by Adam Hartung | Dec 8, 2010 | Food and Drink, General, In the Rapids, Innovation, Leadership, Television, Web/Tech
Summary:
- We too often think of competition as “head to head”
- Smart competitors avoid direct competition, instead using alternative methods in order to lower cost while appealing directly to market needs
- Proctor & Gamble has long dominated advertising for many consumer goods, but the impact, value and payoff of traditional advertising has declined markedly as people have switched to the web
- New competitors can utilize internet and social media tools to achieve better brand positioning and targeted marketing at far lower cost than old mass media products
- Colgate is in a great position to blow past P&G by investing quickly and taking the lead in internet marketing for its products
- Eschew calls for investing in old methods of competition, and instead find new ways to compete that allow you to end-run traditional leaders
According to a recent Advertising Age article (“To Catch Up Colgate May Ratchet Up Its Ad Spending“) Colgate has done a surprisingly good job of holding onto market share, despite underspending almost all its competitors in advertising. This is no mean feat in consumer products, where advertising dominates the cost structure. But the AdAge folks are predicting that to avoid further declines, and grow, Colgate will have to dramatically up its ad spending. That would be old-fashioned, backward-thinking, short-sighted and a lousy use of resources!
Colgate competes with lots of companies, but across categories its primary competitor is Proctor & Gamble. In toothpaste, P&G’s Crest outspends Colgate by over $25M – or about 35%. In dishsoap Colgate spent nothing on Palmolive in 2010, compared to P&G’s spend of $30M on Dawn. In deodorant/body soap Colgate spent about $9M on Softsoap, Irish Spring and Speedstick while P&G spent 9 times more (over $82M) on Old Spice and Secret. (Side note, Unilever spent $148M on Dove and a whopping $267M when adding in Axe and Degree!) In pet food, Unilever spends $35M dollars more (almost 4x) on Iams than Colgate spent on Hills Science Diet. Altogether, in these categories, P&G spent almost $158M more than Colgate (2.5x more)! As a big believer in traditional advertising, AdAge therefore predicts that Colgate should dramatically increase its annual ad budget – and maintain these higher levels for 5 years in order to overcome its historical “underspending.”
But that would be like deciding to trade punches with Goliath!
Why would Colgate want to do more of what P&G does the most? While advisors try to pit competitors directly against each other, head-to-head “gladiator style” combat leaves the combatants bloody – some dead. That’s a dumb way to compete. Colgate has long spent in other areas, such as supporting dog rescue operations and with product specialists gaining endorsements while eschewing more general advertising. Now, if Colgate wants to take action to grow share, it should pick up a sling (to continue the (Biblical metaphor) in its ongoing battle. And the good news is that Colgate has an entire selection of new, alternative weapons to use today.
Across all its product categories, Colgate can utilize a plethora of new social media marketing tools. At costs far lower than traditional mass advertising, Colgate can build promotional web programs that appeal directly to targeted consumers. Twitter, Facebook, Foursquare, Groupon, YouTube, Google and many other tool providers allow Colgate to spend far, far less than traditional advertising to provide specific brand promotions, product information, purchase incentives (such as coupons) and product variations targeted at various niches.
With these tools Colgate can not only reach directly into buyer laptops and mobile devices, but offer specific information and incentives. Traditional advertising, whether print (newspaper and magazine), radio, television or coupons is a low percentage tool. Seeking response rates (or even recall rates) of just 1 to 5 percent is normal – meaning 90% percent of your spending is, quite literally, just “overhead” cost. But with modern on-line tools it is very common to have response rates of 50% – or even higher! (Depending upon how targeted and accurate, of course!)
Colgate is in a great position!
It has spent much less than competitors, and maintained good brand position. It’s biggest competitors are locked-in to spending vast sums on traditional tools that have low impact and are in declining media. Colgate could now decide to commit itself to using the new, modern tools which are lower cost, and have decidedly more targeted results. In this way, Colgate can get out of the “colliseum” where the gladiators are warring, and throw rocks at them from the stands. Play its own game – to win – while letting those in the pit whack away at each other becoming weaker and weaker trying to use the old, heavy and unsophisticated tools.
Now is a wonderful time to be the “underdog” competitor. “Media” and advertising are in transition. How people obtain information on products and services is moving from traditional advertsing and PR (public relations) focused through mass media to networks with common interests in social media. Instead of delays in obtaining information, based upon publisher programming dates, customers are seeking immediate, and current information, exactly when they need it – on their mobile devices. Those competitors who rapidly adopt these new tools are well positioned to be the new Davids in the battle with old Goliaths. And that includes YOU.
by Adam Hartung | Dec 6, 2010 | Current Affairs, Defend & Extend, Disruptions, Food and Drink, Leadership, Lock-in
Summary:
- Business leaders like consistency
- Consistency leads to repetition, sameness, and lower rates of return
- Kraft's product lines are consistent, but without growth
- Kraft's value has been stagnant for 10 years
- Disruptive competitors make higher rates of return, and grow
- Disruptive competitors have higher valuations – just look at Groupon
"Needless consistency is the hobgoblin of small minds" – Ralph Waldo Emerson
That was my first thought when I read the MediaPost.com Marketing Daily article "Kraft Mac & Cheese Gets New, Unified Look." Whether this 80-something year old brand has a "unified" look is wholly uninteresting. I don't care if all varieties have the same picture – and if they do it doesn't make me want to eat more powdered cheese and curved noodles.
In fact, I'm not at all interested in anything about this product line. It is kind of amusing, in an historical way, to note that people (largely children) still eat the stuff which fueled my no-cash college years (much like ramen noodles does for today's college kids.) While there's nothing I particularly dislike about the product, as an investor or marketer there's nothing really to like about it either. Pasta products always do better in a recession, as people look for cheaper belly-fillers (especially for the kid,) so that more is being sold the last couple of years doesn't tell me anything I would not have guessed on my own. That the entire category has grown to only $800M revenue across this 8 decade period only shows that it's a relatively small business with no excitement! Once people feel their finances are on firm footing sales will soon taper off.
Kraft's Mac & Cheese is emblematic of management teams that lock-in on defending and extending old businesses – even though the lack of growth leaves them struggling to grow cash flow and create a decent valuation. Introducing multiple varieties of this product has not produced growth that even matched inflation across the years. Primarily, marketing programs have been designed to try keeping existing customers from buying something else. This most recent Kraft program is designed to encourage adults to try a product they gave up eating many years ago. This is, at best, "foxhole" marketing. Spending money largely just to keep the brand from going away, rather than really expecting any growth. Truly, does anyone think this kind of spending will generate a billion dollar product line in 2011 – or even 2012?
What's wrong with defensive marketing, creating consistency across the product line – across the brand – and across history? It doesn't produce high rates of return. There are lots of pasta products, even lots of brands of mac & cheese. While Kraft's product surely produces a positive margin, multiple competitors and lack of growth means increased spending over time merely leaves the brand producing a marginal rate of return. Incremental ad spending doesn't generate real growth, just a hope of not losing ground. We know people aren't flocking to the store to buy more of the product. New customers aren't being identified, and short-term growth in revenues does not yield the kinds of returns that would enhance valuation and make the world a better place for investors – or employees.
While Kraft is trying to create headlines with more spending in a very tired product, across town in Chicago Groupon has created a $500M revenue business in just 2 years! And new reports from the failed acquisition attempt by Google indicate revenues are likely to reach $2B in 2011 (CNNMoney.com, Fortune, "Google's Groupon Groping Reveals the Shifting Power of the Web World.") Where's Kraft in this kind of growth market? After all, coupons for Kraft products have been in mailers and Sunday inserts for 50 years. Why isn't Kraft putting money into a real growth business, which is producing enormous value while cash flow grows in multiples? While Groupon has created somewhere around $6B of value in 2 years, Kraft's value has only gone sideways for the last decade (chart at Marketwatch.com.)
Kraft has not introduced a new product since — well — DiGiorno. And that's been more than a decade. While the company has big revenues – so did General Motors. The longer a company plays defense, regardless of size, trying to extend its outdated products (and business model) the riskier that business becomes. While big revenues appear to offer some kind of security, we all know that's not true. Not only does competition drive down margins in these older businesses, but newer products make it harder and harder for the old products to compete at all. Eventually, the effort to maintain historical consistency simply allows competitors to completely steal the business away with new products, creating a big revenue drop, or producing such low returns that failure is inevitable.
Lots of business people like consistency. They like consistency in how the brand is executed, or how products are aligned. They like consistency in the technology base, or production capabilities. They like consistency in customers, and markets. They like being consistent with company history – doing what "made the company famous." They like the similarity of doing something again, and again, hoping that consistency will produce good returns.
But consistency is the hobgoblin of small minds. And those who are more clever find ways to change the game. Xerox figured out how to let everyone be a one-button printer, and killed the small printing press manufacturers. HP's desktop printers knocked the growth out of Xerox. Google figured out a better way to find information, and place ads, just about killing newspapers (and magazines.) Apple found a better way to use mobile minutes, taking a big bite out of cell phone manufacturers. Amazon found a better way to sell things, killing off bookstores and putting a world of hurt on many retailers. Netflix found a better way of distributing DVDs and digital movies, sending Blockbuster to bankruptcy. Infosys and Tata found a better way of doing IT services, wiping out PWC and nearly EDS. Hulu (and soon Netflix, Google and Apple) has found a better way of delivering television programming, killing the growth in cable TV. Groupon is finding a better way of delivering coupons, creating huge concerns for direct mail companies. Now tablet makers (like Apple) are demonstrating a better way of working remotely, sending shivers of worry down the valuation of Microsoft. These companies, failed or in jeapardy, were very consistent.
Those who create disruptions show again and again that they can generate growth and above average returns, even in a recession. While those who keep trying to defend and extend their old business are letting consistency drive their behavior – leading to intense competition, genericization, and lower rates of return. Maybe Kraft should spend more money looking for the next food we would all like, rather than consistently trying to convince us we want more Mac & Cheese (or Velveeta).
by Adam Hartung | Apr 28, 2009 | Defend & Extend, In the Whirlpool, Innovation, Leadership
"Chrysler Avoids Bankruptcy as GM steps toward it" is the Marketwatch.com headline. According to the article, Chrysler has a deal to manage its debt while Ford has never been as close to the edge as its two brethren. But GM is trying to get bondholders to take a 60% value reduction AND exchange the bond value for equity value – which of course has no assurance and could easily go to zero. The bondholders are squawking, and it's unclear they will agree. Which would plunge GM into bankruptcy. Are the bondholders just greedy? Or do they see the chance of getting some of their money back better via liquidation?
Ford has some of the most popular and fuel efficient vehicles in the world. They just aren't sold in the USA. But they've long had high share in Europe, where Ford has built smaller cars with both diesel and gasoline engines that have met market needs. Now Ford is preparing to build and sell those cars in the USA, which would move them a lot closer to recent market shifts than the worn out Lincoln line and the renamed 500 (rebadged as Taurus under the guise of the name making all the difference.) These European cars offer an opportunity for Ford to Disrupt the U.S. market and regain a positive footing.
Meanwhile, Chrysler has some of the most innovative cars on the market. Its 300, Charger and Challenger cars use technology that allows V8 engines to shut off 4 when not needed – allowing them to achieve over 30 MPG in a "large" and "performance" format. Further, for those seeking safety and control, the 300 and selected other models are available in all wheel drive, which has been proven to be the #1 safety enhancer possible. And of great value in northern climates where foul weather (rain and especially snow or ice) makes driving treacherous. All included in dramatic styling that appeals to American consumer tastes.
But GM? "GM to focus on four keeper brands" is the MediaPost.com headline. Most GM innovation is concentrated in Pontiac, Hummer, Saturn and Saab. The first of these is to be closed down for sure, and the latter 3 either sold or closed. As the CEO says "the company will focus on four brands it defines as core: Chevrolet, Buick, Cadillac and GMC." Anytime the CEO of a failing company says he plans to save the place by "focusing on the core" and thereby cutting back to some aged part of the company RUN, RUN, RUN. The past is the past, and you NEVER regain it. Making these brands exciting is about as likely as making Holiday Inn a high-end hotel chain.
Think about it. Remember Izod with those alligators on the breast plate? Would you consider buying those shirts in Macy's? Or how about resurrecting Howard Johnson's as the place to stay and eat while traveling? Or shopping at KMart? Or taking instant photos on a Polaroid? When the market moves on, it's moved on. No business can recapture past profit levels by "focusing" on old brands and products that were once great. The clock never runs backward. T he market has shifted, and companies have to shift with it – not try to pretend "focusing on the core" will create profits simply because they are dedicated and focused.
It's Ford's offshore innovation that may save the company. It's Chrysler's engine, drive train and styling innovations that may save it. But GM is getting rid of anything that looks like innovation – and anything that might look like a Disruption or White Space. It has no hope of ever regaining market strength. It's plan is faulty, and won't work. Even if bondholders accept the swap of debt for equity, in short order GM sales will continue declining (as will profits), and there's no way bondholders can sell all that equity in order to recover their invested value in the bonds.
by Adam Hartung | Mar 19, 2009 | Current Affairs, Defend & Extend, Food and Drink, In the Swamp, In the Whirlpool, Leadership, Lock-in
"Nobody doesn't like Sara Lee." That was the jingle I still remember from my youth. For years we heard this on the TV, as we were coaxed to buy the delictable productss, frozen, refrigerated and fresh, offered by Sara Lee. But today, unfortunately, almost nobody likes Sara Lee anymore. Oh – the products are great – it's the company, primarily its leadership, that's a disaster.
It's tough to make money on food. After all, everyone has the same cost for the ingredients. And in the developed world, there's more than enough food to go around. For the last 50 years, to make money on food required adding to the product so it had more value. Such as freezing frozen potatoe slices rather than selling whole potatoes so french fries are more convenient - raising price and margin. Or adding preservatives and vitamins so the bread lasts longer than the other guy's, and may be a touch better for you. Or the biggest addition, advertising so you imbue the food with all kinds of personality elements urging customers to identify with the product. If you want to make money selling food, you have to taste better, prepare faster, sell cheaper and hopefully give me more value in myself — or else I'll by the generic product and kill your margin. And for a number of years, Sara Lee knew how to do this fairly well.
But then, Sara Lee stumbled. It quit launching new products and new brands. It's quality and branding was matched by competitors from Entenmann's to Little Debbie. Without innovation, the frozen, refrigerated and fresh pies, sausage and other products saw margins shrink. So Sara Lee hired a bright exec from PepsiCo to fix up the company named Brenda Barnes. Since then, the story has really gone downhill.
Ms. Barnes focused on her "problem," a low stock price, rather the market challenges Sara Lee faced. She built a 5 year plan to turn around Sara Lee. But his plan had no innovation involved. No plans for growth. Just the opposite, she intended to sell many assets to raise cash. And then use that cash to buy shares. And through this process, she would "prop up" the company stock to the benefit of shareholders. The company would be smaller – but she said it would be worth more – in some kind of weird economics. But, this stock ploy had worked for other industrial companies, she said, so it would work for Sara Lee. Since then, according to the chart at Marketwatch.com, Sara Lee stock has gone from 21 to 7! While the CEO wants to blame the tough economy for her performance, the chart shows that this "strategy" has been a dead loser since the day it was announced. Things have been downhill since long before banks trimmed their lending.
Now, in her latest move, the CEO wants to sell some more businesses. But in an FT.com article "Sara Lee Searches for Sell-off Suitor" there aren't any buyers for remaining businesses. As one analyst commented "it's a rather tired portfolio." That's a polite way of saying "when you don't innovate your business, why would someone want to buy it?" As another analyst said "it's not a very good business." Increasingly, instead of buying these product lines competitors realize they would prefer to compete against them, growing sales organically and profitably — without the headaches and cost of acquisition.
So, because the sale side of the strategy isn't working, we read in Crains ChicagoBusiness.com "Sara Lee to put stock repurchases on hold." After buying shares at $20, $18, $15, the CEO has decided not to buy shares when they are $7 – in order to conserve cash! Maybe if she had spent money on growing the business, expanding products and new business lines, using White Space to innovate new profitable opportunities the stock wouldn't be down to $7 with little interest on the part of any buyers.
Ms. Barnes tried to implement an industrial strategy when it can no longer work. Sara Lee brands aren't some kind of asset that will always go up in value. You can't just expect sales and profits to rise because you do more of the same, and cut costs. The world is highly competitive, and you have to prove the value of your business every day. Customers are demanding, and competitors are ready to steal them away in a heartbeat. You can't prop up the stock by trying to reduce the number of shares, unless you're ready to get down to $1 of revenue and 1 share left valued at $1. What good is that?
Sara Lee could have behaved very differently in 2005 – and CAN behave very differently now. The company clearly needs a new CEO that is ready to develop scenarios of the future which indicate what innovations could have high value. Instead of talking about what Sara Lee used to be, the CEO and management team needs to define what Sara Lee will be in 2015. And by obsessing about competitors, describe how Sara Lee can be a big winner. Then there needs to be Disruption in order to allow the company to consider the new business opportunities, and White Space with permission and resources to rebuild the Success Formula into one that can make above-average rates of return and grow! If Sara Lee will take these actions the company still has time to meet market challenges. But if it doesn't act fast, after 4 years of decline and a very shifted market, nobody's going to have any Sara Lee to nibble on sooner than Ms. Barnes is admitting.
