Tuesday New Jersey Governor Chris Christie vetoed legislation which would have raised the state’s minimum wage to $15/hour over 5 years. The current rate is $8.38, and he felt it was too big an increase, too fast.
Of course the governor makes quite a bit more than the minimum wage. And although he vetoed the legislation because he is “pro-business” he has never run a business and really has no idea what the economic impact of a higher minimum wage would be on New Jersey. He assumes because it would cost more to pay low-wage workers that it would harm businesses who are contributors to his re-election. Happy Labor Day all you minimum wage workers.
What he does not consider is the ability for those businesses to pass along those higher wages by raising prices. When everyone has to pay more then it becomes possible for everyone to raise prices. Simultaneously, the low income people who make more money, and spend 100% of what they make, pass along the higher wages in increased consumption which increases business revenues. So an argument can be made that a higher minimum wage could help businesses to have happier employees who spend more and actually improve the economy overall, and for their business.
Remember Henry Ford and his $5 day? In 1914, by cutting work hours and doubling pay Ford greatly motivated his workforce, reducing turnover and training cost. Simultaneously he improved the ability of his workers to spend more and thus grow sales for many businesses. He was just one company, but his higher pay was so successful that it caused other companies to pay more, and everyone benefited. Many historians think of this as an important event in the birth of the American middle class.
The other contributor to the growth of the middle class was unions. By WWI unions had become far more prevalent in the USA. Unions improved working conditions, fought for the abolition of child labor, eliminated employer discrimination, improved benefits like health care and allowed employees to negotiate for higher wages. By banding together in unions employees were able to negotiate with their employer much more powerfully than for each employee to negotiate individually.
In 1928, the height of the “Gilded Age” of America, the bottom 90% of Americans earned 50.7% of the nation’s income, while the top 1% earned 23.9%. Affects of the Great Depression, and increased unionization, changed this so that by 1944 the bottom 90% was earning 67.5% of the income, while the income of the top 1% had plummeted to 11.3%.
Of course, unions and their bosses were far from perfect. Over time union clout grew, and management increasingly caved to union demands in order to avoid debilitating strikes. Some companies were drowned in worker demands, and became unproductive with featherbedded workers and work rules that seriously harmed productivity. Meanwhile, rampant corruption among union leadership led to intense mob involvement and increased crime. Which led to a lot less support for unions among Americans – often even among the workers who were union members.
In 1979, four years after famed union leader Jimmy Hoffa disappeared after a dust-up with the mob, 34% of American workers were unionized. Today only 10% are unionized, and a large percentage of those are in government positions like teaching, law enforcement, firefighting, postal service, etc. 38% of workers without a college degree were unionized in 1979. Today, 11% are unionized.
And today, we have returned to the Gilded Age. Union dislike has led to implementing Right to Work laws in several states, which makes it far easier for private employers to avoid, or eliminate, unions. And changes in jobs from largely factory line work to far more desk-related (shifting from manufacturing to tech and health care) has made it less easy to find common ground among workers for unionizing. Additionally, sharp cuts in progressive income taxes, which were replaced by dramatic increases in regressive sales and property taxes, coupled with a huge increase in social security and other worker taxes has transformed America’s income portrait. Once again (2012) the top 1% take home 22.5% of America’s income, while the bottom 90% take home only 50.7%.
This dramatic shift in incomes is very prevalent in today’s election contests. There is ample talk about the displaced workers, under-employed workers and hidden unemployment. It is clear there are a lot of very wealthy people who have a lot of power to affect elections – including one candidate who won his party’s candidacy without even raising external funds! Simultaneously, there are a lot of very angry, frustrated people who want significant change – and express an aggressive dislike for the candidates of both major parties.
What is clear is that America prospered when the disparity between rich and poor was not as it is today. There was a greater sense of commonality, even as people disagreed on policies, when workers could identify with the heads of their companies and the bankers. Today, the difference between the haves and have-nots is so great that a large percentage of Americans believe they can only retire if they hit the lottery!
Throughout history income inequality has led to national overthrow, ouster of government heads, and riots. The French overturned their monarchy and became a republic when their king and queen ignored the impoverished. Filipinos threw out the Marcos regime. And home-grown American terrorists are often disenchanted with lifestyles far from their expectations.
There is clearly a need to find ways to reduce income inequality. It is incumbent upon leaders to seek out ways to improve the lives of their constituents, including their customers, suppliers and employees. And one, small act that any governor can do is simply abandon old assumptions about the horribleness of minimum wage laws – and unions as responsible for a currently weak economy – and instead take action to put a few more dollars into the hands of those who work, yet have the least.
Most Americans, including white collar workers and executives, will take the day off next Monday to celebrate Labor Day. This national holiday was created by labor unions in the 1880s, and made a national holiday in 1894 after the US Army and US Marshal’s Service killed multiple workers at the Pullman strike. Labor Day was instituted as a celebration of the American worker, and the economic and social achievements they accomplished. It is a time to honor those who work hard, often for not enough pay, and yet make America great.
Happy Labor Day!
[Footnote: Most of the statistics for this column came from The Atlantic – Fewer Unions, Lower Pay for Everybody]
Summer is here, and everyone needs a business book or two to read. I’m offering some thoughts on “The Founder’s Mentality” by 2 very senior partners and strategy practice heads at Bain & Company – Chris Zook and James Allen. Bain is one of the top 3 management consulting firms in the world, with 8,000 consultants in 55 offices, and has been ranked as one of the best places to work in America by Glass Ceiling.
Since both authors are still part of Bain, they were somewhat bridled by their positions. No partner can bad mouth current or former clients, as it obviously could reveal confidential information — and it certainly isn’t good for finding new clients who never want to be bad-mouthed by their consultant. So one should not expect a lambasting of poorly performing companies in this review of global cases. But after reviewing the work at their clients for over 20 years, and many other cases available via research, these fellows concluded that most companies lose the original founder’s mentality, get bound up in organizational complexity, and simply lose competitiveness due to internal focus.
Moving from mediocre to good
I interviewed Chris Zook, and found him rather candid in his observations. When I asked why people should read this book I really liked his response “Many people have read ‘Good to Great.’ But, honestly, for many organizations the challenge today is simply to move from mediocre to good. They are struggling, and they need some straightforward advice on how to make progress toward growth when the situation appears almost impossible.”
You should read the book to understand the common root cause of problems, and how a company can address those issues. But this column offers some interesting thoughts from Chris about how to apply what you’ll learn from the book to address unnecessary complexity and make your organization more successful.
AH – What is the most critical step toward undoing needless, costly, time consuming complexity?
Zook – “The biggest problem are blockages built between the front line and the top staff. Honestly, the people at the top lose any sense of what is actually happening in the marketplace – what is happening with customers. 80% of the time successfully addressing this requires eliminating 30-40% of the staff. You need non-incremental change. Leaders have to get rid of managers wedded to past decisions, and intent on defending those decisions. Leaders have to get rid of those who focus on managing what exists, and find competent replacements who can manage a transition.”
AH – Market shifts make companies non-competitive, why do you focus so much on internal organizational health?
Zook – “You can’t respond to a market shift if the company is bound up in complex decision-making. Unless a leader attacks complexity, and greatly simplify the decision-making process, a company will never do anything differently. Being aware of changes in the market is not enough. You have to internalize those changes and that requires reorganizing, and usually changing a lot of people. You won’t ever get the information from the front line to top management unless you change the internal company so that it is receptive to that information.”
AH – You say simplification is critical to reversing a company’s stall-out. But isn’t focusing on the “core” missing market opportunities?
Zook – “Analysts cheered Nardeli’s pro-growth actions at Home Depot. But the company stalled. The growth opportunities that external folks liked hearing about diverted attention from implementing what had made Home Depot great — the ‘orange army’ of store employees that were so customer helpful. It is very, very hard to keep ‘growth projects’ from diverting attention to good operations, and that’s why few founders are willing to chase those projects when someone brings them up for investment.”
AH – You talk positively about Cisco and 3M, yet neither has done anything lately, in any market, to appear exemplary
Zook – “It takes a long time to turn around a huge company. Cisco and 3M are still the largest in their defined markets, and profitable. Their long-term future is still to be determined, but so far they are making progress. Investors and market gurus look for turnarounds to happen fast, but that does not fit the reality of what it takes when these companies become very large.”
AH – You talk about “Next Generation Leaders.” Isn’t that just more ageism? Aren’t you simply saying “out with the old leaders, you have to be young to “get it.”
Zook – “Next Generation Leadership is not about age. It’s about mentality. It’s about being young, and flexible, in your thinking. What’s core to a company may well not be what a previous leader thinks, and a Next Gen Leader will dig out what’s core. For example, at Marvel the core was not comics. It was the raft of stories, all of which had the potential to be repurposed. Next Gen Leaders are using new eyes, dialed in with clarity to discover what is in the company that can be reused as the core for future growth. You don’t have to be young to do that, just mentally agile. Unfortunately, there aren’t nearly as many of these agile leaders as there are those stuck in the old ways of thinking.”
AH – Give me your take on some big companies that aren’t in your book, but that are in the news today and on the minds of leaders and investors. Apply “The Founder’s Mentality” to these companies:
Zook – “Did well due to its monopoly. Lost its Founder’s Mentality. Now suffering low growth rates relative to its industry, and in the danger zone of a growth stall-out. They have to refocus. Leadership needs to regain the position of attracting developers to their platform rather than being raided for developers by competitive platforms.”
Zook – “Jobs implemented The Founder’s Mentality brilliantly. Apple got close to its customers again with the retail stores, a great move to learn what customers really wanted, liked and would buy. But where will they turn next? Apple needs to make a big bet, and focus less on upgrades. They need to be thinking about a possible stall-out. But will Apple’s leadership make that next big bet?”
Zook – “One of the greatest founder-led companies of all time. Walton’s retail insurgency was unique, clear and powerful. Things appear to be a bit stale now, and the company would benefit from a refocusing on the insurgency mission, and taking it into renewal of the distribution system and all the stores.”
It’s been almost a decade since I wrote “Create Marketplace Disruption.” In it I detailed how companies, in the pursuit of best practices build locked-in decision-making systems that perpetuate the past rather than prepare for the future. “The Founder’s Mentality” provides several case studies in how organizations, especially large ones, can attack that lock-in to rediscover what made them great and set a chart for a better future. Put it on your reading list for the next plane flight, or relaxation time on your holiday.
I’m a believer in Disruptive Innovation. For almost 100 years economists have been writing about “Creative Destruction,” in which new technologies come along making old technologies — and the companies built on them — obsolete. In the last 20 years, largely thanks to the initial insights of the faculty at Harvard Business School, we’ve seen a dramatic increase in understanding how new companies use new technologies to disrupt markets and wipe out the profitability of companies that were once clearly successful. In a large way, we’ve come to accept that Disruptive Innovation is good, and the concomitant creative destruction of the old players leads to more rapid growth for the economy, increasing jobs and the wherewithal of everyone.
But, not really everyone. The trickle to lots of people can be a long time coming. When market shifts happen, and people lose jobs to new competitors — domestic or offshore — they only know that their life, at least short term, is a lot worse. As they struggle to pay a mortgage, and find a new job, they often learn their skills are outdated. There are jobs, but these folks are not qualified. As they take lesser jobs, their incomes dwindle, and they may well lose their homes. And their healthcare.
Economists call this workplace transition “temporary economic dislocation.” Fancy term. They claim that eventually folks do enter the workplace who are properly trained, and those folks make more money than the workers associated with the previous, now inferior, technology.
That’s great for economists. But terrible for the folks who lost their jobs. As someone once said “a recession is when your neighbor loses his job. A depression is when you lose your job.” And for a lot of people, the market shift from an industrial economy to an information economy has created severe economic depression in their lives.
A person learns to be a printer, or a printing plate maker, in the 1970s when they are 20-something. Good job, makes a great wage. Secure, as printing demand just keeps rising. But then along comes the internet with PDF and JPEG documents that people read on a screen, and folks simply quit needing, or wanting, printed documents. In 2016, now age 50-something, this printer or plate-maker no longer has a job. Demand is down, and its really easy to send the printing to some offshore market like Thailand, Brazil or India where printing is cheaper.
What’s he or she to do now? Go back to school you may say. But to learn how to do what? Say it’s on-line (or digital) document production. OK, but since everyone in the 20s has been practicing this for over a decade it takes years to actually be competitive. And then, what’s the pay for a starting digital graphic artist? A lot less than what they made as a printer. And who’s going to hire the 58-62 year old digital graphic artist, when there are millions of well trained 20 somethings who seem to be quicker, and more attuned to what the publishers want (especially when the boss ordering the work is 35-42, and really uncomfortable giving orders and feedback to someone her parents’ age.) Oh, and when you look around there are millions of immigrants who are able to do the work, and willing to do it for a whole lot less than anyone native born to your country.
Source: Master Investor UK
In England last week these disaffected people made it a point to show their country’s leadership that their livelihoods were being “creatively destroyed.” How were they to keep up their standard of living with the flood of immigrants? And with the wealth of the country constantly shifting from the middle class to the wealthy business leaders and bankers? While folks who have done well the last 25 years voted overwhelmingly to remain in the EU (such as those who live in what’s called “The City”), those in the suburbs and outlying regions voted overwhelmingly to leave. Sort of like their income gains, and jobs, left.
To paraphrase the famous line from the movie Network, “they were mad as Hell and they weren’t going to take it any longer.” Simply put, if they couldn’t participate in the wonderful economic growth of EU participation, they would take it away from those who did. The point wasn’t whether or not the currency might fall 10% or more, or whether stocks on the UK exchange would be routed. After all, these folks largely don’t go to Europe or America, so they don’t care that much what the Euro or dollar costs. And they don’t own stocks, because they aren’t rich enough to do so, so what does it hurt them if equities fall? If this all puts a lot of pain on the wealthy – well just maybe that is what they really wanted.
America is seeing this in droves. It’s called the Donald Trump for President campaign. While unemployment is a remarkably low 5%, there are a lot of folks who are working for less money, or simply out of work entirely, because they don’t know how to get a job. They may laugh at Robert DiNero as a retired businessman now working for free in “The Intern.” But they really don’t think it’s funny. They can’t afford to work for free. They need more income to pay higher property taxes, sales taxes, health care and the costs of just about everything else. And mostly they know they are rapidly being priced out of their lifestyle, and their homes, and figuring they’ll be working well into their 70s just to keep from falling into poverty.
These people hate President Obama. They don’t care if the stock market has soared during his Presidency – they don’t own stocks (and if they do in a 401K or similar program they don’t care because it does them no good today.) They don’t care that he’s created more jobs than anyone since Reagan or Roosevelt, because they see their jobs gone, and they blame him if their recent college graduate doesn’t have a well-paying job. They don’t care if we are closing in on universal health care, because all they see is that health care is becoming ever more expensive – and often beyond their ability to pay. For them, their personal America is not as good as they expected it to be – and they are very, very angry. And the President is a very identifiable symbol they can blame.
Creative Destruction, and disruptive innovations, are great for the winners. But they can be wildly painful to the losers. And when the disruptions are as big, and frequent, as what’s happened the last 30 years – globalized economy, nationwide and international super banks, outsourcing, offshoring and the entirety of the Internet of Things – it has left a lot of people really concerned about their future. As they see the top 1% live opulent lifestyles, they struggle to keep a 12 year old car running and pay the higher license plate fees. They really don’t care if the economy is growing, or the dollar is strong, or if unemployment is at near-record lows. They know they are on the losing end of the stick. For them, well, America really isn’t all that great anymore.
So, hungry for revenge, they are happy to kill the goose for dinner that laid the golden eggs. They will take what they can, right now, and they don’t care if the costs are astronomical.
Despite their hard times, does this not sound at the least petty, and short-sighted? Doesn’t it seem rather selfish to damn everyone just because your situation isn’t so good?
Some folks will think that government policy really doesn’t matter that much. That actions like Brexit won’t stop they improvements coming from innovation. They think all will work out OK. They so long for a return to a previous time, when they perceived things were much better, that they are ready to stop the merry-go-round for everyone.
And they can do this. Brexit will create a Depression for the UK. The economy not only won’t grow, it will shrink. Probably for another decade. There will be fewer jobs, meaning less wealth for everyone. Those with assets will ride it out. Those who already struggled will struggle more. Lacking investment funds, private and public, there will be less investment in infratructure and the means of production, making life harder for everyone. There will be less, if any, money to invest in innovation, so there will be fewer new products to enjoy, and fewer improvements in lifestyle and productivity. The currency will be lower, so there will be fewer imports, making the cost of everything go up. In short, it will be very, painful, and costly, for everyone now that those who felt left out of the economic expansion have had their day at the polls.
Growth is a great thing. Growth creates jobs, a better lifestyle, higher productivity, more income and more wealth for everyone. But growth is NOT a given. Policies, and government actions, can stop growth dead in its tracks. The innovations we’ve all been fascinated by, and made part of our everyday lives, from smartphones to autos that last hundreds of thousands of miles and tens of years, to low cost air conditioning, to electricity nearly everywhere, to miracle drugs and gene-based bio-pharmaceuticals that have extended our lives by 30%+ in just one generation — all of these things can come to a screeching, terrible halt.
All it takes to stop the gains of innovation are policies that try to return us to a previous time. In the process of making our countries great again, we can absolutely destroy them. It is impossible to go back in time. It is not impossible to kill the means of economic growth. All we have to do is focus on constructing walls instead of creating jobs, protecting industries instead of free trade, and wrapping ourselves in the flag of sovereignty instead of collaborating globally to maximize growth. By focusing on ourselves we can absolutely hurt a lot of other people.
The politicians getting attention now are those espousing a return to some bygone era. Those who denounce the gains of innovation, and offer pity to those who’ve struggled with market disruptions. But these are not the leaders who will help people improve their lives. Those who focus on promoting innovation, attacking the concentration of wealth at the top, providing more incentives to infrastructure development, and mobilizing resources for training and new job creation can make life better for everyone.
Let’s hope everyone watches what happens in the UK last week, this week and going forward learn the long-term lesson of short-term thinking. Let’s hope that we can return to favoring growth, even a the cost of disruption and creative destruction.
Microsoft is buying Linked-In, and we should expect this to be a disaster.
It is clear why Linked-in agreed to be purchased. As revenues have grown, gross margins have dropped precipitously, and the company is losing money. And LInked-in still receives 2/3 of its revenue from recruiting ads (the balance is almost wholly subscription fees,) unable to find a wider advertiser base to support growth. Although membership is rising, monthly active users (MAUs, the most important gauge of social media growth) is only 9% – like Twitter, far below the 40% plus rate of Facebook and upcoming networks. With only 106M MAUs, Linked in is 1/3 the size of Twitter, and 1/15th the size of Facebook. And its $1.5B Lynda acquisition is far, far, far from recovering its investment – or even demonstrating viability as a business.
Even though the price is below the all-time highs for LNKD investors, Microsoft’s offer is far above recent trading prices and a big windfall for them.
But for Microsoft investors, this is a repeat of the pattern that continues to whittle away at their equity value.
Once upon a time, in a land far away, and barely remembered by young people, Microsoft OWNED the tech marketplace. Individuals and companies purchased PCs preloaded with Microsoft Windows 95, Microsoft Office, Microsoft Internet Explorer and a handful of other tools and trinkets. And as companies built networks they used PC servers loaded with Microsoft products. Computing was a Microsoft solution, beginning to end, for the vast majority of users.
But the world changed. Today PC sales continue their multi-year, accelerating decline, while some markets (such as education) are shifting to Chromebooks for low cost desktop/laptop computing, growing their sales and share. Meanwhile, mobile devices have been the growth market for years. Networks are largely public (rather than private) and storage is primarily in the cloud – and supplied by Amazon. Solutions are spread all around, from Google Drive to apps of every flavor and variety. People spend less computing cycles creating documents, spreadsheets and presentations, and a lot more cycles either searching the web or on Facebook, Instagram, WhatsApp, YouTube and Snapchat.
But Microsoft’s leadership still would like to capture that old world. They still hope to put the genie back in the bottle, and have everyone live and work entirely on Microsoft. And somehow they have deluded themselves into thinking that buying Linked-in will allow them to return to the “good old days.”
Microsoft has not done a good job of integrating its own solutions like Office 365, Skype, Sharepoint and Dynamics into a coherent, easy to use, and to some extent mobile, solution. Yet, somehow, investors are expected to believe that after buying Linked-in the two companies will integrate these solutions into the LInked-in social platform, enabling vastly greater adoption/use of Office 365 and Dynamics as they are tied to Linked-in Sales Navigator. Users will be thrilled to have their personal information analyzed by Microsoft big data tools, then sold to advertisers and recruiters. Meanwhile, corporations will come back to Microsoft in droves as they convert Linked-in into a comprehensive project management tool that uses Lynda to educate employees, and 365 to push materials to employees – and allow document collaboration – all across their mobile devices.
Do you really believe this? It might run on the Powerpoint operating system, but this vision will take an enormous amount of code integration. And with Linked-in operated as separate company within Microsoft, who is going to do this integration? This will involve a lot of technical capability, and based on previous performance it appears both companies lack the skills necessary to pull it off. How this mysterious, magical integration will happen is far, far from obvious, or explained in the announcement documents. Sounds a lot more like vaporware than a straightforward software project.
And who thinks that today’s users, from individuals to corporations, have a need for this vision? While it may sound good to Microsoft, have you heard Linked-in users saying they want to use 365 on Linked in? Or that they’ll continue to use Linked-in if forced to buy 365? Or that they want their personal information data mined for advertisers? Or that they desire integration with Dynamics to perform Linked-in based CRM? Or that they see a need for a social-network based project management tool that feeds up training documents or collaborative documents? Are people asking for an integrated, holistic solution from one vendor to replace their current mobile devices and mobile solutions that are upgraded by multiple vendors almost weekly?
And, who really thinks Microsoft is good at acquisition integration? Remember aQuantive? In 2007 Microsoft spent $6B (an 85% premium to market price) to purchase this digital ad agency in order to build its business in the fast growing digital ad space. Don’t feel bad if you don’t remember, because in 2012 Microsoft wrote it off. Of course, there was the buy-it-and-write-it-off pattern repeated with Nokia. Microsoft’s success at taking “bold moves” to expand beyond its core business has been nothing less than horrible. Even the $1.2B acquisition of Yammer in 2012 to make Sharepoint more collaborative and usable has been unsuccessful, even though rolled out for free to 365 users. Yammer is adding nothing to Microsoft’s sales or value as competitor Slack has reaped the growth in corporate messaging.
The only good news story about Microsoft acquisitions is that they missed spending $44B to buy Yahoo – which is now on the market for $5B. Whew, thank goodness that one got away!
Microsoft’s leadership primed the pump for this week’s announcement by having the Chairman talk about investing outside of the company’s core a couple of weeks ago. But the vast majority of analysts are now questioning this giant bet, at a price so high it will lower Microsoft’s earnings for 2 years. Analysts are projecting about a $2B revenue drop for $90B Microsoft next year, and this $26B acquisition will deliver only a $3B bump. Very, very expensive revenue replacement.
Despite all the lingo, Microsoft simply cannot seem to escape its past. Its acquisitions have all been designed to defend and extend its once great history – but now outdated. Customers don’t want the past, they are looking to the future. And no matter how hard they try, Microsoft’s leaders simply appear unable to define a future that is not tightly linked to the company’s past. So investors should expect Linked-In’s future to look a lot like aQuantive. Only this one is going to be the most painful yet in the long list of value transfer from Microsoft investors to the investors of acquired companies.
Last week Bloomberg broke a story about how Microsoft’s Chairman, John Thompson, was pushing company management for a faster transition to cloud products and services. He even recommended changes in spending might be in order.
Really? This is news?
Let’s see, how long has the move to mobile been around? It’s over a decade since Blackberry’s started the conversion to mobile. It was 10 years ago Amazon launched AWS. Heck, end of this month it will be 9 years since the iPhone was released – and CEO Steve Ballmer infamously laughed it would be a failure (due to lacking a keyboard.) It’s now been 2 years since Microsoft closed the Nokia acquisition, and just about a year since admitting failure on that one and writing off $7.5B And having failed to achieve even 3% market share with Windows phones, not a single analyst expects Microsoft to be a market player going forward.
So just now, after all this time, the Board is waking up to the need to change the resource allocation? That does seem a bit like looking into barn lock acquisition long after the horses are gone, doesn’t it?
The problem is that historically Boards receive almost all their information from management. Meetings are tightly scheduled affairs, and there isn’t a lot of time set aside for brainstorming new ideas. Or even for arguing with management assumptions. The work of governance has a lot of procedures related to compliance reporting, compensation, financial filings, senior executive hiring and firing – there’s a lot of rote stuff. And in many cases, surprisingly to many non-Directors, the company’s strategy may only be a topic once a year. And that is usually the result of a year long management controlled planning process, where results are reviewed and few challenges are expected. Board reviews of resource allocation are at the very, very tail end of management’s process, and commitments have often already been made – making it very, very hard for the Board to change anything.
And these planning processes are backward-oriented tools, designed to defend and extend existing products and services, not predict changes in markets. These processes originated out of financial planning, which used almost exclusively historical accounting information. In later years these programs were expanded via ERP (Enterprise Resource Planning) systems (such as SAP and Oracle) to include other information from sales, logistics, manufacturing and procurement. But, again, these numbers are almost wholly historical data. Because all the data is historical, the process is fixated on projecting, and thus defending, the old core of historical products sold to historical customers.
Copyright Adam Hartung
Efforts to enhance the process by including extensions to new products or new customers are very, very difficult to implement. The “owners” of the planning processes are inherent skeptics, inclined to base all forecasts on past performance. They have little interest in unproven ideas. Trying to plan for products not yet sold, or for sales to customers not yet in the fold, is considered far dicier – and therefore not worthy of planning. Those extensions are considered speculation – unable to be forecasted with any precision – and therefore completely ignored or deeply discounted.
And the more they are discounted, the less likely they receive any resource funding. If you can’t plan on it, you can’t forecast it, and therefore, you can’t really fund it. And heaven help some employee has a really novel idea for a new product sold to entirely new customers. This is so “white space” oriented that it is completely outside the system, and impossible to build into any future model for revenue, cost or – therefore – investing.
Take for example Microsoft’s recent deal to sell a bunch of patent rights to Xiaomi in order to have Xiaomi load Office and Skype on all their phones. It is a classic example of taking known products, and extending them to very nearby customers. Basically, a deal to sell current software to customers in new markets via a 3rd party. Rather than develop these markets on their own, Microsoft is retrenching out of phones and limiting its investments in China in order to have Xiaomi build the markets – and keeping Microsoft in its safe zone of existing products to known customers.
The result is companies consistently over-investment in their “core” business of current products to current customers. There is a wealth of information on those two groups, and the historical info is unassailable. So it is considered good practice, and prudent business, to invest in defending that core. A few small bets on extensions might be OK – but not many. And as a result the company investment portfolio becomes entirely skewed toward defending the old business rather than reaching out for future growth opportunities.
This can be disastrous if the market shifts, collapsing the old core business as customers move to different solutions. Such as, say, customers buying fewer PCs as they shift to mobile devices, and fewer servers as they shift to cloud services. These planning systems have no way to integrate trend analysis, and therefore no way to forecast major market changes – especially negative ones. And they lack any mechanism for planning on big changes to the product or customer portfolio. All future scenarios are based on business as it has been – a continuation of the status quo primarily – rather than honest scenarios based on trends.
How can you avoid falling into this dilemma, and avoiding the Microsoft trap? To break this cycle, reverse the inputs. Rather than basing resource allocation on financial planning and historical performance, resource allocation should be based on trend analysis, scenario planning and forecasts built from the future backward. If more time were spent on these plans, and engaging external experts like Board Directors in discussions about the future, then companies would be less likely to become so overly-invested in outdated products and tired customers. Less likely to “stay at the party too long” before finding another market to develop.
If your planning is future-oriented, rather than historically driven, you are far more likely to identify risks to your base business, and reduce investments earlier. Simultaneously you will identify new opportunities worthy of more resources, thus dramatically improving the balance in your investment portfolio. And you will be far less likely to end up like the Chairman of a huge, formerly market leading company who sounds like he slept through the last decade before recognizing that his company’s resource allocation just might need some change.
Snapchat filed with the SEC this week its latest fundraising. According to TechCrunch, $1.8B cash was added to the company, bringing its current value to the range of $18-$20B. Not bad for a company with 2015 revenues of about $59M. And quite a high valuation for a one-product company that probably nobody who reads this column has ever used – or even knows anything about.
So why is Snapchat so highly valued? Because revenue estimates are for $250M-$350M in 2016, and up to $1B for 2017. From 50million daily active users in March, 2014 Snapchat has grown to 110million users by December, 2015 – so a growth rate of about 50% per year. And this growth has not been all USA, over half the Snapchat users are from Europe and the rest of the world – and the non-USA markets are growing the fastest. Clearly, at 20 times 2017 revenue estimates, investors are expecting dramatic growth in users, and revenue. Numbers of the magnitude that drove the valuation of Google (over $500B) and Facebook ($340B.)
So what is Snapchat? It is the complete opposite of this column. Snapchat is like Twitter only without the text. Of course, most of my readers don’t tweet either, so that may not help. It is a picture or 10 second video messaging app. But, most of my readers don’t use messaging apps either.
Think of texting, only you don’t actually text. Instead you send a picture or short video. That’s it. Pretty simple. Just a way to send your friends pics and videos with your phone – although you can be creative with the pictures and make changes.
People who use Snapchat find it addictive. They may send dozens, or hundreds, of pictures daily. To single friends, groups, or even all their friends – since users can pick who gets the pic.
For my readers, this must seem ridiculous. Who would want to send, or receive, several pictures every day from some, or many, of your colleagues and friends?
In 1927 Fred Bernard [trivia] popularized the phrase we use today “A picture is worth a thousand words.” And today, that is more true than ever. Pictures are replacing words for a vast and growing segment of the population. This is now a very fast growing trend, and it is projected to continue.
“Why is this a trend, and not a fad?” you may ask. The answer goes to the heart of how we use language and images. For thousands of years very few people knew how to read or write. To promulgate information, religious and government leaders would have artists paint images that told the story they wanted spread. These images were then taken from town to town, and people were taught the stories by having someone explain the picture. Then the image would be recalled by the population. It was only after the advent of mass education that using written words became the primary medium for providing information.
Simultaneously, paintings were really expensive. And early photography was expensive. Both mediums were used primarily to memorialize a story, or event. Thus there were relatively few of these images, and they were often treasured, hung on walls or kept in albums for later review.
Today images are extremely cheap and easy. Almost everyone has a phone with a camera. So it is easy to take a picture, and it is easy to view a picture. Pictures have become free. And if you can replace a thousand words with one photo, it is far more efficient – and thus from a resource perspective it is far cheaper (think of how long it takes to write an email as opposed to taking a picture.) Given that this flip in resources required has happened, and that the use of mobile technology is growing worldwide and will never revert, we know that this is not s short-term fad, but rather a trend.
Once we communicated by telephone calls. That has dropped dramatically because real-time communication takes a lot more effort to coordinate and implement than asynchronous communication. I can email or text any time I want, and my friend can receive that message when it is convenient for her. And she can choose to respond at her convenience, or not respond at all. Thus email and texting exploded due to the technical capability and their improved economy. Today we have the ability to communicate in pictures or short videos which is even more information dense, and even more economical.
I’m sure many of my readers are saying “well, that may be good for someone else, but not for me.” And that’s good, because you read my columns. But factually, the number of readers is destined to decrease as the number of viewers go up. There’s a reason every time you open an on-line magazine column you are bombarded by short videos ads. They are more communication dense and they are more successful at capturing attention – even if they do irritate you. There’s a reason that fewer and fewer people read books, and rely instead on columns like this one to gain insights. And there’s a reason more and more people connect on Facebook rather than sending emails – and rather than sending snail mail (when was the last time you actually mailed someone a birthday card?) While you may not imagine using pictures to replace language, the fact is lots and lots and lots of people are making the switch, and thus it is a trend that will affect how we do many things for many years into the future. Haven’t you ever watched a YouTube video rather than read an instruction manual?
Snapchat has capitalized on this new trend by making an app which allows you and your friends to communicate far more information a whole lot faster. Rather than interrupting your friends with a phone call (they may be busy right now,) or writing them an email or text message, you can just send them a photo. Have you ever used your phone to photo a label and sent it to someone who’s shopping for you? Or taken a photo of an item so you can find an exact replacement? That same action now can become your way of communicating – of telling your current story. Don’t tell your friends what you had for lunch, just send a photo. Don’t tell your friends you are shopping on Madison Avenue, just take a picture. Pictures are not archives, but rather just a fast, more compact and information filled form of communication.
Snapchat did not discover a new bio-pharmaceutical. It did not create a breakthrough new technology, such as extended battery life. It did not identify a sales opportunity in a far flung country. Nor did it have a breakthrough manufacturing process. Rather, merely by being the leader at implementing an emerging trend Snapchat’s founders have created $20billion of current value.
Now that you know this trend, what are you going to do so you can capture additional value for your business?
WalMart announced 1st quarter results on Thursday, and the stock jumped almost 10% on news sales were up versus last year. It was only $1.1B on $115B, about 1%, but it was UP! Same store sales were also up 1%, but analysts pointed out that was largely due to lower prices to hold competitors at bay.
While investors cheered the news, at the higher valuation WalMart is still only worth what it was in June, 2012 (just under $70/share.) From then through August, 2015 WalMart traded at a higher valuation – peaking at $90 in January, 2015. Subsequent fears of slower sales had driven the stock down to $56.50 by November, 2015. So this is a recovery for crestfallen investors the last year, but far from new valuation highs.
Unfortunately, this is likely to be just a blip up in a longer-term ongoing valuation decline for WalMart. And that value will be captured by those who understand the most important, undeniable trend in retail.
(c) AdamHartung.com Data Sources: Yahoo Finance and www.trend-stock-analysis-on.net
Although the numbers for WalMart’s valuation are a bit better than when the associated chart was completed last week, as you can see WalMart’s assets are greater than the company’s total valuation. This is because the return on its assets, today and projected, are so low that WalMart must borrow money in order to make them overall worthwhile. And the fact that on the balance sheet, at book value, the assets appear to be some $50B lower due to depreciation, and the difference be cost and market value.
This is because WalMart competes almost entirely in the intensely competitive and asset-dense market of traditional brick-and-mortar retail. This requires a lot of land, buildings, shelves and inventory. And that market is barely growing. Maybe 1-2%/year.
Compare t his with Amazon. Amazon has about $30B of assets. Yet its valuation is over $330B. So Amazon captures an extra value of $300B by competing in the asset sparse market of on-line retailing where it needs little land, few buildings, far less shelving and a lot less inventory. And it is competing in a market the Commerce Department says is growing at 15%/year.
The trend to on-line sales is extremely important, as it has entirely different customer acquisition and retention requirements, and very different ways of competing. Amazon understands those trends, and continues to lead its rivals. Today on-line retail is 10.5% of all non-restaurant, non-bar retail. And that 15% growth rate accounts for 60% of ALL the growth in this retail segment. Amazon keeps advancing, growing as fast (or faster) than the industry average, especially in key categories. Meanwhile, despite its vast resources and best efforts WalMart admitted its on-line sales growth is only 7% – half the segment growth rate – and its growth is decelerating.
By understanding this one trend – a very big, important, powerful trend – Amazon captures more value than the current value of ALL the Walmart stores, distribution centers and their contents. With all those assets WalMart can only convince investors it is worth about $200B. With about 13% of the assets used by WalMart, Amazon convinces investors it is worth 33% more than WalMart – over $330B. That’s $300B of value created just by knowing where the market is headed, and how to deliver for customers in that future market.
Yes, Amazon has other businesses, such as AWS cloud services and tech products in tablets, smartphones and smart speakers. But these too (some not nearly as successful as others, mind you) are very much on trends. WalMart once dominated retail technology with its massive computer systems and enormous databases. But WalMart limited itself to using its technology to defend & extend its core traditional retail business via store forecasts, optimized distribution and extensive pricing schemes. Amazon is monetizing its technology prowess by, again, leveraging trends and making its services and products available to others.
How does this apply to you? When someone asks “If you could have anything you want, what would you ask for?” most of us would start with health, happiness, peace and similar intangibles for us, our families and mankind. But if forced to make a tangible selection, we would ask for an asset. Buildings, equipment, cash. Yet, as WalMart and Amazon show us, those assets are only as valuable as what you do with them. And thus, it is more valuable to understand the trends, and how to use assets wisely for greatest value, than it is to own a pile of assets.
So the really important question is “Do you know what trends are going to be important to your business, and are you implementing a strategy to leverage those key trends?” If you are trying to protect your assets, you will likely be overwhelmed by the trend leader. But if you really understand the trends and are ready to act on them, you could be the one to capture the most value in your marketplace, and likely without adding a lot more costly assets.
Last week Sears announced sales and earnings. And once again, the news was all bad. The stock closed at a record, all time low. One chart pretty much sums up the story, as investors are now realizing bankruptcy is the most likely outcome.
Chart Source: Yahoo Finance 5/13/16
Quick Rundown: In January, 2002 Kmart is headed for bankruptcy. Ed Lampert, CEO of hedge fund ESL, starts buying the bonds. He takes control of the company, makes himself Chairman, and rapidly moves through proceedings. On May 1, 2003, KMart begins trading again. The shares trade for just under $15 (for this column all prices are adjusted for any equity transactions, as reflected in the chart.)
Lampert quickly starts hacking away costs and closing stores. Revenues tumble, but so do costs, and earnings rise. By November, 2004 the stock has risen to $90. Lampert owns 53% of Kmart, and 15% of Sears. Lampert hires a new CEO for Kmart, and quickly announces his intention to buy all of slow growing, financially troubled Sears.
In March, 2005 Sears shareholders approve the deal. The stock trades for $126. Analysts praise the deal, saying Lampert has “the Midas touch” for cutting costs. Pumped by most analysts, and none moreso than Jim Cramer of “Mad Money” fame (Lampert’s former roommate,) in 2 years the stock soars to $178 by April, 2007. So far Lampert has done nothing to create value but relentlessly cut costs via massive layoffs, big inventory reductions, delayed payments to suppliers and store closures.
Homebuilding falls off a cliff as real estate values tumble, and the Great Recession begins. Retailers are creamed by investors, and appliance sales dependent Sears crashes to $33.76 in 18 months. On hopes that a recovering economy will raise all boats, the stock recovers over the next 18 months to $113 by April, 2010. But sales per store keep declining, even as the number of stores shrinks. Revenues fall faster than costs, and the stock falls to $43.73 by January, 2013 when Lampert appoints himself CEO. In just under 2.5 years with Lampert as CEO and Chairman the company’s sales keep falling, more stores are closed or sold, and the stock finds an all-time low of $11.13 – 25% lower than when Lampert took KMart public almost exactly 13 years ago – and 94% off its highs.
Sears became a retailing juggernaut via innovation. When general stores were small and often far between, and stocking inventory was precious, Sears invented mail order catalogues. Over time almost every home in America was receiving 1, or several, catalogues every year. They were a major source of purchases, especially by people living in non-urban communities. Then Sears realized it could open massive stores to sell all those things in its catalogue, and the company pioneered very large, well stocked stores where customers could buy everything from clothes to tools to appliances to guns. As malls came along, Sears was again a pioneer “anchoring” many malls and obtaining lower cost space due to the company’s ability to draw in customers for other retailers.
To help customers buy more Sears created customer installment loans. If a young couple couldn’t afford a stove for their new home they could buy it on terms, paying $10 or $15 a month, long before credit cards existed. The more people bought on their revolving credit line, and the more they paid Sears, the more Sears increased their credit limit. Sears was the “go to” place for cash strapped consumers. (Eventually, this became what we now call the Discover card.)
In 1930 Sears expanded the Allstate tire line to include selling auto insurance – and consumers could not only maintain their car at Sears they could insure it as well. As its customers grew older and more wealthy, many needed help with financia advice so in 1981 Sears bought Dean Witter and made it possible for customers to figure out a retirement plan while waiting for their tires to be replaced and their car insurance to update.
To put it mildly, Sears was the most innovative retailer of all time. Until the internet came along. Focused on its big stores, and its breadth of products and services, Sears kept trying to sell more stuff through those stores, and to those same customers. Internet retailing seemed insignificantly small, and unappealing. Heck, leadership had discontinued the famous catalogues in 1993 to stop store cannibalization and push people into locations where the company could promote more products and services. Focusing on its core customers shopping in its core retail locations, Sears leadership simply ignored upstarts like Amazon.com and figured its old success formula would last forever.
But they were wrong. The traditional Sears market was niched up across big box retailers like Best Buy, clothiers like Kohls, tool stores like Home Depot, parts retailers like AutoZone, and soft goods stores like Bed, Bath & Beyond. The original need for “one stop shopping” had been overtaken by specialty retailers with wider selection, and often better pricing. And customers now had credit cards that worked in all stores. Meanwhile, for those who wanted to shop for many things from home the internet had taken over where the catalogue once began. Leaving Sears’ market “hollowed out.” While KMart was simply overwhelmed by the vast expansion of WalMart.
What should Lampert have done?
There was no way a cost cutting strategy would save KMart or Sears. All the trends were going against the company. Sears was destined to keep losing customers, and sales, unless it moved onto trends. Lampert needed to innovate. He needed to rapidly adopt the trends. Instead, he kept cutting costs. But revenues fell even faster, and the result was huge paper losses and an outpouring of cash.
To gain more insight, take a look at Jeff Bezos. But rather than harp on Amazon.com’s growth, look instead at the leadership he has provided to The Washington Post since acquiring it just over 2 years ago. Mr. Bezos did not try to be a better newspaper operator. He didn’t involve himself in editorial decisions. Nor did he focus on how to drive more subscriptions, or sell more advertising to traditional customers. None of those initiatives had helped any newspaper the last decade, and they wouldn’t help The Washington Post to become a more relevant, viable and profitable company. Newspapers are a dying business, and Bezos could not change that fact.
Mr. Bezos focused on trends, and what was needed to make The Washington Post grow. Media is under change, and that change is being created by technology. Streaming content, live content, user generated content, 24×7 content posting (vs. deadlines,) user response tracking, readers interactivity, social media connectivity, mobile access and mobile content — these are the trends impacting media today. So that was where he had leadership focus. The Washington Post had to transition from a “newspaper” company to a “media and technology company.”
So Mr. Bezos pushed for hiring more engineers – a lot more engineers – to build apps and tools for readers to interact with the company. And the use of modern media tools like headline testing. As a result, in October, 2015 The Washington Post had more unique web visitors than the vaunted New York Times. And its lead is growing. And while other newspapers are cutting staff, or going out of business, the Post is adding writers, editors and engineers. In a declining newspaper market The Washington Post is growing because it is using trends to transform itself into a company readers (and advertisers) value.
CEO Lampert could have chosen to transform Sears Holdings. But he did not. He became a very, very active “hands on” manager. He micro-managed costs, with no sense of important trends in retail. He kept trying to take cash out, when he needed to invest in transformation. He should have sold the real estate very early, sensing that retail was moving on-line. He should have sold outdated brands under intense competitive pressure, such as Kenmore, to a segment supplier like Best Buy. He then should have invested that money in technology. Sears should have been a leader in shopping apps, supplier storefronts, and direct-to-customer distribution. Focused entirely on defending Sears’ core, Lampert missed the market shift and destroyed all the value which initially existed in the great retail merger he created.
Every company must understand critical trends, and how they will apply to their business. Nobody can hope to succeed by just protecting the core business, as it can be made obsolete very, very quickly. And nobody can hope to change a trend. It is more important than ever that organizations spend far less time focused on what they did, and spend a lot more time thinking about what they need to do next. Planning needs to shift from deep numerical analysis of the past, and a lot more in-depth discussion about technology trends and how they will impact their business in the next 1, 3 and 5 years.
Sears Holdings was a 13 year ride. Investor hope that Lampert could cut costs enough to make Sears and KMart profitable again drove the stock very high. But the reality that this strategy was impossible finally drove the value lower than when the journey started. The debacle has ruined 2 companies, thousands of employees’ careers, many shopping mall operators, many suppliers, many communities, and since 2007 thousands of investor’s gains. Four years up, then 9 years down. It happened a lot faster than anyone would have imagined in 2003 or 2004. But it did.
And it could happen to you. Invert your strategic planning time. Spend 80% on trends and scenario planning, and 20% on historical analysis. It might save your business.
Phablets are a very hot, growing market. Phablets are those huge phones (greater than 4″ screen size) that some people carry around. From almost nothing in 2012, over the last 3 years the market has exploded:
Source: Jay Yarrow, Business Insider http://www.businessinsider.com/in-one-chart-heres-why-the-ipad-business-is-cratering-2015-3?utm_content=&utm_medium=email&utm_source=alerts&nr_email_referer=1
The original creator of this market data, Kulbinder Garcha of Credit Suisse, thinks this demonstrates cannibalization of tablet sales by phablets. And this is supposedly a bad thing for Apple.
But there is another way to look at this. By introducing and promoting a phablet (iPhone 6+ and Galaxy S6,) Apple and Samsung are growing users of mobile media and mobile apps. As the chart shows, growth in tablet sales was nothing compared to what happened when phablets came along. So people who didn’t buy a tablet, and maybe (likely?) wouldn’t, are buying phablets. The market is growing faster with phablets than had they not been introduced, and even if tablet sales shrink Apple and Samsung see revenues continue growing.
Who wins as phablet sales grow? Those who have phablet products in the market, and newer versions in the works.
Source: Kantar WorldPanel and Seeking Alpha http://seekingalpha.com/article/3032926-microsoft-the-china-mobile-backed-lenovo-windows-10-smartphone-could-be-a-future-tailwind?ifp=0
As this chart shows, the companies who dominate smartphone sales are those who make Android-based products (#1 is Samsung) and Apple. Microsoft missed the mobile/smartphone trend, and even though it purchased Nokia it has never obtained anything close to double digit share in any market.
Unfortunately for Microsoft enthusiasts, and investors, Microsoft’s Windows10 product is focused first on laptop (PC) users, second on hybrid (products used as both a laptop and tablet), third tablets (primarily the slow-selling Microsoft Surface) and in a far, far trailing position smartphones.
As data from IDC shows, Surface sales are inconsequential. So the big loser from phablet cannibalization of tablets will be Microsoft. Given its very small user base, and the heavy losses Microsoft has taken on Surface, there is little revenue or cash flow to support an intense competitive effort in a shrinking market. Apple and Samsung will market hard to grow as many sales as possible, and likely will make the tablet products more affordable. Thus one should anticipate Microsoft’s very small tablet share would decline as tablet sales shrink.
This is the problem created when any business misses a major trend.
Microsoft missed the trend to mobile. They didn’t prepare for it in any of their major products, and they let new products, like music player Zune and Lumia phones, languish – and mostly die. By the time Microsoft reacted Apple and Samsung had enormous leads. Microsoft is still trying to play catch-up with its “core” Windows product.
But worse, because it is so far behind, Microsoft’s leaders are unable to forecast where the market will be in 3 years. Consequently they develop products for today’s market, like tablets (and their hybrid products,) which we now see will be obsolete as the market shifts to new products (like phablets.) Because Apple and Samsung already have the new products (phablets) they are prepared to cannibalize the old product sales (tablets) in order to overall grow the marketplace. But Microsoft has no phablet product, really no smartphone product, and will find itself most likely writing off more future Surface products as its tiny market share erodes to nothing.
So this trend to phablets continues to make a Microsoft comeback as a major personal technology competitor problematic. Windows 10 may be coming, but its relevance looks increasingly like that of new Blackberry models. There is little reason to care, because the products are years late and poorly positioned for leading edge customers. Further, developers will already be onto new competitive platforms long before the outdated Microsoft products make it to market. Without share you don’t capture developers, without developers you don’t have a robust app market, without apps you don’t capture customers, without customers you can’t build share — and that’s a terrible whirlpool Microsoft is captured within.
Be sure your business keeps its eyes on trends, and does not wait to react. Waiting can turn out to be deadly.
Retail sales fell .9% in December. Even excluding autos and gasoline, retail sales fell .3%. Further, November retail sales estimates were revised downward from an initial .7% gain to a meager .4%, and October sales advances were revised downward from a .5% gain to a mere .3%. Sales were down at electronic stores, clothing stores and department stores – all places we anticipated gains due to an improving economy, more jobs and more cash in consumer pockets.
Whoa, what’s happening? Wasn’t lower gasoline pricing going to free up cash for people to go crazy buying holiday gifts? Weren’t we all supposed to feel optimistic about our jobs, higher future wages and more money to spend after that horrible Great Recession thus leading us to splurge this holiday?
There were early signals that conventional wisdom was going to be wrong. Back on Black Friday (so named because it is supposedly the day when retailers turn a profit for the year) we learned sales came in a disappointing 11% lower than 2013. Barron’s analyzed press releases from Wal-Mart, and discerned that 2014 was a weaker Black Friday than 2013 and probably 2012. Simply put, fewer people went shopping on Black Friday than before, despite longer store hours, and they bought less.
So was this really a horrible holiday?
Retail store sales are only part of the picture. Increasingly, people are shopping on-line – and we all know it. According to ComScore, on-line sales made to users of PCs (this excludes mobile devices) were up 17% on Cyber Monday, in stark contrast to traditional brick-and-mortar. Exceeding $2B, it was the largest on-line retail day in history. The Day after Cyber Monday sales were up 27%, and the Green Monday (one week after Cyber Monday) sales were up 15% (all compared to year ago.) Overall, the week after Thanksgiving on-line sales rose 14%, and on Thanksgiving Day itself sales were up a whopping 32%. The week before Christmas (16th-21st) on-line sales surged 18%. According to IBM Digital Analytics the on-line November-December sales were up 13.9% vs. 2013.
The trend has never been more pronounced. Regardless of how much people are going to spend, they are spending less of it in traditional brick-and-mortar retail, and more of it on-line.
So, what about Wal-Mart? The chain remains mired in its traditional way of doing business. Even though same-store sales have been flat-to-down most of the last 2 years, and the number of full-line stores has declined in the USA, the chain remains committed quarter after quarter to defending its outdated success formula. Even in China, where Alibaba has demonstrated it can grow on-line ecommerce revenues more than 50%/year, Wal-Mart continues to try growing with a physical presence – even though it has been a tough, unsuccessful slog.
Yet, despite its bribery scandal in Mexico undertaken to prop up revenues, lawsuits due to over-worked, stressed truck drivers having accidents on double shifts killing and injuring people, and an inability to grow, Wal-Mart’s stock trades at near all-time highs. The stock has nearly doubled since 2011, even though the company is at odds with the primary retail, and demographic, trends.
On the other end of the spectrum is Amazon.com. Amazon is still growing revenues at over 20%/year. And introducing successful new publishing and internet service businesses, expanding same day delivery (and even one hour delivery) in urban markets like New York City, as well as expansion of its Prime service to include more original programming with famed director Woody Allen after winning the Golden Globe award for its original series Transparent.
However, several analysts were trash talking Amazon in 2014. 20% growth has them worried, given that the company once grew at 40%. Even though Amazon’s growth is a serious reason companies like Wal-Mart cannot grow. And there is the perennial lack of profitability – including a larger than expected loss in the second quarter ; a loss which included a $170M write-off on FirePhones which never really found a customer base. The latter item led to a Fast Company brutal lambasting of CEO Jeff Bezos as a micro-manager out-of-touch with customers.
This lack of analyst support has seriously hurt Amazon.com share performance. From 2010 to early 2014 the stock quadrupled in value from $100 to $400. But over the past year the stock has fallen back 25%. After dropping to $300/share in April, the stock has rallied but then retrenched no less than 3 times, and is now trading very close to its 52 week low. And, it shows no momentum, trading below its moving average.
Which is why investors in Wal-Mart should sell, and reinvest in Amazon.com.
All the trends point to Wal-Mart being overvalued. Its revenues show no signs of achieving any substantial growth. And, despite its sheer size, all retail trends are working against the behemoth. It has been trying to find a growth engine for 10 years, but nothing has come to fruition – including big investments in offshore markets. The company keeps trying to defend & extend its old success formula, thus creating a bigger and bigger gap between itself and future market success.
Simultaneously, Amazon.com continues to invest in major developing trends. From publishing to television programming to cloud/web services and even general retail, everything into which Amazon invests is growing. And even though this is a company with $100B in revenues, it is still growing at a remarkable 20%. While some analysts may wish the investment rate would slow, and that Amazon would never make mistakes (like Firephone,) the truth is that Amazon is putting money into projects which have pretty good odds of making sizable money as it helps change the game in multiple markets.
Think of investing like paddling a canoe. When you are investing against trends, it’s like paddling up the river. You can make progress, but it is hard. And, one little mistake and you easily slip backward. Lose any momentum at all and you could completely turn around and disappear (like happened to Circuit City, and now both Sears and JCPenney.) When you invest with the trends it is like paddling down the river. The trend, like a current, keeps you moving in the right direction. You can still make mistakes, but the odds are quite a lot higher you will make your destination easily, and with resources to spare. That’s why the sales results for December are important. The show traditional retailers are paddling up river, while on-line retailers are paddling down-river.
I don’t know if Wal-Mart’s stock value has peaked, but it is hard to understand why anybody would expect it to go higher. It could continue to rise, but there are ample reasons to expect investors will figure out how tough future profits will be for Wal-Mart and dispose of their positions. On the other hand, even though Amazon.com could continue to slide down further there are even more reasons to expect it will have great future quarters with revenue gains and – eventually – those long-sought-after profits that some analysts seek. Meanwhile, Amazon is investing in projects with internal rates of return far higher than most other companies because they are following major trends. Odds are pretty good that in a few years the trends will make investors happy they own Amazon, and dropped out of Wal-Mart.