with ApplePay, for example. Nor can iPhone users tell Siri to execute commands for remote systems which are controlled by apps, like unlocking doors, turning on appliances, shooting remote security video or placing an on-line order. Apple has a lot of devices, and apps, but so far Siri is not integrated in a way that allows voice activation like can be done with Alexa.

apple tv and siri image

Additionally, as big as the iPhone installed base has become, when comparing markets the actual raw number of speakers could catch up with iPhones.  Echo Dot is $35.  The cheapest iPhone is the SE, at $399 (on the Apple site although available from Best Buy at $160.)  And an iPhone 7 starts at $650.  The huge untapped Apple markets, such as China and India, will find it a lot easier to purchase low cost speakers than iPhones, especially if their focus is to use some of those 15,000 skills.  And because of the low pricing ($35 to $90) it is easy to buy multiple devices for multiple locations in one’s home or office.

Will we look back and call Echo a Disruptive Innovation?

Innovators Dilemma chart

Innovator’s Dilemma

Recall the wisdom of Clayton Christensen‘s “Innovator’s Dilemma.” The incumbent keeps improving their product, hoping to maintain a capability lead over the competition.  But eventually the incumbent far overshoots customer needs, developing a product that is overly enhanced.  The disruptive innovator enters the market with a considerably “less good” product, but it meets customer needs at a much lower price.  People buy the cheaper product to meet their limited goal, and bypass the more capable but more expensive early market leader.

Doesn’t this sound remarkably similar to the development of iPhones (now on version 8 and expected to sell at over $1,000) compared with a $35 speaker that is far less capable, but still does 15,000 interesting things?

The biggest loser in this new market is Microsoft

This week Microsoft announced another 1,500 layoffs in what has become an annual bloodletting ritual for the PC software giant.  But even worse was the announcement that Microsoft would no longer support any version of Windows Phone OS version 8.1 or older – which is 80% of the Windows Phone market.  Given that Microsoft has less than 2% market share, and that less than .4% of the installed smartphone base operates on Windows Phone, killing support for these phones will lead to sales declines.  This action, along with gutting the internal developer team last year, clearly  indicates Microsoft has given up on the phone business for good.  This means that now Microsoft has no device platform for Cortana, Microsoft’s voice assistant, to use.

Microsoft ignored smartphones, allowing Apple’s iOS to become the early standard.  Apple rapidly grew its installed base. Microsoft could not convince developers to write for Windows Phone because there weren’t enough devices in the market.  Without a phone base, with tablet and hybrid sales flat to declining, and with PC sales in the gutter Cortana enters the market DOA (Dead On Arrival.)  Even if it were the best voice assistant on the planet developers will not create skills for Cortana because there are no devices out there using Cortana as the interface.

So Microsoft completely missed yet another market. This time the market for voice activated devices in the smart phone, smart car or any other smart device in the IoT marketplace.  It missed mobile, and now it has missed voice assist.  As PC sales decline, Microsoft’s only hope is to somehow emerge a big winner in cloud storage and services (IaaS or Infrastructure as a Service) with Azure.  But, Azure was a late-comer to the cloud market and is far behind Amazon’s AWS (Amazon Web Services.)  Amazon has +40% market share, which is 40% more than the share of Microsoft, Google and IBM combined.

Build the base and developers will come…

For Independence Day – Why The USA Could Lose World Dominance – Demographic Trends

For Independence Day – Why The USA Could Lose World Dominance – Demographic Trends

Tuesday American celebrates Independence Day, and the decision to break away as a colony from England.  Since then America has been on quite a growth journey, and today most Americans cannot imagine a world where the USA is not the dominant power.  They were born post World War II and simply believe that America was once the great world power, and always will be.  Like it is some God-given immutable right.

But it’s not.

most populous nations in 2050

Statista, UN Division

 

From the early 1800s well into the middle 1900s America had one of the fastest population growth rates in the world.  “Bring us your tired, your poor, your huddled masses yearning to breathe free” is on the Statue of Liberty for no small reason – America accepted floods of immigrants from around the world as westward expansion and the industrial age created huge opportunity for everyone.  People flooded America, and many people had very large families.  Well into the 1900s it was not uncommon for people to have 6, 8 or 10 siblings.

  1. Boomers were raised being told “eat your dinner, there’s a starving child in India who would love to have that. India struggled to  build its own economy after Ghandi evicted the English. And in the 1950s and 1960s it was a remarkably poor country. But today, India is a thriving, growing advanced society. Yes, there are still many poor in India. But it is no longer a country to be pooh-poohed as an also ran. It has a flourishing economy, advanced home developed technology and a sophisticated military. Today about 15% of Indians are Muslim; so about 175M people. But the Muslim population is the fastest growing, and by 2050 there will be 310M Indian Muslims, or a population about 80% the size of the entire United States.
  2. American’s treat Africa as the home of former slaves. Far too many Americans simply ignore the continent and its issues of civil wars and genocide entirely – as if it is unimportant. However, by 2050 there will be more people in Nigeria than America. Today about half of Nigerians are Muslim.  By 2050 that will grow to 60%, or 245M, which will be almost 2/3 the entire U.S. population.  Additionally, Nigeria is an oil rich country that is a major player in energy markets.  And a strong trading partner with China.
  3.  Americans think of countries like Indonesia and Pakistan as small and remote.  But by 2050 these two countries will have 630M people, which will be 50% more than the USA.  And their populations are almost entirely Muslim.  Additionally, Indonesia is an oil rich country that is also a major player in energy markets.
  4. Americans’ ignorance of Africa will be forced to change, as other African countries continue to grow.  Areas Americans think of as barren, poverty-stricken wastelands in the Congo and Ethiopia will grow to over 300M people.  The famine and bloodshed from internal strife will expand, creating ongoing refugee problems and spreading of global diseases.
  5. While China’s population is shrinking, the country’s emergence from the draconian times of Chairman Mao and his infamous Gang of Four is long gone.  China is no longer a backwater country lacking infrastructure, technology or an advanced military.  China now has nuclear capability, and has an active space program.  The Chinese have demonstrated they can move resources very fast on everything from infrastructure projects to technology, and China is a very active investor in projects across Africa and Latin America.  As American policy has retrenched from these areas, the Chinese are actively stepping in with money, one-upping the USA in using capitalism to win hearts, minds and foreign policy partners.

When the boomers were born America was rich in natural resources, had a growing economy, and had avoided the devastation that was left behind in Japan, Europe parts of southeast Asia and north Africa.  India was an emerging country, finding its way after refuting colonialism.  And China was off the world stage due to the inwardly focused leadership.  So Americans  have lived a very long time thinking that the world will always be a Christian, capitalist, democratic place where the USA’s domination could not be challenged.

But many things have changed dramatically, and many more changes are coming soon enough.  In a few short years population growth will make America a relatively far smaller country.  And both technology skill development and understanding how to use capitalism have unleashed dramatic growth in what were formerly derisively referred to as “emerging” countries.  “Emerging” implying that America had nothing to concern itself as regards these countries.

Zulu were some of the most feared warriors in Africa.  But, they had a practice of being inwardly focused.  As they looked inward they did not fear external enemies, but only those who came into their inner circle.  Approaching their internal circle could invite attack, and demolition.  But, eventually the external enemies became too many, and too far reaching, and the inwardly focused Zulu were attacked on multiple fronts from a growing host of enemies.  The Zulu lost their domination as Africa’s military leaders.

Americans must address their inclination for inwardly focusing on “what’s good for America.” It is naively affixing self-blinders to think policy decisions can be made independently of the world community, and without harmful retribution.  There are a lot more “of them” than their are “of us.”  And the majority of “them” have nuclear weapons just as powerful as “ours.”  And “their” economies are just as strong as “ours.”  In many cases actually a lot stronger. These countries can stand on their own without U.S. support, and they can implement policies which can be very destructive to U.S. economic interests globally.  And they can form their own coalitions to avoid working with America.

As other countries grow, those that choose to ignore immigration and the global movement of people will be big losers.  Today Japan is struggling, losing economic power annually, because it refuses to endorse a robust immigration policy.  Unfortunately, the same thing cold happen to America as its population growth rate falls, and its economic growth falls with it.  Outlawing sanctuary cities that help immigrants merge into American society is a misbegotten policy based on false assumptions about America’s lack of need for immigrants to remain globally competitive.

If America chooses to start all-out trade wars to protect its economy, America could be isolated and likely lose more than it gains. Where once American resources and technology were essential, that is far less true today.  European countries have every bit the technology and investment skills of Americans, as do the Chinese and many other countries.  Just look at how many of your beloved products, such as mobile phones, computers, TVs, and game consoles, are not made in America at all.  There are ample trade opportunities between all countries to supply each other with goods and products, including commodities such as wheat, coal, oil, lumber and gold, that could bypass America entirely.

If America starts a shooting war it is far from clear that it will be as untouched as WWII.  And far from clear who will “win,” especially if nuclear war ensues.

And while it is tempting to think that God is on the side of Christians, ignoring the growth of Islam is as foolish as the Romans attempting to ignore the growth of Christianity.  Thinking that the growth of Islam is a “Middle Eastern problem” is a dramatic understatement of the situation.  Population growth rates of Muslims are far greater globally than other religions.  It is ridiculous to think that Islam will not be a major part of the world religious landscape.  Thinking that Islam is a problem is hyperbole.  Thinking America can isolate itself from Islam is simply an hallucination.

Demographic trends are powerful forecasters.  They are very easy to predict, and almost always correct.  And they foretell a lot about how we will live and work in the future.  The key to good policy making is understanding these trends and working to take advantage of them for growth.  Ignoring them is a perilous journey that always ends very badly.  Since many of the trends are obvious, isn’t it time to plan for them effectively?

Are The Cloud And IoT Making PCs, Laptops And Tablets Irrelevant?

Are The Cloud And IoT Making PCs, Laptops And Tablets Irrelevant?

Last week Microsoft announced its new Surface Pro 5 tablet would be available June 15.  Did you miss it?  Do you care?

Do you remember when it was a big deal that a major tech company released a new, or upgraded, device?  Does it seem like increasingly nobody cares?

Non-phone device sales are declining, while smartphone sales accelerate

This chart compares IDC sales data, and forecasts, with adjustments to the forecast made by the author. The adjustments offer a fix to IDC’s historical underestimates of PC and tablet sales declines, while simultaneously underestimating sales growth in smartphones.

Since 2010 people are buying fewer desktops and laptops.  And after tablet sales ramped up through 2013, tablet purchases have declined precipitously as well. Meanwhile, since 2014 sales of smartphones have doubled, or more, sales of all non-phone devices. And it’s also pretty clear that these trends show no signs of changing.

Why such a stark market shift? After all desktop and laptop sales grew consistently for some 3 decades. Why are they in such decline? And why did  the tablet market make such a rapid up, then down movement? It seems pretty clear that people have determined they no longer need large internal hard drives to work locally, nor big keyboards and big screens of non-phone devices. Instead, they can do so much with a phone that this device is becoming the only one they need.

Today a new desktop starts at $350-$400. Laptops start as low as $180, and pretty powerful ones can be had for $500-$700. Tablets also start at about$180, and the newest Microsoft Surface 5 costs $800. Smartphones too start at about $150, and top of the line are $600-$800. So the purchase decision today is not based on price. All devices are more-or-less affordable, and with a range of capabilities that makes price not the determining factor.

Smartphones let most people do most of what they need to do

Every month the Internet-of-Things (IoT) is putting more data in the cloud. And developers are figuring out how to access that data from a smartphone. And smartphone apps are making it increasingly easy to find data, and interact with it, without doing a lot of typing. And without doing a lot of local processing like was commonplace on PCs. Instead, people access the data – whether it is financial information, customer sales and order data, inventory, delivery schedules, plant performance, equipment performance, maintenance specs, throughput, other operating data, web-based news, weather, etc. — via their phone. And they are able to analyze the data with apps they either buy, or that their companies have built or purchased, that don’t rely on an office suite.

Additionally, people are eschewing the old forms of connecting — like email, which benefits from a keyboard — for a combination of texting and social media sites. Why type a lot of words when a picture and a couple of emojis can do the trick?

And nobody listens to CD-based, or watches DVD-based, entertainment any longer. They either stream it live from an app like Pandora, Spotify, StreamUp, Ustream, GoGo or Facebook Live, or they download it from the cloud onto their phone.

To obtain additional insight into just how prevalent this shift to smartphones has become look beyond the USA. According to IDC there are about 1.8 billion smartphone users globally.  China has nearly 600M users, and India has over 300 million users — so they account for at least half the market today. And those markets are growing by far the fastest, increasing purchases every quarter in the range of 15-25% more than previous years.

Chinese manufacturers are rapidly catching up to Apple and Samsung – there will be losers

Clayton Christensen often discusses how technology developers “overshoot” user needs. Early market leaders keep developing enhancements long after their products do all people want, producing upgrades that offer little user benefit.  And that has happened with PCs and most tablets. They simply do more than people need today, due to the capabilities of the cloud, IoT and apps. Thus, in markets like China and India we see the rapid uptake of smartphones, while demand for PCs, laptops and tablets languish. People just don’t need those capabilities when the smartphone does what they want — and provides greater levels of portability and 24x7 access, which are benefits greatly treasured.

And that is why companies like Microsoft, Dell and HP really have to worry. Their “core” products such as Windows, Office, PCs, laptops and tablets are getting smaller. And these companies are barely marginal competitors in the high growth sales of smartphones and apps. As the market shifts, where will their revenues originate? Cloud services, versus Amazon AWS?  Game consoles?

Even Apple and Samsung have reasons to worry. In China Apple has 8.4% market share, while Samsung has 6%. But the Chinese suppliers Oppo, Vivo, Huawei and Xiaomi have 58.4%. And as 2016 ended Chinese manufacturers, including Lenovo, OnePlus and Gionee, were grabbing over 50% of the Indian market, while Samsung has about 20% and Apple is yet to participate. How long will Apple and Samsung dominate the global market as these Chinese manufacturers grow, and increase product development?

When looking at trends it’s easy to lose track of the forest while focusing on individual trees. Don’t become mired in the differences, and specs, comparing laptops, hybrids, tablets and smartphones. Recognize the big shift is away from all devices other than smartphones, which are constantly increasing their capabilities as cloud services and IoT grows. So buy what suits your, and your company’s, needs — without “overbuying” because capabilities just keep improving. And keep your eyes on new, emerging competitors because they have Apple and Samsung in their sites.

The #1 Real Estate Stock To Own Is Built On Trends – Alexandria Real Estate Equities (NYSE:ARE)

The #1 Real Estate Stock To Own Is Built On Trends – Alexandria Real Estate Equities (NYSE:ARE)

Writing on trends, I frequently profile tech companies that use trends to outperform competitors. But using trends is not restricted to tech companies.

By following trends, since 1998 Alexandria Real Estate Equities has tripled the performance of the NASDAQ, quadrupled returns of the S&P 500, and quintupled the Russell 2000.  Alexandria has even outperformed technology stalwart Microsoft, and investment guru Berkshire Hathaway by 230%.

alexandria return comparisons

Although you probably never heard of it, Alexandria has trounced its real estate peers.  Over the last three years Alexandria has returned double the FTSE NAREIT Equity Office Index, and double the SNL US REIT Office Index.  Alexandria’s value has almost doubled during this time, and produced returns 2.3 times better than such well known competitors as Vornado Realty Trust and Boston Properties.

alexandria real estate three year shareholder return is

In 1983, Joel Marcus was a lawyer in the IPO market when he noticed the high value launch of biotech firms like Amgen and Genentech.  He began tracking the growth of biotechs to see what kind of opportunity might appear to serve these high growth companies.

By 1994 Marcus realized that these companies were struggling to find appropriate real estate to serve their unique needs for laboratory space, and the infrastructure these labs require.  It was a classic under-served market, and it was growing fast.

Jacobs Engineering (NYSE:JEC) was serving some of these companies’ needs, including erecting structures for them.  But Jacobs did not own any buildings or consider itself a real estate developer.  So Marcus approached Jacobs about starting a company to meet the real estate needs of this high growth biotech industry.  Marcus put up some money, Jacobs put up some money, and other friends/associates combined to raise $19 million.  There was no professionally managed money involved – and no real estate developers.

Biotech industry wordle

Focusing on the rapidly expanding biotech scene in San Diego, the newly created Alexandria bought 4 buildings.  They refocused the buildings on the unserved needs of local biotech companies and did a quick flip, breaking even on the transaction.  With just a bit of money Alexandria had proven that the market existed, the trend was real and users were under-served.

But, like any idea based on an emerging trend, growing was not easy.  Using their first transaction as “proof of concept” CEO Marcus and his team set out to raise $100 million. Quickly Paine Webber (now UBS) secured $75 million in debt financing.  But moving forward required raising $25 million in equity.

Over the next few weeks Alexandria pitched a slew of nay-sayers.  From GE Capital to CALPERS investors felt that their first deal was a “1-trick pony,” and this “niche market” was not a sustainable business.  Finally, after 29 failed pitches, the AEW pension fund, an early stage real estate investor, saw the trend and invested.

The Alexandria team realized that fast client growth meant there was no time to develop from ground up. They focused on high growth geographies for biotech, places where the trend was more pronounced, and bought 11 existing properties:

  • In Seattle they found a cancer center they could buy, improve and do a sale-leaseback
  • In San Francisco they identified a portfolio of properties in Alameda they could improve, lease to biotech companies and even suit the needs of the FDA as a tenant
  • In Maryland they identified opportunities to support the lab needs of the Army Corps of Engineers forensic research lab, and ATF testing lab for imported vodka, and a medical testing lab near Dulles – which is now leased to Quest Diagnostics

Realizing that companies needing labs tended to cluster, leadership focused on finding locations where clusters were likely to emerge.  They bought land in San Francisco, San Diego, New York and Worcester, MA. What looked like risky locations to others looked like profitable opportunities to Alexandria due to their superior trend research.

Historically pharma companies built their headquarters, and labs, in suburban locations where development was easy, and labs were welcome. Alexandria realized the new trend for emerging companies was to be near universities in urban environments, and although land was costly — and development more difficult — this was the right place to leverage the trend.

Today Alexandria is the bona fide market leader in labs and tech facilities in the USA. By seeing the trend early they bought land which is now so expensive it is practically untouchable – even for $1 billion. Their development pipeline includes Mission Bay, Kendall Square, the Manhattan borough of New York City and RTP (Research Triangle Park.) Today companies want to be where the lab is — and frequently the lab space is now owned, or being developed, by Alexandria.

alexandria real estate Campus Pointe, California
alexandria real estate equities Research Triangle Park
alexandria real estate equities new york

This didn’t happen by accident. Not at the beginning nor as Alexandria plans its future growth.  The company maintains a team of 13 researchers studying market trends in technology, and under-served real estate needs. They constantly track employers of tech/research people, competitors, historical and emerging customers — and identify prospective tech tenants who will need specialized real estate.  A few of the leading trends Alexandria follows include:

  • Urbanization — The siloed campuses set in bucolic suburbs is the past
  • Innovation externalization — Over 50% of innovation in big pharma is now outsourced. And universities are spinning out innovations faster than ever into development centers for testing and commercialization
  • Nutrition and disease management — These are emerging markets ripe with new products making their way to commercialization, and needing space to grow

Alexandria’s historical and ongoing successes relied first and foremost on using trends to understand underserved markets where needs will soon be the greatest.  This is an important lesson for all businesses. No matter what you do, what you sell, or your industry you can generate higher returns, outperform your peers, and outperform the market rewarding investors by identifying trends and investing in them.

Thanks to Joel Marcus for providing an interview to explain the history and current practices at Alexandria.

GE Needs A New Strategy And A New CEO

GE Needs A New Strategy And A New CEO

(Photo: General Electric CEO Jeffrey Immelt, ERIC PIERMONT/AFP/Getty Images)

General Electric stock had a small pop recently when investors thought CEO Jeffrey Immelt might be pushed out. Obviously more investors hope the CEO leaves than stays. And it appears clear that activist investor Nelson Peltz of Trian Partners thinks it is time for a change in CEO atop the longest running member of the Dow Jones Industrial Average (DJIA.)

You can’t blame investors, however. Since he took over the top job at General Electric in 2001 (16 years ago) GE’s stock value has dropped 38%. Meanwhile, the DJIA has almost doubled. Over that time, GE has been the greatest drag on the DJIA, otherwise the index would be valued even higher! That is terrible performance — especially as CEO of one of America’s largest companies.

But, after 16 years of Immelt’s leadership, there’s a lot more wrong than just the CEO at General Electric these days. As the JPMorgan Chase analyst Stephen Tusa revealed in his analysis, these days GE is actually overvalued, “cash is weak, margins/share of customer wallet are already at entitlement, the sum of the parts valuation points to a low 20s stock price.” He goes on to share his pessimism in GE’s ability to sell additional businesses, or create cost lowering synergies or tax strategies.

Former Chairman and CEO of General Electric Jack Welch. (AP Photo/Richard Drew)

What went so wrong under Immelt? Go back to 1981. GE installed Jack Welch as its new CEO.  Over the next 20 years there wasn’t a business Neutron Jack wouldn’t buy, sell or trade. CEO Welch understood the importance of growth. He bought business after business, in markets far removed from traditional manufacturing, building large positions in media and financial services. He expanded globally, into all developing markets. After businesses were  acquired the pressure was relentless to keep growing. All had to be no. 1 or no. 2 in their markets or risk being sold off. It was growth, growth and more growth.

 Welch’s focus on growth led to a bigger, more successful GE. Adjusted for splits, GE stock rose from $1.30 per share to $46.75 per share during the 20 year Welch leadership. That is an improvement of 35 times – or 3,500%. And it wasn’t just due to a great overall stock market.  Yes, the DJIA grew from 973 to 10,887 — or about 10.1 times. But GE outperformed the DJIA by 3.5 times (350%).  Not everything went right in the Welch era, but growth hid all sins — and investors did very, very, very well.

Under Welch, GE was in the rapids of growth. Welch understood that good operating performance was not enough. GE had to grow. Investors needed to see a path to higher revenues in order to believe in long term value creation. Immediate profits were necessary but insufficient to create value, because they could be dissipated quickly by new competitors. So Welch kept the headquarters team busy evaluating opportunities, including making some 600 acquisitions. They invested in things that would grow, whether part of historical GE, or not.

Jeff Immelt as CEO took a decidedly different approach to leadership. During his 16 year leadership GE has become a significantly smaller company. He sold off the plastics, appliances and media businesses — once good growth providers — in the name of “refocusing the company.” Plans currently exist to sell off the electrical distribution/grid business (Industrial Solutions) and water businesses, eliminating another $5 billion in annual revenue. He has dismantled the entire financial services and real estate businesses that created tremendous GE value, because he could not figure out how to operate in a more regulated environment. And cost cutting continues. In the GE Transportation business, which is supposed to remain, plans have been announced to double down on cost cutting, eliminating another 2,900 jobs.

Under Immelt GE has focused on profits. Strategy turned from looking outside, for new growth markets and opportunities, to looking inside for ways to optimize the company via business sales, asset sales, layoffs and other cost cutting. Optimizing the business against some sense of an historical “core” caused nearsighted — and shortsighted — quarterly actions, financial gyrations and transactions rather than building a sustainable, growing revenue stream. Under Immelt sales did not just stagnate, sales actually declined while leadership pursued higher margins.

By focusing on the “core” GE business (as defined by Immelt) and pursuing short term profit maximization, leadership significantly damaged GE. Nobody would have ever imagined an activist investor taking a position in Welch’s GE in an effort to restructure the company. Its sales growth was so good, its prospects so bright, that its P/E (price to earnings) multiple kept it out of activist range.

But now the vultures see the opportunity to do an even bigger, better job of whacking up GE — of tearing it into small bits while killing off all R&D and innovation — like they did at DuPont. Over 16 years Immelt has weakened GE’s business — what was the most omnipresent industrial company in America, if not the world – to the point that it can be attacked by outsiders ready to chop it up and sell it off in pieces to make a quick buck.

Thomas Edison, one of the world’s great inventors, innovators and founder of GE, would be appalled. That GE needs now, more than ever, is a leader who understands you cannot save your way to prosperity, you have to invest in growth to create future value and increase your equity valuation.

In May, 2012 (five years ago) I warned investors that Immelt was the wrong CEO. I listed him as the fourth worst CEO of a publicly traded company in America. While he steered GE out of trouble during the financial crisis, he also simply steered the company in circles as it used up its resources. Then was the time to change CEOs, and put in place someone with the fortitude to develop a growth strategy that would leverage the resources, and brand, of GE. But, instead, Immelt remained in place, and GE became a lot smaller, and weaker.

At this point, it is probably too late to save GE. By losing sight of the need to grow, and instead focusing on optimizing the old business while selling assets to raise cash for reorganizations, Immelt has destroyed what was once a great innovation engine. Now that the activists have GE in their sites it is unlikely they will let it ever return to the company it once was – creating whole new markets by developing new technologies that people never before imagined. The future looks a lot more like figuring out how to maximize the value of each piece of meat as it’s carved off the GE carcass.