by Adam Hartung | Feb 9, 2014 | Current Affairs, Defend & Extend, Food and Drink, In the Swamp, Leadership, Lifecycle, Lock-in
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?”
President Obama began his push for raising the minimum wage above $10 a year ago in his 2013 State of the Union. Since then, several articles have been written on income inequality and raising the minimum wage. Although the case to raise it is not clear cut, there is no doubt it has increased the rhetoric against the top 1% of earners. And now the President is mandating an increase in the minimum wage for federal workers and contractors to $10.10/hour, despite lack of congressional support and flak from conservatives.
Whether the economic case is provable, it appears that public sentiment is greatly in favor of a much higher minimum wage. And it will not affect all companies the same. Those that depend upon low priced labor, such as retailers like Wal-Mart and fast food companies like McDonald’s have a much higher concern. As should their employees, suppliers and investors.
A recent Federal Reserve report took a specific look at what happens to fast food companies when the minimum wage goes up, such as happened in Illinois, California and New Jersey. And the results were interesting. Because they discovered that a higher minimum wage really did hurt McDonald’s, causing stores to close. But….. and this is a big but…. those closed stores were rapidly replaced by competitors that could pay the higher wages, leading to no loss of jobs (and an overall increase in pay for labor.)
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.
by Adam Hartung | Dec 18, 2012 | Current Affairs, Defend & Extend, Food and Drink, In the Swamp, Leadership
How would you recognize signs of a troubled business? Often the key indicator is when leadership clearly takes "more of the same" to excess.
This week McDonald's leadership began encouraging franchisees to open on Christmas Day. Their primary objective, clearly stated, was to produce more revenue and hopefully show a strong December.
I nominate McDonald's for the 2012 Dickens' Award as the most Scrooge-est business behavior this season.
"Christmas is but an excuse for workers to pick their employer's pockets every 25th December" is I believe how Charles Dickens put it in "A Christmas Carol." Poor Bob Cratchet couldn't even have 1 day off per year. And in McDonald's case the company founder actually made it corporate policy to never be open on Thanksgiving or Christmas days so employees could be with family.
Bah! Humbug!
Now, there are a lot of trends McDonald's could legitimately cite when making a case for being open on Christmas – a case that could actually shed a positive light on the company:
- The number of single people has risen over the last decade. This trend means that many more people now have a need for at least one meal not in a family setting on 25 December.
- America has a large and storied Jewish community for whom 25 December does not have a special religious meaning. For these people enjoying their habitual norms such as eating at McDonald's would indicate an open-minded company supports all faiths.
- America is a nation of immigrants. While the founders were European Christians, today America has a very diverse group of immigrants, especially from Asia and the Indian sub-continent, who follow Islam and other faiths for which 25 December has, again, no particular meaning. Offering them a place to eat on their day off could show a connection with their growing importance to America's future. An act of understanding to their impact on the country.
These are just 3, and there are likely more and better ones (please offer your thoughts in the comments section.) But truthfully, this is not why McDonald's is urging franchisees to toil on this national holiday. Instead, it is just to make a buck.
But then again, what trend has McDonald's successfully leveraged in the last… let's say 2 decades? Despite the rapid growth of high end coffee, the "McCafe" concept was a decade late, and so missed the mark that it has made no impact when competing against Caribou Coffee, Peet's or Starbucks. And it has had minimal benefit for McDonald's.
To understand the dearth of new products just go to McDonald's web site where you'll see an animated ad for the "101 reasons to eat a McRib" – that mystery meat product which is at least 30 years old and rotated on and off the menu in the guise of "something new."
McDonald's had a very rough last quarter. It's sales per store declined versus a year ago. The number of stores has stagnated, sales are stagnant, new products are non-existent. Even Ronald McDonald has aged, and apparently moved on to the nursing home. What can you think about that is exciting about McDonald's?
Desperate to do something, McDonald's fired the head of North America. But that doesn't fix the growth problem at McDonald's, it just demonstrates the company is internally fixated on blame rather understanding external market shifts and taking action. McDonald's keeps doing more of the same, year after year; such as opening more stores in emerging markets, staying open longer hours at existing locations and even opening on Thanksgiving and Christmas in the U.S.
McDonald's Ghost of Christmas past was its great strength, from its origin, of consistency. In the 1960s when people traveled away from home they could never be quite sure what a restaurant offered. McDonald's offered a consistent product, that people liked, at a consistent (and affordable) price. This success formula launched tremendous growth, and a revolution in America's restaurant industry, creating a great string of joyous past Christmases.
But the Ghost of Christmas present is far more bleak. 50 years have passed, and now people have a lot more options – and much higher expectations – regarding dining. But McDonald's really has failed to adapt. So now it is struggling to grow, struggling to meet goals, struggling to be a kind and gentle employer. Now asking its employees to work on Christmas – and ostensibly eat Big Macs.
What is the Ghost of Christmas Future for McDonald's? Not surprisingly, if it cannot adapt to changing markets things are likely to worsen. No company can hope to succeed by simply doing more of the same forever. Constantly focusing on efficiency, and beating on franchisees and employees to stay open longer, is a downward spiral. Eventually every business HAS to innovate; adapt to changing market conditions, or it will die. Just look at the tombstones – Kodak, Hostess, Circuit City, Bennigan's ….
Take time between now and 2013 to ask yourself, what is your Ghost of Christmas past upon which your business was built? How does that compare to the Ghost of Christmas present? If there's a negative gap, what should you expect your Ghost of Christmas Future to look like? Are you adapting to changing markets, or just hoping things will improve while you resist putting enough coal on the fire to keep everyone warm?
by Adam Hartung | May 15, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lifecycle
"Chrysler delivers the bad news to 789 dealers" was yesterday's headline. Today the headline read "GM notifies dealers of shutdowns" as the company sent 1,100 dealers the notice they would no longer be allowed to stay in business. Thousands are losing jobs. Chrysler is bankrupt, and GM looks destined to file shortly. But wait a minute, GM was the market share leader for the last 50 years!! These big companies, in manufacturing, were supposed to be able to protect their business and become "cash cows." They weren't supposed to get beaten up, see their cash sucked away and end up with nothing!
About 30 years ago a fairly small management consultancy that was started as a group to advise a bank's clients hit upon an idea that skyrcketed its popularity. The fledgling firm was The Boston Consulting Group, and its idea was the Growth/Share matrix. It created many millions of dollars in fees over the years, and is now a staple in textbooks on strategic planning. Unfortunately, like a lot of business ideas from that era, we're learning from companies like GM and Chrysler that it doesn't work so well.
The idea was simple. Growth markets are easier to compete in because people throw money at the companies – either via sales or investment. So it's easier to make money in growing businesses. Market share was considered a metric for market power. If you have high share, you supposedly could pretty much dictate prices. High share meant you were the biggest, which supposedly meant you had the biggest assets (plant, etc.) and thus you had the lowest cost. So, low growth and low share meant your business was a dog. High growth and low share was a question mark – maybe you'd make money if you eventually get high share. High growth and high share was a star. And low growth but high share is a cash cow because you could dominate a business using your market clout to print money – or in the venacular of the matix – milk the money from this cow into which you put very little feed.
In the 1970s/80s, looking at the industrial era, this wasn't a bad chart. Especially in asset intensive businesses that had what were then called "scale advantages." In the industrial world, having big plants with lots of volume was interpreted as the way to being a low-cost company. Of course, this assumed most cost was tied up in plant and equipment – rather than inventory, people, computers, advertising, PR, viral marketing, etc. The first part of the matrix has held up pretty well; the last part hasn't. We now know that it's easier to make money in growth. But it doesn't turn out that share really gives you all that much power nor does it have a big determination in profitability.
We know that having share is no defense of profits. The assumption about entry barriers keeping competitors at bay, and thus creating a "defensive moat" around profits, is simply not true. Today, companies build "scale" facilities overnight. They obtain operating knowledge by hiring competitor employees, or simply obtaining the "best practices" from the internet. Distribution systems are copied with third party vendors and web sites. Even advertising scale can be obtained with aggressive web marketing at low cost. And so many facilities are "scale" in size that overcapacity abounds – meaning the competitor with no capacity (using outsourced manufacturing) can be the "low cost" competitor (like Dell.).
Thus, all markets are overrun with competitors that drive down profits any time growth slows. As GM learned, even with more than 50% share (which they once had) they could not stop competitors from differentiating and effectively competing. Not even Chrysler, with the backing of Mercedes, could maintain its share and profits against far less well healed competitors. When growth slows, the cash disappears into the competitive battles of the remaining players. Unfortunately, even new players enter the market just when you'd think everyone would run for the hills (look at Tata Motors launching itself these days wtih the Nano). Competitors never run out of new ideas for trying to compete – even when there's no growth – so they keep hammering away at the declining returns of once dominant players until they can no longer survive.
Competition exists in all businesses except monopolies, and threatens returns of even those with highest share. Today it might be easy to say that Google cannot be challenged. That is short-sighted. People said that about Microsoft 20 years ago – and today between Apple, Linux and Google Microsoft's revenue growth is plummeting and the company is unable to produce historical results. People once said Sears could not be challenged in retailing. Kodak in amateur photography. And GM in cars. Competitors don't quit when growth slows – until they go bankrupt – and even then they don't quit (again, look at Chrysler). High share is no protection against competition.
And thus, there is no "easy cash in the cow" to be milked. It all gets spent fighting to stay alive. Trying to protect share by cutting price, paying for distribution, advertising. And if you don't spend it, you simply vanish. Really fast. Like Lehman Brothers. Or Bennigans.
The only way to make money, long term, is to keep growing. To keep growing you have to move into new markets, new technologies, new services – in other words you have to keep moving with the marketplace. And that produces success more than anything else. It's all about growth. Forget about trying to have the "cash cow" – it's like the unicorn – it never existed and it never will.
