by Adam Hartung | Jul 15, 2014 | Current Affairs, Defend & Extend, In the Swamp, Leadership
Famed actor and comedian Tracy Morgan has filed a lawsuit against Walmart. He was seriously injured, and his companion and fellow comedian James McNair was killed, when their chauffeured vehicle was struck by a WalMart truck going too fast under the control of an overly tired driver.
It would be easy to write this off as a one-time incident. As something that was the mistake of one employee, and not a concern for management. Walmart is huge, and anyone could easily say “mistakes will happen, so don’t worry.” And as the country’s largest company (by sales and employees) Walmart is an easy target for lawsuits.
But that would belie a much more concerning situation. One that should have investors plenty worried.
Walmart isn’t doing all that well. It is losing customers, even as the economy recovers. For a decade Walmart has struggled to grow revenues, and same store sales have declined – only to be propped up by store closings. Despite efforts to grow offshore, attempts at international expansion have largely been flops. Efforts to expand into smaller stores have had mixed success, and are marginal at generating new revenues in urban efforts. Meanwhile, Walmart still has no coherent strategy for on-line sales expansion.
Unfortunately the numbers don’t look so good for Walmart, a company that is absolutely run by numbers. Every single thing that can be tracked in Walmart is tracked, and managed – right down the temperature in every facility (store, distribution hub, office) 24x7x365. When the revenue, inventory turns, margin, distribution costs, etc. aren’t going in the right direction Walmart is a company where leadership applies the pressure to employees, right down the chain, to make things better.
Unfortunately, a study by Northwestern University Kellogg School of Management has shown that when a culture is numbers driven it often leads to selfish, and unethical, behavior. When people are focused onto the numbers, they tend to stretch the ethical (and possibly legal) boundaries to achieve those numerical goals. A great recent example was the U.S. Veterans Administration scandal where management migrated toward lying about performance in order to meet the numerical mandates set by Secretary Shinseki.
Back in November, 2012 I pointed out that the Walmart bribery scandal in Mexico was a warning sign of big problems at the mega-retailer. Pushed too hard to create success, Walmart leadership was at least skirting with the law if not outright violating it. I projected these problems would worsen, and sure enough by November the bribery probe was extended to Walmart’s operations in Brazil, China and India.
We know from the many employee actions happening at Walmart that in-store personnel are feeling pressure to do more with fewer hours. It does not take a great leap to consider it possible (likely?) that distribution personnel, right down to truck drivers are feeling pressured to work harder, get more done with less, and in some instances being forced to cut corners in order to improve Walmart’s numbers.
Exactly how much the highest levels of Walmart knows about any one incident is impossible to gauge at this time. However, what should concern investors is whether the long-term culture of Walmart – obsessed about costs and making the numbers – has created a situation where all through the ranks people are feeling the need to walk closer to ethical, and possibly legal, lines. While it may be that no manager told the driver to drive too fast or work too many hours, the driver might have felt the pressure from “higher up” to get his load to its destination at a certain time – or risk his job, or maybe his boss’s.
If this is a widespread cultural issue – look out! The legal implications could be catastrophic if customers, suppliers and communities discover widespread unethical behavior that went unchecked by top echelons. The C suite executives don’t have to condone such behavior to be held accountable – with costs that can be exorbitant. Just ask the leaders at JPMorganChase and Citibank who are paying out billions for past transgressions.
Worse, we cannot expect the marketplace pressures to ease up any time soon for Walmart. Competitors are struggling mightily. JCPenney cannot seem to find anyone to take the vacant CEO job as sales remain below levels of several years ago, and the chain is most likely going to have to close several dozen (or hundreds) of stores. Sears/KMart has so many closed and underperforming stores that practically every site is available for rent if anyone wants it. And in the segment which is even lower priced than Walmart, the “dollar stores,” direct competitor Family Dollar saw 3rd quarter profits fall another 33% as too many stores and too few customer wreak financial havoc and portend store closings.
So the market situation is not improving for Walmart. As competition has intensified, all signs point to a leadership which tried to do “more, better, faster, cheaper.” But there is no way to maintain the original Walmart strategy in the face of the on-line competitive onslaught which is changing the retail game. Walmart has continued to do “more of the same” trying to defend and extend its old success formula, when it was a disruptive innovator that stole its revenues and cut into profits. Now all signs point to a company which is in grave danger of over-extending its success formula to the point of unethical, and potentially illegal, behavior.
If that doesn’t scare the heck out of Walmart investors I can’t imagine what would.
by Adam Hartung | Apr 22, 2013 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership
JCPenney's board fired the company CEO 18 months ago. Frustrated with weak performance, they replaced him with the most famous person in retail at the time. Ron Johnson was running Apple's stores, which had the highest profit per square foot of any retail chain in America. Sure he would bring the Midas touch to JC Penney they gave him a $50M sign-on bonus and complete latitude to do as he wished.
Things didn't work out so well. Sales fell some 25%. The stock dropped 50%. So about 2 weeks ago the Board fired Ron Johnson.
The first mistake: Ron Johnson didn't try solving the real problem at JC Penney. He spent lavishly trying to remake the brand. He modernized the logo, upped the TV ad spend, spruced up stores and implemented a more consistent pricing strategy. But that all was designed to help JC Penney compete in traditional brick-and-mortar retail. Against traditional companies like Wal-Mart, Kohl's, Sears, etc. But that wasn't (and isn't) JC Penney's problem.
The problem in all of traditional retail is the growth of on-line. In a small margin business with high fixed costs, like traditional retail, even a small revenue loss has a big impact on net profit. For every 5% revenue decline 50-90% of that lost cash comes directly off the bottom line – because costs don't fall with revenues. And these days every quarter – every month – more and more customers are buying more and more stuff from Amazon.com and its on-line brethren rather than brick and mortar stores. It is these lost revenues that are destroying revenues and profits at Sears and JC Penney, and stagnating nearly everyone else including Wal-Mart.
Coming from the tech world, you would have expected CEO Johnson to recognize this problem and radically change the strategy, rather than messing with tactics. He should have looked to close stores to lower fixed costs, developed a powerful on-line presence and marketed hard to grab more customers showrooming or shopping from home. He should have targeted to grow JCP on-line, stealing revenues from other traditional retailers, while making the company more of a hybrid retailer that profitably met customer needs in stores, or on-line, as suits them. He should have used on-line retail to take customers from locked-in competitors unable to deal with "cannibalization."
No wonder the results tanked, and CEO Johnson was fired. Doing more of the tired, old strategies in a shifting market never works. In Apple parlance, he needed to be focused on an iPad strategy, when instead he kept trying to sell more Macs.
But now the Board has made its second mistake. Bringing back the old CEO, Myron Ullman, has deepened JP Penney's lock-in to that old, traditional and uncompetitve brick-and-mortar strategy. He intends to return to JCP's legacy, buy more newspaper coupons, and keep doing more of the same. While hoping for a better outcome.
What was that old description of insanity? Something about repeating yourself…..
Expectedly, Penney's stock dropped another 10% after announcing the old CEO would return. Investors are smart enough to recognize the retail market has shifted. That newsapaper coupons, circulars and traditional advertising is not enough to compete with on-line merchants which have lower fixed costs, faster inventory turns and wider product selection.
It certainly appears Mr. Johnson was not the right person to grow JC Penney. All the more reason JCP needs to accelerate its strategy toward the on-line retail trend. Going backward will only worsen an already terrible situation.
by Adam Hartung | Oct 12, 2011 | Current Affairs, Defend & Extend, eBooks, In the Rapids, In the Whirlpool, Innovation, Leadership, Lifecycle, Lock-in, Transparency, Web/Tech
Wal-Mart has had 9 consecutive quarters of declining same-store sales (Reuters.) Now that’s a serious growth stall, which should worry all investors. Unfortunately, the odds are almost non-existent that the company will reverse its situation, and like Montgomery Wards, KMart and Sears is already well on the way to retail oblivion. Faster than most people think.
After 4 decades of defending and extending its success formula, Wal-Mart is in a gladiator war against a slew of competitors. Not just Target, that is almost as low price and has better merchandise. Wal-Mart’s monolithic strategy has been an easy to identify bulls-eye, taking a lot of shots. Dollar General and Family Dollar have gone after the really low-priced shopper for general merchandise. Aldi beats Wal-Mart hands-down in groceries. Category killers like PetSmart and Best Buy offer wider merchandise selection and comparable (or lower) prices. And companies like Kohl’s and J.C. Penney offer more fashionable goods at just slightly higher prices. On all fronts, traditional retailers are chiseling away at Wal-Mart’s #1 position – and at its margins!
Yet, the company has eschewed all opportunities to shift with the market. It’s primary growth projects are designed to do more of the same, such as opening smaller stores with the same strategy in the northeast (Boston.com). Or trying to lure customers into existing stores by showing low-price deals in nearby stores on Facebook (Chicago Tribune) – sort of a Facebook as local newspaper approach to advertising. None of these extensions of the old strategy makes Wal-Mart more competitive – as shown by the last 9 quarters.
On top of this, the retail market is shifting pretty dramatically. The big trend isn’t the growth of discount retailing, which Wal-Mart rode to its great success. Now the trend is toward on-line shopping. MediaPost.com reports results from a Kanter Retail survey of shoppers the accelerating trend:
- In 2010, preparing for the holiday shopping season, 60% of shoppers planned going to Wal-Mart, 45% to Target, 40% on-line
- Today, 52% plan to go to Wal-Mart, 40% to Target and 45% on-line.
This trend has been emerging for over a decade. The “retail revolution” was reported on at the Harvard Business School website, where the case was made that traditional brick-and-mortar retail is considerably overbuilt. And that problem is worsening as the trend on-line keeps shrinking the traditional market. Several retailers are expected to fail. Entire categories of stores. As an executive from retailer REI told me recently, that chain increasingly struggles with customers using its outlets to look at merchandise, fit themselves with ideal sizes and equipment, then buying on-line where pricing is lower, options more plentiful and returns easier!
While Wal-Mart is huge, and won’t die overnight, as sure as the dinosaurs failed when the earth’s weather shifted, Wal-Mart cannot grow or increase investor returns in an intensely competitive and shifting retail environment.
The winners will be on-line retailers, who like David versus Goliath use techology to change the competition. And the clear winner at this, so far, is the one who’s identified trends and invested heavily to bring customers what they want while changing the battlefield. Increasingly it is obvious that Amazon has the leadership and organizational structure to follow trends creating growth:
- Amazon moved fairly quickly from a retailer of out-of-inventory books into best-sellers, rapidly dominating book sales bankrupting thousands of independents and retailers like B.Dalton and Borders.
- Amazon expanded into general merchandise, offering thousands of products to expand its revenues to site visitors.
- Amazon developed an on-line storefront easily usable by any retailer, allowing Amazon to expand its offerings by millions of line items without increasing inventory (and allowing many small retailers to move onto the on-line trend.)
- Amazon created an easy-to-use application for authors so they could self-publish books for print-on-demand and sell via Amazon when no other retailer would take their product.
- Amazon recognized the mobile movement early and developed a mobile interface rather than relying on its web interface for on-line customers, improving usability and expanding sales.
- Amazon built on the mobility trend when its suppliers, publishers, didn’t respond by creating Kindle – which has revolutionized book sales.
- Amazon recently launched an inexpensive, easy to use tablet (Kindle Fire) allowing customers to purchase products from Amazon while mobile. MediaPost.com called it the “Wal-Mart Slayer“
Each of these actions were directly related to identifying trends and offering new solutions. Because it did not try to remain tightly focused on its original success formula, Amazon has grown terrifically, even in the recent slow/no growth economy. Just look at sales of Kindle books:
Source: BusinessInsider.com
Unlike Wal-Mart customers, Amazon’s keep growing at double digit rates. In Q3 unique visitors rose 19% versus 2010, and September had a 26% increase. Kindle Fire sales were 100,000 first day, and 250,000 first 5 days, compared to 80,000 per day unit sales for iPad2. Kindle Fire sales are expected to reach 15million over the next 24 months, expanding the Amazon reach and easily accessible customers.
While GroupOn is the big leader in daily coupon deals, and Living Social is #2, Amazon is #3 and growing at triple digit rates as it explores this new marketplace with its embedded user base. Despite only a few month’s experience, Amazon is bigger than Google Offers, and is growing at least 20% faster.
After 1980 investors used to say that General Motors might not be run well, but it would never go broke. It was considered a safe investment. In hindsight we know management burned through company resources trying to unsuccessfully defend its old business model. Wal-Mart is an identical story, only it won’t have 3 decades of slow decline. The gladiators are whacking away at it every month, while the real winner is simply changing competition in a way that is rapidly making Wal-Mart obsolete.
Given that gladiators, at best, end up bloody – and most often dead – investing in one is not a good approach to wealth creation. However, investing in those who find ways to compete indirectly, and change the battlefield (like Apple,) make enormous returns for investors. Amazon today is a really good opportunity.
by Adam Hartung | May 21, 2009 | Current Affairs, General, In the Swamp, Leadership, Lifecycle, Lock-in, Openness
"Target heads toward the Crossroads" is the Marketwatch headline today. Like almost all large retailers, Target has had a tough year. Profits dropped, and Target hit a growth stall. If not careful, the company could fall away into noncompetitiveness, like KMart did. At the same time, some think Target is the only strong competitor to WalMart. Just to rough up the problem, outside investors led by raider Bill Ackman are trying to pressure Target to "restructure" and spin off its real estate into a publicly traded trust. Management isn't helped by a Wall Street Journal report "Proxy firm backs critics in Target vote" recommending shareholders vote to put Mr. Ackman on the Board. At this time, in the Flats, is when management teams are most vulnerable – and more often than not make decisions that doom the company.
It's at this time, when growth has stalled and vultures are swirling around, that management is most likely to turn to Defend & Extend Management. They look backward, and try to implement old practices hoping it will ward off attacks. They stop Disrupting, instead forcing high levels of conformance among employees. They jump into short-term cost cutting actions, which kill off new growth ideas, and shut down White Space projects to conserve cash. Instead of heading toward new markets, they emulate traditional competitors and focus on short-term actions. Unfortunately, these actions throw the company into the Swamp, hurting their ability to compete long term and making them victims of competitors. Look at Motorola, which swung from an intense high into the throws of near-failure when the executive team turned toward D&E management after Carl Icahn attacked the company. Instead of going after market growth, the D&E practices plunged the company into a cash drain leading to cataclysmic drop in sales and market share.
The worst thing Target could do is try to be Wal-Mart. Nobody can beat WalMart at being WalMart. And WalMart has its own troubles, including saturation of its stores as well as declining customer interest in its low-cost format. Recent resurgence, linked to the worst economy in 70 years, does not reflect a change in what customers want from retailers long-term. Rather, it's a short-term blip for a Locked-in Success Formula that has seen declining returns on investment for over a decade. If Target were to try emulating WalMart, in format or approach, it would be disastrous.
Nor is doing what Target always did the right thing to do. The market has shifted. What worked in 2005 cannot be assured of working in 2010. Trying to refind its "core" and do more of the same practices would again be a Defend & Extend approach which will hurt results. Amplifying those D&E practices by taking radical actions, such as spinning out its real estate in a short-term financial machination, would only reduce the variables Target can use to regain growth. Following the recommendations of raider Ackman and his Pershing Square firm will attempt to short-term spike profitability, but at the grave risk of killing the company long-term.
What Target needs to do now, more than ever, is study the market. The retail industry is under a major shift as on-line participants increase capability and share, per-store numbers struggle to maintain, and as underlying real estate values tumble. Customer expectations, from baby boomers to GenY are different than they were in 2001, and all retailers need to adapt to these changes. The retailers that do, with new approaches – perhaps mixed approaches that combine on-line with traditional, and/or combine mega-stores with specialty, etc. – will be the ones that capture share as pent-up consumer demand re-emerges in the future. What scenario of the future looks most likely to attract and retain customers in 2015?
Simultaneously, Target needs to study competitors, to define its positioning that produces best results. The good news is that the biggest competitor (WalMart) is so locked in that it's easy to predict. Target can study WalMart, Kohl's, Gordman's, J.C.Penney and others to identify what actions it can take that will avoid head-to-head battering and instead provide rapid growth. Especially by focusing on on-line competitors, including Netshops.com, much can be learned about how the market is shifting and where Target should go to maximize growth.
Above all, Target needs to take this opportunity to Disrupt old behaviors and convince employees, and shareholders, that Target will pull out all stops to become the leading retailer by 2020. WalMart is so Locked-in that it can easily decline (and if you doubt that, just look at other market leaders and how they did coming out of downturns – like GM and Sears). The right retailer, making the right decisions, can become the next leader. But not by just doing more of the same. It will take a concerted effort to open the doors for trying and doing new things.
And right now Target needs to be throwing up test stores and new concepts – White Space projects – where it can learn what will work for the next great retailing Success Formula. No amount of planning is worth as much as experimentation. The newest ideas in retailing need to be reviewed and tested to see what can work now. Maybe the time has finally arrived for home grocery shopping, for example. Who knows? What we do know is that the company that uses this market transition period to build a new Success Formula aligned with changing customer expectations will be positioned to be the new market leader.
Conventional wisdom would say that Target should cut costs, emulate WalMart, get really cheap with prices, tighten its supply chain, spin out all "non core" assets and focus on returning to practices that made a profit in 2004, 05, 06 and 07. But our studies for The Phoenix Principle showed that those practices almost always doom the competitor. Instead, at this critical lifecycle point, it's more important than ever to focus on GROWTH and return to the Rapids – otherwise you end up in the Swamp, moving along toward the Whirlpool, like Woolworths, S.S. Kresge, TG&Y, Sears, KMart and Sharper Image.
