But that decline has not been equally applied to all brands. The biggest, old line brands have suffered terribly. Nearly gone are old brands like Milwaukee’s Best, which were best known for being low priced – and certainly not focused on taste. But the most hurt, based on volume declines, have been what were once the largest brands; Budweiser, Miller Lite and Miller High Life. These have lost more than a quarter of their volume, losing a whopping 13million barrels/year of demand. These 3 brand declines account for 6% reduction in the entire beer market.
The popular myth is that this has been due to the rise of craft beers. And there is no doubt, craft beer sales have done well. Sales are up 80%. Many articles (including the WSJ)tout the growth of craft beers, which are ostensibly more tasty and appealing, as being the reason old-line brands have declined. It is an easy explanation to accept, and has largely gone unchallenged. Even the brewer of Budweiser, Annheuser-Busch InBev, has reacted to this argument by taking the incredible action of dropping clydesdale horses from their ads after 81 years – in an effort to woo craft beer drinkers, which are thought to be younger and less sentimental about large horses.
This all makes sense. Too bad it’s the wrong conclusion – and the wrong actions being taken.
Realize that craft beer sales are up from a small base, and today ALL craft beer sales still account for only 7.6% of the market. In fact, ALL craft beers combined sell only the same volume as the now smaller Budweiser. The problem with Budweiser sales – and sales of other big name brand beers – is a change in demographics.
Drinkers of Budweiser and Lite are simply older. These brands rose to tremendous dominance in the 1970s. Many of those who loved this brand are simply older – or dead. Where a hard working fellow in his 30s or 40s might enjoy a six pack after work, today that Boomer (if still alive) is somewhere between late 50s and 70s. Now, a single beer, or maybe two, will suffice thank you very much. And, equally challenging for sales, today’s Boomer is more often drinking a hard liquor cocktail, and a glass of wine with dinner. Beer drinking has its place, but less often and in lower quantities.
So, just as decline in Boomer population and consumption has hurt the once great beer brands, we can look at the growth in Hispanic demographics and see a link to sales of growing brands. Two significant (non-craft volume) beer brands that more than doubled sales since 2008 are Modelo Especial and Dos Equis. In fact, these were the 2 fastest growing brands in America, even though the first does no English language advertising at all, and the latter only lightly funds advertising with an iconic multi-year campaign. Together their sales total almost 5.4M barrels – which makes these 2 brands equal to 1/3 the ENTIRE craft beer marketplace. And growing 33% faster!
Chasing the myth of craft sales is doing nothing for InBev and MillerCoors as they try to defend and extend outdated brands. On the other hand, Heineken controls Dos Equis, and Constellation Brands controls Modello Especial. These two companies are squarely aligned with demographic trends, and well positioned for growth.
So, be careful the next time you hear some simple explanation for why a product or service is declining. The answer might sound appealing, but have little economic basis. Instead, it is much smarter to look at big trends and you’ll likely see why in the same market one product is growing, while another is declining. Trends – such as demographics – often explain a lot about what is happening, and lead you to invest much smarter.
The trend toward the death of broadcast TV as we’ve known it keeps moving forward. This trend may not happen as fast as the death of desktop computers, but it is a lot faster than glacier melting.
This television season (through October) Magna Global has reported that even the oldest viewers (the TV Generation 55-64) watched 3% less TV. Those 35-54 watched 5% less. Gen Xers (25-34) watched 8% less, and Millenials (18-24) watched a whopping 14% less TV. Live sports viewing is not even able to maintain its TV audience, with NFL viewership across all networks down 10-19%.
Everyone knows what is happening. People are turning to downloaded entertainment, mostly on their mobile devices. With a trend this obvious, you’d think everyone in the media/TV and consumer goods industries would be rethinking strategy and retooling for a new future.
But, you would be wrong. Because despite the obviousness of the trend, emotional ties to hoping the old business sticks around are stronger than logic when it comes to forecasting.
That, my young friends, is how “hockey stick” forecasts are created. A lot of old assumptions, combined with a willingness to hope trends will be delayed, and you can ignore real data while promising people that the future will indeed look like the past – even when it defies common sense.
To compensate for fewer ads the networks have raised prices on all ads. But how long can that continue? This requires a really committed buyer (read more about CMO weaknesses below) who simply refuses to acknowledge the market has shifted and the dollars need to shift with it. That cannot last forever.
Meanwhile, us old folks can remember the days when Nielsen ratings determined what was programmed on TV, as well as what advertisers paid. Nielsen had a lock on measuring TV audience viewing, and wielded tremendous power in the media and CPG world.
But now AC Nielsen is struggling to remain relevant. With TV viewership down, time shifting of shows common and streaming growing like the proverbial weed Nielsen has no idea what entertainment the public watches. They don’t know what, nor when, nor where. Unwilling to move quickly to develop tools for catching all the second screen viewing, Nielsen has no plan for telling advertisers what the market really looks like – and the company looks to become a victim of changing markets.
Which then takes us to looking at those folks who actually buy ads that drive media companies. The Chief Marketing Officers (CMOs) of CPG companies. Surely these titans of industry are on top of these trends, and rapidly shifting their spending to catch the viewers with the most ads placed for the lowest cost.
You would wish.
Unfortunately, because these senior executives are in the oldest age groups, they are a victim of their own behavior. They still watch TV, so assume others must as well. If there is cyber-data saying they are wrong, well they simply discount that data. The Nielsen’s aren’t accurate, but these execs still watch the ratings “because it’s the best info we have” – a blatant untruth by the way. But Nielsen does conveniently reinforce their built in assumptions, and their hope that they won’t have to change their media spend plans any time soon.
Further, very few of these CMOs actually use social media. The vast majority watch their children, grandchildren and young employees use mobile devices constantly – and they bemoan all the activity on YouTube, Facebook, Instagram and Twitter – or for the most part even Linked-in. But they don’t actually USE these products. They don’t post information. They don’t set up and follow channels. They don’t connect with people, share information, exchange photos or tell stories on social media. Truthfully, they ignore these trends in their own lives. Which leaves them woefully inept at figuring out how to change their company marketing so it can be more relevant.
The trend is obvious. The answer, equally so. Any modern marketer should be an avid user of social media. Most network heads and media leaders are farther removed from social media than the Pope! They don’t constantly download entertainment, and exchanging with others on all the platforms. They can’t manage the use of these channels when they don’t have a clue how they work, or how other people use them, or understand why they are actually really valuable tools.
Are you using these modern tools? Are you actually living, breathing, participating in the trends? Or are you, like these outdated execs, biding your time wasting money on old programs while you look forward to retirement? And likely killing your company.
When trends emerge it is imperative we become part of that trend. You can’t simply observe it, because your biases will lead you to hope the trend reverts as you continue doing more of the same. A leader has to adopt the trend as a leader, be a practicing participant, and learn how that trend will make a substantial difference in the business. And then apply some vision to remain relevant and successful.
Remember the RAZR phone? Whatever happened to that company?
Motorola has a great tradition. Motorola pioneered the development of wireless communications, and was once a leader in all things radio – as well as made TVs. In an earlier era Motorola was the company that provided 2-way radios (and walkie-talkies for those old enough to remember them) not only for the military, police and fire departments, but connected taxies to dispatchers, and businesses from electricians to plumbers to their “home office.”
Motorola was the company that developed not only the thing in a customer’s hand, but the base stations in offices and even the towers (and equipment on those towers) to allow for wireless communication to work. Motorola even invented mobile telephony, developing the cellular infrastructure as well as the mobile devices. And, for many years, Motorola was the market share leader in cellular phones, first with analog phones and later with digital phones like the RAZR.
How did Motorola Solutions become a mere shell of its former self?
Unfortunately, several years ago Motorola was a victim of disruptive innovation, and leadership reacted by deciding to “focus” on its “core” markets. Focus and core are two words often used by leadership when they don’t know what to do next. Too often investment analysts like the sound of these two words, and trumpet management’s decision – knowing that the code implies cost reductions to prop up profits.
But smart investors know that the real implication of “focusing on our core” is the company will soon lose relevancy as markets advance. This will lead to significant sales declines, margin compression, draconian actions to create short-term P&L benefits and eventually the company will disappear.
Motorola’s market decline started when Blackberry used its server software to help corporations more securely use mobile devices for instant communications. The mobile phone transitioned from a consumer device to a business device, and Blackberry quickly grabbed market share as Motorola focused on trying to defend RAZR sales with price reductions while extending the RAZR platform with new gimmicks like additional colors for cases, and adding an MP3 player (called the ROKR.) The Blackberry was a game changer for mobile phones, and Motorola missed this disruptive innovation as it focused on trying to make sustaining improvements in its historical products.
Of course, it did not take long before Apple brought out the iPhone and with all those thousands of apps changed the game on Blackberry. This left Motorola completely out of the market, and the company abandoned its old platform hoping it could use Google’s Android to get back in the game. But, unfortunately, Motorola brought nothing really new to users and its market share dropped to nearly nothing.
The mobile phone business quickly overtook much of the old Motorola 2-way radio business. No electrician or plumber, or any other business person, needed the old-fashioned radios upon which Motorola built its original business. Even police officers used mobile phones for much of their communication, making the demand for those old-style devices rarer with each passing quarter.
But rather than develop a new game changer that would make it once again competitive, Motorola decided to split the company into 2 parts. One would be the very old, and diminishing, radio business still sold to government agencies and niche business applications. This business was profitable, if shrinking. The reason was so that leadership could “focus” on this historical “core” market. Even if it was rapidly becoming obsolete.
But the money from the Google sale was invested in trying to defend that old market, which is clearly headed for obsolescence. Profit pressures intensify every quarter as sales are harder to find when people have alternative solutions available from ever improving mobile technology.
But, of course, this ongoing “focus” on its “core” has failed to produce any revenue growth. So the company has been forced to undertake wave after wave of layoffs. As buildings empty they go for lease, or sale. And nobody cares, any longer, about Motorola. There are no news articles about new products, or new innovations, or new markets. Motorola has lost all market relevancy as its leaders used “focus” on its “core” business to decimate the company’s R&D, product development, sales and employment.
Retrenchment to focus on a core market is not a strategy which can benefit shareholders, customers, employees or the community in which a business operates. It is an admission that the leaders missed a major market shift, and have no idea how to respond. It is the language adopted by leaders that lack any vision of how to grow, lack any innovation, and are quickly going to reduce the company to insignificance. It is the first step on the road to irrelevancy.
Straight from Dr. Christensen’s “Innovator’s Dilemma” we now have another brand name to add to the list of those which were once great and meaningful, but now are relegated to Wikipedia historical memorabilia – victims of their inability to react to disruptive innovations while trying to sustain aging market positions – Motorola, Sears, Montgomery Wards, Circuit City, Sony, Compaq, DEC, American Motors, Coleman, Piper, Sara Lee………..
Of course, one bad week – even one bad earnings announcement – is no reason to dump a good company’s stock. The short term vicissitudes of short-term stock trading should not greatly influence long-term investors. But in IBM’s case, we now have 8 straight quarters of weaker revenues. And that HAS to be disconcerting. Managing earnings upward, such as the previous quarter, looks increasingly to be a short-term action, intended to overcome long-term revenues declines which portend much worse problems.
This revenue weakness roughly coincides with the tenure of CEO Virginia Rometty. And in interviews she increasingly is defending her leadership, and promising that a revenue turnaround will soon be happening. That it hasn’t, despite a raft of substantial acquisitions, indicates that the revenue growth problems are a lot deeper than she indicates.
But powerful as that legacy has been, in markets that move as fast as digital technology any company can be displaced very fast. Just ask the leadership at Sun Microsystems that once owned the telecom and enterprise markets for servers – before almost disappearing and being swallowed by Oracle in just 5 years (after losing $200B in market value.) Or ask former CEO Steve Ballmer at Microsoft, who’s delays at entering mobile have left the company struggling for relevancy as PC sales flounder and Windows 8 fails to recharge historical markets.
CEO Rometty may take pride in her earnings management. But we all know that came from large divestitures of the China business, and selling the PC and server business. As well as significant employee layoffs. All of which had short-term earnings benefits at the expense of long-term revenue growth. Literally $6B of revenues sold off just during her leadership.
Which in and of itself might be OK – if there was something to replace those lost sales. (Even if they didn’t have any profits – because at least we have faith in Amazon creating future profits as revenues zoom.)
What really worries me about IBM are two things that are public, but not discussed much behind the hoopla of earnings, acquisitions, divestitures and all the talk, talk, talk regarding a new future.
The Washington Post reported this week about the huge sums of money pouring out of corporations into stock buybacks rather than investing in R&D, new products, new capacity, enhanced marketing, sales growth, etc. $500B in buybacks this year, 34% more than last year’s blistering buyback pace, flowed out of growth projects. To make matters worse, this isn’t just internal cash flow going for buybacks, but companies are actually borrowing money, increasing their debt levels, in order to buy their own stock!
And the Post labels as the “poster child” for this leveraged stock-propping behavior…. IBM. IBM
“in the first quarter bought back more than $8 billion of its own stock, almost all of it paid for by borrowing. By reducing the number of outstanding shares, IBM has been able to maintain its earnings per share and prop up its stock price even as sales and operating profits fall.
The result: What was once the bluest of blue-chip companies now has a debt-to-equity ratio that is the highest in its history. As Zero Hedge put it, IBM has embarked on a strategy to “postpone the day of income statement reckoning by unleashing record amounts of debt on what was once upon a time a pristine balance sheet.”
In the case of IBM, looking beyond the short-term trees at the long-term forest should give investors little faith in the CEO or the company’s future growth prospects. Much is being hidden in the morass of financial machinations surrounding acquisitions, divestitures, debt assumption and stock buybacks. Meanwhile, revenues are declining, and investments in R&D are falling. This cannot bode well for the company’s long-term investor prospects, regardless of the well scripted talking points offered last week.
There is a definite trend to raising the minimum wage. Regardless your political beliefs, the pressure to increase the minimum wage keeps growing. The important question for business leaders is, “Are we prepared for a $12 or $15 minimum wage?”
The implications for businesses that use low-priced labor are clear. It is time to change the business model – to adapt for a different future. A higher minimum wage does not doom McDonald’s – but it will force the company to adapt. If McDonald’s (and Burger King, Wendy’s, Subway, Dominos, Pizza Hut, and others) doesn’t adapt the future will be very ugly for their customers and the company. But if these companies do adapt there is no reason the minimum wage will hurt them particularly hard.
The chains that replaced McDonald’s closed stores were Five Guys, Chick-fil-A and Chipotle. You might remember that in 1998 McDonald’s started investing in Chipotle, and by 2001 McDonald’s owned the chain. And Chipotle’s grew rapidly, from a handful of restaurants to over 500. But then in 2006 McDonald’s sold all its Chipotle stock as the company went IPO, and used the proceeds to invest in upgrading McDonald’s stores and streamlining the supply chain toward higher profits on the “core” business.
Now, McDonald’s is shrinking while Chipotle is growing. Bloomberg/BusinessWeek headlined “Chipotle: The One That Got Away From McDonalds” (Oct. 3, 2013.) Investors were well served to trade in McDonald’s stock for Chipotle’s. And franchisees have suffered through sales problems as they raised prices off the old “dollar menu” while suffering higher food costs creating shrinking margins. Meanwhile Chipotle’s franchisees have been able to charge more, while keeping customers very happy, and maintain margins while paying higher wages. In a nutshell, Chipotle’s (and similar competitors) has captured the lost McDonald’s business as trends favor their business.
So McDonald’s obviously made a mistake. But that does not mean “game over.” All McDonald’s, Burger King and Wendy’s need to do is adapt. Fighting the higher minimum wage will lead to a lot of grief. There is no doubt wages will go up. So the smart thing to do is figure out what these stores will look like when minimum wages double. What changes must happen to the menu, to the store look, to the brand image in order for the company to continue attracting customers profitably.
This will undoubtedly include changes to the existing brands. But, these companies also will benefit from revisiting the kind of strategy McDonald’s used in the 1990s when buying Chipotle’s. Namely, buying chains with a different brand and value proposition which can flourish in a higher wage economy. These old-line restaurants don’t have to forever remain dominated by the old brands, but rather can transition along with trends into companies with new brands and new products that are more desirable, and profitable, as trends change the game. Like The Limited did when selling its stores and converting into L Brands to remain a viable company.
Now is the time to take action. Waiting until forced to take action will be too late. If McDonald’s and its brethren (and Wal-Mart and its minimum-wage-paying retail brethren) remain locked-in to the old way of doing business, and do everything possible to defend-and-extend the old success formula, they will follow Howard Johnson’s, Bennigan’s, Circuit City, Sears and a plethora of other companies into brand, and profitability, failure. Fighting trends is a route to disaster.
However, by embracing the trend and taking action to be successful in a future scenario of higher labor these companies can be very successful. There is nothing which dictates they have to follow the road to irrelevance while smarter brands take their place. Rather, they need to begin extensive scenario planning, understand how these competitors succeed and take action to disrupt their old approach in order to create a new, more profitable business that will succeed.
Disruptions happen all the time. In the 1970s and 1980s gasoline prices skyrocketed, allowing offshore competitors to upend the locked-in Detroit companies that refused to adapt. On-line services allowed Google Maps to wipe out Rand-McNally, Travelocity to kill OAG and Wikipedia to kill bury Encyclopedia Britannica. These outcomes were not dictated by events. Rather, they reflect an inability of an existing leader to adapt to market changes. An inability to embrace disruptions killed the old competitors, while opening doors for new competitors which embraced the trend.
Now is the time to embrace a higher minimum wage. Every business will be impacted. Those who wait to see the impact will struggle. But those who embrace the trend, develop future scenarios that incorporate the trend and design new business opportunities can turn this disruption into a big win.
The grocery industry is truly global, because everyone eats and almost nobody grows their own food. It moves like a giant crude oil carrier, much slower than technology, so identifying trends takes more patience than, say, monitoring annual smartphone cycles. Yet, there are clearly pronounced trends which make a huge difference in performance.
Good for those who recognize them. Bad for those who don't.
Safeway, like a lot of the dominant grocers from the 1970s-1990s, clearly missed the trends.
Coming out of WWII large grocers replaced independent neighborhood corner grocers by partnering with emerging consumer goods giants (Kraft, P&G, Coke, etc.) to bring customers an enormous range of products very efficiently. They offered a larger selection at lower prices. Even though margins were under 10% (think 2% often) volume helped these new grocery chains make good returns on their assets. Dillon's (originally of Hutchinson, Kansas and later purchased by Kroger) became a 1970s textbook, case study model of effective financial management for superior returns by Harvard Business Schoolguru William Fruhan.
But times changed.
Looking at the trend toward low prices, Aldi from Germany came to the U.S. market with a strategy that defines the ultimate in low cost. Often there is only one brand of any product in the store, and that is likely to be the chain's private label. And often it is only available in one size. And customers must be ready to use a quarter to borrow the shopping cart (returned if you replace the cart.) And customers pay for their sacks. Stores are remarkably small and efficient, frequently with only 2 or 3 employees. And with execution so well done that the Aldi brand became #1 in "simple brands" according to a study by brand consultancy Seigal+Gale.
Of course, we also know that big discount chains like WalMart and Target started cherry picking the traditional grocer's enormous SKU (stock keeping units) list, limiting selection but offering lower prices due to lower cost.
Looking at the quality trend, Whole Foods and its brethren demonstrated that people would pay more for better perceived quality. Even though filling the aisles with organic
products and the ultimate in freshness led to higher prices, and someone nicknaming the chain
"whole paycheck," customers payed up to shop there, leading to superior
Connected to quality has been the trend, which began 30 years ago, to "artisanal" products. Shoppers pay more to buy what are considered limited edition products that are perceived as superior due to a range of "artisanal quality" features; from ingredients used to age of product (or "freshness,") location of manufacture ("local,") extent to which it is considered "organic," quantity of added ingredients for preservation or vitamin enhancement ("less is more,") ecological friendliness of packaging and even producer policies regarding corporate social and ecological responsibility.
But after decades of partnership, traditional grocers today remain dependant on large consumer goods companies to survive. Large CPGs supply a massive number of SKUs in a limited number of contracts, making life easy for grocery store buyers. Big CPGs pay grocers for shelf space, coupons to promote customer purchases, rebates, ads in local store circulars, discounts for local market promotions, sales volumes exceeding commitments and even planograms which instruct employees how to place products on shelves — all saving money for the traditional grocer. In some cases payments and rebates equalling more than total grocer profits.
Additionally, in some cases big CPG firms even deliver their products into the store and stock shelves at no charge to the grocer (called store-door-delivery as a substitute for grocer warehouse and distribution.) And the big CPG firms spend billions of dollars on product advertising to seemingly assure sales for the traditional grocer.
These practices emerged to support the bi-directionally beneficial historically which tied the traditional grocer to the large CPG companies. For decades they made money for both the CPG suppliers and their distributors. Customers were happy.
But the market shifted, and Safeway (including its employees, customers, suppliers and investors) is the loser.
The old retail adage "location, location, location" is no longer enough in grocery. Traditional grocery stores can be located next to good neighborhoods, and execute that old business model really well, and, unfortunately, not make any money. New trends gutted the old Safeway/Dominick's business model (and most of the other traditional grocers) even though that model was based on decades of successful history.
The trend to low price for customers with the least funds led them to shop at the new low-price leaders. And companies that followed this trend, like Aldi, WalMart and Target are the winners.
The trend to higher perceived quality and artisanal products led other customers to retailers offering a different range of products. In Chicago the winners include fast growing Whole Foods, but additionally the highly successful Marianno's division of Roundy's (out of Milwaukee.) And even some independents have become astutely profitable competitors. Such as Joe Caputo & Sons, with only 3 stores in suburban Chicago, which packs its parking lots daily by offering products appealing to these trendy shoppers.
And then there's the Trader Joe's brand. Instead of being all things to all people, Aldi created a new store chain designed to appeal to customers desiring upscale products, and named it Trader Joe's. It bares scance resemblance to an Aldi store. Because it is focused on the other trend toward artisinal and quality. And it too brings in more customers, at higher margin, than Dominick's.
When you miss a trend, it is very, very painful. Even if your model worked for 75 years, and is tightly linked to other giant corporations, new trends lead to market shifts making your old success formula obsolete.
Simultaneously, new trends create opportunities. Even in enormous industries with historically razor-thin margins – or even losses. Building on trends allows even small start-up companies to compete, and make good profits, in cutthroat industries – like groceries.
Trends really matter. Leaders who ignore the trends will have companies that suffer. Meanwhile, leaders who identify and build on trends become the new winners.
In 1985 there was universal agreement that investors should
be heavily in pharmaceuticals.
Companies like Merck, Eli Lilly, Pfizer, Sanofi, Roche, Glaxo and Abbott
were touted as the surest route to high portfolio returns.
What happened? In the old days pharma companies had to demonstrate
their drug worked; called product efficacy. It did not have to be better than existing drugs. If the drug worked, without big safety
issues, the company could launch it.
Then the business folks took over with ads, distribution,
salespeople and convention booths, convincing doctors to prescribe and us to
Big pharma companies grew into large, masterful consumer
products companies. Leadership’s view of the market changed, as it was
perceived safer to invest in Pepsi vs. Coke marketing tactics and sales warfare
to dominate a blockbuster category than product development. Think of the marketing cost in the
Celebrex vs. Vioxx war. Or Viagra
But the market shifted when the FDA decided new drugs had to
be not only efficacious, they had to enhance the standard of care. New drugs actually had to prove better in clinical trials than existing
drugs. And often safer, too.
Hurrumph. Big pharma’s enormous scale advantages in
marketing and communication weren’t enough to assure new product success. It actually took new products. But that meant bigger R&D investments,
perceived as more risky, than the new consumer-oriented pharma companies could
tolerate. Shortly pipelines
thinned, generics emerged and much lower margins ensued.
In some disease areas, this evolution was disastrous for
patients. In antibiotics,
development of new drugs had halted.
Doctors repeatedly prescribed (some say overprescribed) the same antibiotics. As the bacteria evolved, infections
became more difficult to treat.
With help from the CDC and NIH, the Infectious Diseases
Society of America pushed through the GAIN (Generating Antibiotic Incentives
Now) Act (H.R. 2182.) This gave
creators of new antibiotics the opportunity for new, faster pathways through
clinical trials and review in order to expedite approvals and market launch.
Which allowed new game changers like Melinta Therapeutics
into the game.
Melinta (formerly Rib-X) was once considered a “biopharma science
company” with Nobel Prize-winning technology, but little hope of commercial
product launch. But now the large
unmet need is far clearer, the playing field has few to no large company
competitors, the commercialization process has been shortened and cheapened,
and the opportunity for extended returns is greater!
Venture firm Vatera Healthcare Partners, with a history of investing in game changers (especially transformational technology,) entered the picture as lead investor. Vatera's founder Michael Jaharis quickly hired Mary Szela, the former head of U.S.
Pharmaceuticals for Abbott (now Abbvie) as CEO. Her resume includes leading the growth of Humira, one of
the world’s largest pharma brands with multi-billion dollar annual sales.
Under her guidance Melinta has taken fast action to work
with the FDA on a much quicker clinical trials pathway of under 18 months for commercializing delafloxacin. In layman’s
language, early trials of delafloxacin appeared to provide better performance
for a broad spectrum of resistant bacteria in skin infections. And as a one-dose oral (or IV)
application it could be a simpler, high quality solution for gonorrhea.
Melinta continues adding key management resources as it
seeks “breakthrough product” designation under GAIN from the FDA for its RX-04
product. RX-04 is an entirely
different scientific approach to infectious disease control, based on that previously
mentioned proprietary, Nobel-winning ribosome science. It’s a potential product category
game changer that could open the door for a pipeline of follow-on products.
Melinta is using GAIN to do something big pharma, with its
shrinking R&D and commercial staff, is unable to accomplish. Melinta is helping
redefine the rules for approving antibiotics, in order to push through new,
The best news is that this game change is great for investors.
Those companies who understand the
trend (in this case, the urgent need for new antibiotics) and how the market
has shifted (GAIN,) are putting in place teams to leverage newly invented drugs
working with the FDA. Investment timelines and dollars are looking
far more manageable – and less risky.
Twenty-five years ago pharma looked like a big-company-only
market with little competition and huge returns for a handful of companies. But things changed. Now companies (like Melinta) with new
solutions have the opportunity to move much faster to prove efficacy and safety
– and save lives. They are the
game changers, and the ones more likely to provide not only solutions to the
market but high investor returns.
There is an important lesson here for every city – and for our country.
Detroit was a thriving city during the industrial revolution. Innovation in all things mechanical led to the modern automobile; a marvelous innovation which, literally, everyone wanted. As demand skyrocketed, Henry Ford's management team developed the modern assembly line which allowed production volumes to skyrocket as well. Detroit was a hotbed of industrial innovation.
This fueled growth in jobs, which led to massive immigration to Detroit. With growth the tax base expanded, and quickly Detroit was a leading city with all the best things people could want. In the 1950s and 1960s Detroit reaped the benefits of the local auto companies, and their suppliers, as ongoing innovations drove better cars, more sales, more revenue taxes, higher property values and higher property taxes. It was a glorious virtuous circle.
But things changed.
Offshore competitors came into the market creating different kinds of autos appealing to different customers. Initially they had lower costs, and less expensive designs. Their cars weren't as good as GM, Ford or Chrysler – but they were cheap. And when gasoline prices took off in the 1970s people suddenly realized these cars were also more fuel efficient and cheaper to maintain. As these offshore competitors gained more sales they invested in making better cars, until they had quality as good as the Detroit companies, plus better fuel efficiency.
But the Detroit companies had become stuck in their processes that worked in earlier days. Even though the market shifted, they didn't. What passed for innovations were increasingly simple appearance changes as bottom-line focus reduced willingness to do new things, and offered fewer new things to do. GM and its brethren didn't shift with the market, and by the 1980s the seeds of big problems already were showing. By the 1990s profits were increasingly variable and elusive.
The formerly weak and small competitors now were more competitive in a changed market favoring smaller cars with more, and better, technology. The market had changed, but the big American auto companies had not. They kept doing more of the same – hopefully better, faster and striving for cheaper. But they were falling further behind. By the 2000s decade failure had become the viable option, with both Chrysler and GM going bankrupt.
As this cycle played out, the impact on Detroit was clear. Less success in the business base meant fewer revenue tax dollars from less profitable companies. Cost reductions meant employment stagnated, then started falling. Incomes stagnated, and people left Detroit to find better paying jobs. Property values began to fall. Income and property taxes declined. Governments had to borrow more, and cut costs, leading to declines in services. What had been a virtuous circle became a violently destructive whirlpool.
Detroit's business leaders failed to invest in programs to drive more new jobs in non-auto, non-industrial, business development. As competitors hurt the local industry, Detroit (and Michigan's) leaders kept trying to invest in saving the historical business, while the economy was shifting from an industrial base to an information one. It wasn't just autos that were less valuable as companies, but everything industrial. Yet, leaders failed at attracting new technology companies. The economic shift – the market shift – was unaddressed, and now Detroit is bankrupt.
Much as I like living in Chicago, unfortunately the story is far too similar in my town. Long an industrial hub, Chicago (and Illinois) enjoyed the benefits of growing companies, employment and taxes during the heyday of industrialism. This led to well paid, and very well pensioned, government employees providing services. The suburbs around Chicago exploded as people migrated to the Windy City for jobs – despite the brutal winters.
But Chicago has been dramatically affected by the shift to an information economy. The old machine shops, tool and dye makers and myriad parts manufacturers were decimated as that work often went offshore to cheaper manufacturers. Large manufacturers like Western Electric and International Harvester (renamed Navistar) failed. Big retailers like Montgomery Wards disappeared, and even Sears has diminished to a ghost of its former self. All businesses killed by market shifts.
And as a result, people quit moving to Chicago – and actually started leaving. There are now fewer jobs in Illinois than in the year 2000, and as a result people have left town. They've gone to cities (and states) where they could find jobs in growth industries allowing for more opportunity, and rising incomes.
Just like Detroit, Chicago shows early signs of big problems. Crime is up, with an unpleasantly large increase in murders. Insufficient income and property tax revenues led to budget crises across the board. Dramatic actions like selling city parking meters to shore up finances has led to Chicago having the most expensive parking in the country – despite far from the highest incomes. Property taxes in suburbs have escalated, with taxes in collar Lake county higher than Los Angeles! Yet the state pension system is bankrupt, causing the legislature to put in place a 50% state income tax increase! Meanwhile the infrastructure is showing signs of needing desperate work, but there is no money.
Like Detroit, Chicago's businesses (and governments) have invested insufficiently in innovation. Recent Chicago Tribune columns on local consumer goods behemoth Kraft emphasized (and typified) the lack of new product development and stalled revenue growth. Where Bay Area tech companies expect 50% of revenues (or more) from new products (or variations), Kraft has admitted it has relied on stalwarts like Velveeta and Mac & Cheese so much that fewer than 10% of revenues come from anything new.
Culturally, too many decisions in the executive suites of both the companies, and the governments, are focused on what worked in the past rather than investing in innovation. Even though the vaunted University of Illinois has one of the world's top 5 engineering schools, the majority of graduates find they leave the state for better paying jobs. And a dearth of angel or venture funding means that start-ups simply are forced coastal if they hope to succeed.
And this reaches to our national policies as well. Plenty of arguments abound for cutting costs – but are we effectively investing in innovation? Do our tax policies, as well as our expenditures, drive innovation – or constrict it? It was government programs which unleashed nuclear power and gave us a rash of innovations from putting a man on the moon. Yet, today, we seem obsessed with cutting budgets, cutting costs and doing less – not even more – of the same.
Growth is a wonderful thing. But growth does not happen without investment in innovation. When companies, or industries, stop investing in innovation growth slows – and eventually stops. Communities, states and even nations cannot thrive unless there is a robust program of investing for, and implementing, innovation.
With innovation you create renewal. Without it you create Detroit.
Michael Dell has put together a hedge fund, one of his largest suppliers and some debt money to take his company, Dell, Inc. private. There are large investors threatening to sue, claiming the price isn't high enough. While they are wrangling, small investors should consider this privatization manna from heaven, take the new, higher price and run to invest elsewhere – thankful you're getting more than the company is worth.
In the 1990s everybody thought Dell was an incredible company. With literally no innovation a young fellow built an enormously large, profitable company using other people's money, and technology. Dell jumped into the PC business as it was born. Suppliers were making the important bits, and looking for "partners" to build boxes. Dell realized he could let other people invest in microprocessor, memory, disk drive, operating system and application software development. All he had to do was put the pieces together.
Dell was the rare example of a company that was built on nothing more than execution. By marketing hard, selling hard, buying smart and building cheap Dell could produce a product for which demand was skyrocketing. Every year brought out new advancements from suppliers Dell could package up and sell as the latest, greatest model. All Dell had to do was stay focused on its "core" PC market, avoid distractions, and win at execution. Heck, everyone was going to make money building and selling PCs. How much you made boiled down to how hard you worked. It wasn't about strategy or innovation – just execution.
Dell's business worked for one simple reason. Everybody wanted PCs. More than one. And everybody wanted bigger, more powerful PCs as they came available. Market demand exploded as the PC became part of everything companies, and people, do. As long as demand was growing, Dell was growing. And with clever execution – primarily focused on speed (sell, build, deliver, get the cash before the supplier has to be paid) – Dell became a multi-billion dollar company, and its founder a billionaire with no college degree, and no claim to being a technology genius.
But, the market shifted. As this column has pointed out many times, demand for PCs went flat – never to return to previous growth rates. Users have moved to mobile devices such as smartphones and tablets, while corporate IT is transitioning from PC servers to cloud services. iPad sales now nearly match all of Dell's sales. Dell might well be the world's best PC maker, but when people don't want PCs that doesn't matter any more.
If you think adding debt to Dell will save it from the market shift, just look at how well that strategy worked for fixing Tribune Corporation. A Sam Zell led LBO took over the company claiming he had plans for a new future, as advertisers shifted away from newspapers. Bankruptcy came soon enough, employee pensions were wiped out, massive layoffs undertaken and 4 years of legal fighting followed to see if there was any plan that would keep the company afloat. Debt never fixes a failing company, and Dell knows that. Dell has no answer to changing market demand away from PCs.
Now the buzzards are circling. HP has been caught in a rush to destruction ever since CEO Fiorina decided to buy Compaq and gut the HP R&D in an effort to follow Dell's wild revenue ride. Only massive cost cutting by the following CEO Hurd kept HP alive, wiping out any remnants of innovation. Now HP has a dismal future. But it hopes that as the PC market shrinks the elimination of one competitor, Dell, will give newest CEO Whitman more time to somehow find something HP can do besides follow Dell into bankruptcy court.
Watching as its execution-oriented ecosystem manufacturers are struggling, supplier Microsoft is pulling out its wallet to try and extend the timeline. Plundering its $85B war chest, Microsoft keeps adding features, with acquisitions such as Skype, that consume cash while offering no returns – or even strong reasons for people to stop the transition to tablets.
Additionally it keeps putting up money for companies that it hopes will build end-user products on its software, such as its $500M investment in Barnes & Noble's Nook and now putting $2B into Dell. $85B is a lot of money, but how much more will Microsoft have to spend to keep HP alive – or money losing Acer – or Lenovo? A billion here, a billion there and pretty soon it adds up to a lot of money! Not counting losses in its own entertainmnet and on-line divisions. The transition to mobile devices is permanent and Microsoft has arrived at the game incredibly late – and with products that simply cannot obtain better than mixed reviews.
The lesson to learn is that management, and investors, take a big risk when they focus on execution. Without innovation, organizations become reliant on vendors who may, or may not, stay ahead of market transitions. When an organization fails to be an innovator, someone who creates its own game changers, and instead tries to succeed by being the best at execution eventually market shifts will kill it. It is not a question of if, but when.
Being the world's best PC maker is no better than being the world's best maker of white bread (Hostess) or the world's best maker of photographic film (Kodak) or the world's best 5 and dime retailer (Woolworth's) or the world's best manufacturer of bicycles (Schwinn) or cold rolled steel (Bethlehem Steel.) Being able to execute – even execute really, really well – is not a long-term viable strategy. Eventually, innovation will create market shifts that will kill you.
Microsoft needed a great Christmas season. After years of product stagnation, and a big market shift toward mobile devices from PCs, Microsoft's future relied on the company seeing customers demonstrate they were ready to jump in heavily for Windows8 products – including the new Surface tablet.
Looking deeper, for the 4th quarter PC sales declined by almost 5% according to Gartner research, and by almost 6.5% according to IDC. Both groups no longer expect a rebound in PC shipments, as they believe homes will no longer have more than 1 PC due to the mobile device penetration – the market where Surface and Win8 phones have failed to make any significant impact or move beyond a tiny market share. Users increasingly see the complexity of shifting to Win8 as not worth the effort; and if a switch is to be made consumer and businesses now favor iOS and Android.
These trends mean nothing short of the ruin of Microsoft. Microsoft makes more than 75% of its profits from Windows and Office. Less than 25% comes from its vaunted servers and tools. And Microsoft makes nothing from its xBox/Kinect entertainment division, while losing vast sums on-line (negative $350M-$750M/quarter). No matter how much anyone likes the non-Windows Microsoft products, without the historical Windows/Office sales and profits Microsoft is not sustainable.
So what can we expect at Microsoft:
Ballmer has committed to fight to the death in his effort to defend & extend Windows. So expect death as resources are poured into the unwinnable battle to convert users from iOS and Android.
As resources are poured out of the company in the Quixotic effort to prolong Windows/Office, any hope of future dividends falls to zero.
Expect enormous layoffs over the next 3 years. Something like 50-60%, or more, of employees will go away.
Expect closure of the long-suffering on-line division in order to conserve resources.
The entertainment division will be spun off, sold to someone like Sony or even Barnes & Noble, or dramatically reduced in size. Unable to make a profit it will increasingly be seen as a distraction to the battle for saving Windows – and Microsoft leadership has long shown they have no idea how to profitably grow this business unit.
As more and more of the market shifts to competitive cloud businesses Apple, Amazon and others will grow significantly. Microsoft, losing its user base, will demonstrate its inability to build a new business in the cloud, mimicking its historical experiences with Zune (mobile music) and Microsoft mobile phones. Microsoft server and tool sales will suffer, creating a much more difficult profit environment for the sole remaining profitable division.
Missing the market shift to mobile has already forever tarnished the Microsoft brand. No longer is Microsoft seen as a leader, and instead it is rapidly losing market relevancy as people look to Apple, Google, Amazon, Samsung, Facebook and others for leadership. The declining sales, and lack of customer interest will lead to a tailspin at Microsoft not unlike what happened to RIM. Cash will be burned in what Microsoft will consider an "epic" struggle to save the "core of the company."
But failure is already inevitable. At this stage, not even a new CEO can save Microsoft. Steve Ballmer played "Bet the Company" on the long-delayed release of Win8, losing the chance to refocus Microsoft on other growing divisions with greater chance of success. Unfortunately, the other players already had enough chips to simply bid Microsoft out of the mobile game – and Microsoft's ante is now long gone – without holding a hand even remotely able to turn around the product situation.
Game over. Ballmer loses. And if you keep your money invested in Microsoft it will disappear along with the company.