Cost of Ignoring Trends- Facebook’s Fiasco

Cost of Ignoring Trends- Facebook’s Fiasco

In my recent “Rebooting Business” on-line conference I was asked if Black Lives Mattered and other protests should affect strategy. I said “of course!!” These demonstrations clearly show a segment of the marketplace with unserved and under-served needs. Needs so badly served people have taken to the streets!

Every organization needs to assess its strategy to determine if it is on this trend toward inclusion. Are you sensitive to the needs of these under-served segments? Or are you sloppily still out there with old stereo-tropes like the Aunt Jemima syrup – which Quaker Oats finally pulled. Do you know if your organization, products, suppliers, customers and communities are meeting market needs for inclusion? Or are you just assuming you’ll be OK?

Amazingly one of the biggest trend creating companies has demonstrated the cost of missing trends. Facebook is a remarkable company. Where MySpace failed, and countless others never created a marketplace, Facebook used its initial platform, then added Instagram, then Messenger, then WhatsApp to take an enormous lead in social media. Facebook built on trends in our desire to be mobile, and to communicate asynchronously, to attract billions of people to its platform – and as a result advertisers.

But…. Inexplicably…. the CEO Mark Zuckerberg and his leadership team have been tone-deaf to the events since George Floyd was killed. And they were remarkably blindsided, showing they truly weren’t prepared. Zuckerberg has long refused to even look for false information on Facebook – and never really considered removing it. Lies, falsehoods, misstatements – Facebook let people of all stripes (good, and very often bad) say anything they wanted on the platform. This wasn’t inclusion, it was allowing loud voices to present harmful content – and it was clearly disturbing a whole lot of people.

Now is the comeuppance. Advertisers have decided not to advertise on Facebook. They realize that their ads, presented next to false, and sometimes truly hateful, content gives the impression that they support this content. So, in droves, they have said their ad dollars will go somewhere else. Giant consumer goods companies Honda, Unilever, Proctor & Gamble, Coca-Cola, Diageo and Hershey as well as one of the world’s largest mobile providers Verizon, and mercantile suppliers North Face and Patagonia have joined retailers like Starbucks and REI as just some of the larger boycotters – out of over 100 on the growing list. So serious is this problem that some advertisers are “pausing” social media ads all together, suggesting another possible trend

Nobody can fight trends and hope to win. Nobody. No matter how big. And this is a sharp rebuke for one of the trendiest companies on the planet. That the leadership team didn’t see this coming is astonishing. In a late reversal, Facebook has made new efforts to identify hate content (including harmful posts by politicians), but that they didn’t react much quicker is just absurd. That they appeared to think they could platform political ads, and political content, and not have viewers associate Facebook with politics is downright bizarre. This has been the dumbest self-inflicted move by a big company in a very long time. And all they had to do to avoid this nightmare was admit that inclusion was a very big global trend that they had to build into their offering.

But don’t lose sight of the lesson. TRENDS MATTER. If you align with trends your business can do GREAT! Like Facebook. But if you don’t pay attention, and you miss a big trend (like demographic inclusion) the pain the market can inflict can be HUGE and FAST. Like Facebook. Are you aligned with trends? What are the threats and opportunities in your strategy and markets? Do you need an outsider to assess what you don’t know you don’t know? You’ll be surprised how valuable an inexpensive assessment can be for your future business https://adamhartung.com/assessments/

Why You Can’t Invest Like Warren Buffett – and Shouldn’t Try

Why You Can’t Invest Like Warren Buffett – and Shouldn’t Try

Warren Buffett is the famous head of Berkshire Hathaway.  Famous because he has made himself a billionaire several times over, and made his investors excellent returns.

Berkshire Hathaway doesn’t really make anything. Rather, it owns companies that make things, or supply services.  So when you buy a share of BRK you are actually buying a piece of the companies it owns, and a piece of the over $116B it invests in equities of other public companies from the cash flow of its owned entities.

Over the last decade the value of a share of BRK has increased 149%.  Pretty darn good, considering the DJIA (Dow Jones Industrial Average) has only increased 64%, and the S&P 500 69%, in the same time period.  So for long-term investors, putting your money with Mr. Buffett would have done more than twice as good as buying one of these leading indices.

For this reason, many investors recommend looking at what Berkshire Hathaway buys in its equity portfolio, and then buying those same stocks.  On the face of it, seems smart.  “Invest like Warren Buffet” one might say.

Warren Buffett

But that would be a bad idea.  Berkshire Hathaway’s value has little to do with the publicly traded equities it owns.  In fact, those holdings may well be a damper on BRKs valuation.

Of that giant portfolio, 4 equities make up 58% of the total holdings.  Let’s look at how those have done the last decade:

  • American Express (AXP,) about 10% of the portfolio, is up 83%
  • Coke (KO,) about 15% of the portfolio, is up 109%
  • IBM (IBM,) about 10% of the portfolio, is up 64%
  • Wells Fargo (WFC,) nearly 25% of the portfolio) is up 71%

Note – not one of these stocks is up anywhere near as much as Berkshire Hathaway.  There is no mathematical formula which one can use to multiply the gains on these stocks and interpret that into an overall value increase of 149%!

There are several other large, well known companies in the Berkshire Hathaway portfolio which have large (millions of shares being held) but lesser percentage positions:

  • ExxonMobil (XOM) up 86%
  • General Electric (GE) down <26%>
  • Proctor & Gamble (PG) up 61%
  • USBancorp (USB) up 40%
  • USG (USG) down <30%>
  • UPS up 24%
  • Verizon up 38%
  • Walmart up 61%

This is not to say that Berkshire Hathaway has owned all these stocks for 10 years.  And, this is not all the portfolio.  But it is well known that Mr. Buffett is a long-term investor who eschews short-term trading.  And, these are at least randomly representative of the portfolio holdings.  So by buying and selling shares at different times, and using various trading strategies, BRK’s returns could be somewhat better than the performance of these stocks.  But, again, there is no arithmetic which exists that can turn the returns on these common stocks into the 149% gain which Berkshire Hathaway has achieved.

Simply put, Berkshire Hathaway makes money by doing things that no individual investor could ever accomplish.  The cash flow is so enormous that Mr. Buffett is able to make deals that are not available to you, me or any other investor with less than $1B (or more likely $10B.)

When the banks looked ready to melt down in 2008 GE was in a world of hurt for money to shore up problems in its GE Capital unit.  When GE went out to raise $12B via a common stock sale it turned to Mr. Buffett to lead the investment.  And he did, taking a $6B position.  For being so gracious, in addition to GE shares Berkshire Hathaway was able to buy $3B in preferred shares with a guaranteed dividend of 10%!  Additionally, Mr. Buffett was given warrants allowing him to buy up to $3B of GE shares for a fixed price of $22.25 per share regardless of the price at which GE was trading.  These are what are called “sweeteners” in the financial trade.  They greatly reduce the risk on the common stock purchase, and simultaneously dramatically improve the returns.

These “sweeteners” are not available to us average, ordinary investors.  And this is critical to understand.  Because if someone thought that Mr. Buffett made all that money by being a good stock picker, that someone would be operating on the wrong assumption.  Mr. Buffett is a very good deal maker who gets a lot more when making his investments than we get.  He can do that because he can move so much money, so quickly.  Faster even than any large bank.

Take, for example, the recent deal for Berkshire Hathaway to acquire the Duracell battery business from P&G.  Where most of us (individuals or corporations) would have to fork over the $3B that P&G wanted, Berkshire Hathaway can simply give back P&G shares it has long held.  By exchanging those shares for Duracell, Berkshire avoids paying any tax on the stock gains – thus using P&G shares in its portfolio as a currency to buy the battery business with pre-tax dollars rather than the after-tax dollars the rest of us would have to put up.  In a nutshell, that saves at least 35%.  But, beyond that, the deal also allows P&G to sell Duracell without having to pay tax on the assets from their end of the transaction, saving P&G 35% as well.  To make the same deal, any other buyer would have been required to pay a lot more money.

Acquiring Duracell Berkshire gets 100% of another slow-growth but very good cash flow company (like Dairy Queen, Burlington Northern Rail, etc.) and does so at a very favorable price.  This deal adds more cash flow to BRK, more assets to BRK, and has nothing to do with whether or not the stocks in its public equity portfolio are outperforming the DJIA or S&P.

This in no way diminishes Berkshire Hathaway, or Mr. Buffett.  But it points out that many people have very bad assumptions when it comes to understanding how Mr. Buffett, or rather Berkshire Hathaway, makes money.  Berkshire Hathaway is not a mutual fund, and no investor can make a fortune by purchasing common shares in the companies where Mr. Buffett invests.

Berkshire Hathaway is an extremely complicated company, and deep in its core it is an institution that has a tremendous understanding of financial instruments, financial markets, tax laws and risk.  It has long owned insurance companies, and its leaders understand actuarial tables as well as how to utilize complex financial instruments and sophisticated tax opportunities to reduce risk, and raise returns, on deals that no one else could make.

By maximizing cash flow from its private holdings the Berkshire Hathaway constantly maintains a very large cash pool (currently some $60B) which it can move very, very quickly to make deals nobody, other than some of the largest private equity pools, could obtain.

The process by which Berkshire Hathaway decides to buy, hold or sell any security is unique to Berkshire Hathaway.  The size of its transactions are enormous, and where we as individuals buy shares by the hundreds (the old “round lot,”) Berkshire buys millions. What stocks Berkshire Hathaway chooses to buy, hold or sell has much more to do with the unique situation of Berkshire Hathaway than stock price forecasts for those companies.

It is a myth for an individual investor to think they could invest like Mr. Buffett, and trying to emulate his returns by emulating the Berkshire portfolio is simply unwise.

 

 

Buy Facebook, P&G’s CEO told you to

Buy Facebook.  I don't care what the IPO price is.

Since Facebook informed us it was going public, and it's estimated IPO valuation was reported, debate has raged over whether the company could possibly be worth $75-$100B.  Almost nobody writes that Facebook is undervalued, but many question whether it is overvalued. 

If you are a trader, moving in and out of positions monthly and using options to leverage short-term price swings then this article is not for you.  But, if you are an investor, someone who holds most stock purchases for a year or longer, then Facebook's IPO may be undervalued.  The longer you can hold it, the more you'll likely make.  Buy it in your IRA if possible, then let it build you a nice nest egg.

About 85% of Facebook's nearly $4B revenues, which almost doubled in 2011, are from advertising.  So understanding advertising is critical to knowing why you want to buy, and hold, Facebook

Facebook has 28% of the on-line display ad market, but only 5% of all on-line advertising.  On-line advertising itself is generally predicted to grow at 16%/year.  But there is a tremendous case to be made that the market will grow a whole lot faster, and Facebook's share will become a whole lot larger.

At the end of January Proctor & Gamble's stock took a hit as earnings missed expectations, and the CEO projected a tough year going forward.  He announced 1,600 layoffs, many in marketing, as he admitted the ad budget was going to be "moderated" – code for cut.  While advertising had grown at 24%/year sales were only growing at 6%.  He then admitted that the "efficiency" of on-line advertising was demonstrating the ability to be much higher than traditional advertising.  In other words, he is planning to cut traditional marketing and advertising, such as coupon printing and ads in newspapers and television, and spend more on-line.

P&G spends about $10B/year on advertising.  2.5x the Facebook revenue.  Now, imagine if P&G moves 10% – or 25% – of its advertising from television (which is now a $250B market) on-line.  That is $1-$2.5B per year, from just one company!  Such a "marginal" move, by just one company, adds 1-3% to the total on-line market.  Now, magnify that across Unilever, Danon, Kimberly-Clark, Colgate, Avon, Coke, Pepsi …… the 200 or 300 largest advertisers and it becomes a REALLY BIG number.

The trend is clear.  People spend less time watching TV and reading newspapers.  We all interact with information and entertainment more and more on computers and mobile devices.  Ad declines have already killed newspapers, and television is on the precipice of following its print brethren.  The market shift toward advertising on-line will continue, and the trend is bound to accelerate. 

Last year P&G launched an on-line marketing program for Old Spice.  The CEO singled out the 1.8 billion free impressions that received on-line.  When the CEO of one of the world's largest advertisers takes note, and says he's going to move that way, you can bet everyone is going to head that direction.  Especially as they recognize the poor "efficiency" of traditional media spending.

And don't forget the thousands of small businesses that have much smaller budgets.  Most of them rarely, or never, could afford traditional media.  On-line is not only more effective, but far cheaper.  Especially as mobile devices makes local marketing even more targeted and effective.  So as big companies shift to on-line we can expect small to medium sized businesses to shift as well, and new advertisers are being created which will expand the market even further.  This trend could lead to a much faster organic market growth rate beyond 16% – perhaps 25% or even more!

Which brings us back to Facebook, which will be the primary beneficiary of this market shift. 

Facebook is rapidly catching up with Google in the referral business.  850 million users is important, because it shows the ability Facebook has to bring people on-line, keep them on-line and then refer them somewhere.  The kind of thing that made Google famous, big and valuable with search a decade ago.  In fact, people spend much more time on Facebook than they do Google.  When advertisers want to reach their audience they go where the people are (and are being referred) and that is Facebook.  Nobody else is even close. 

The good thing about having a big user base, and one that shares information, is the ability to gather data.  Just like Google kept all those billions of searches to analyze and share data, increasingly Facebook is able to do the same.  Facebook will be able to tell advertisers how people interact, how they move between pages, what keeps them on a page and what leads to buying behavior.  Facebook uses this data to help users be more effective, just like Google does to help us do great searches.  But in the future Facebook can package and sell this data to advertisers, helping  them be more effective, and they can use it for selling, and placing, ads.

Facebook usage is dominant in social media, but becoming more dominant in all internet use.  Like how Windows became the dominant platform for PC users, Facebook is well on its way to being the platform for how we use the web.  Email will be less necessary as we communicate across Facebook with those we really want to know.  Information on topics of interest will stream to us through Facebook because we select them, or our friends refer them.  Solving problems will use referrals more, and searching less.  The platform will help us be much more efficient at using the internet, and that reinforces more usage and more users.  All the while attracting more advertisers.

The big losers will be traditional media.  We may watch sports live, but increasingly we'll be unwilling to watch streaming TV as the networks trained boomers.  Companies like NBC will suffer just as newspaper giants such as Tribune Corp., New York Times and Dow Jones.  Ad agencies will have a very tough time, as ad budgets drop their placement fees will decline concomittantly.  Lavish spending on big budget ads will also decline. 

Anyone in on-line advertising is likely to be a winner initially.  Linked-in, Twitter, Pinterest and Google will all benefit from the market shift.  But the biggest winner of all will be Facebook.

What if the on-line ad market grows 25%/year (think not possible? look at how fast the smartphone and tablet markets have grown while PC sales have stagnated last 2 years as that market shifted.  And don't forget that incremental amount could easily happen just by the top 50 CPG companies moving 10% of their budget!)?   That adds $20-$25B incrementally.  If Facebook's share shifts from 5% to 10% that would add $2-2.5B to Facebook first year; more than 50%! 

Blow those numbers up just a bit more.  Say double on-line advertising and give Facebook 20% share as people drop email and traditional search for Facebook – plus mobile device use continues escalating.  Facebook revenues could double up, or more, for several years as trends obsolete newspapers, magazines, televisions, radios, PCs and traditional thoughts about advertising.

If you missed out on AT&T in the 1950s, IBM in the 1960s, Microsoft in 1980, or Apple in 2000, don't miss this one.  Forget about all those spreadsheets and short-term analyst forecasts and buy the trend.  Buy Facebook.

Play To Win, Not “Catch up” – Colgate’s Opportunity

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

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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.

 

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Fire the Status Quo Police! – Forbes, AT&T, Microsoft, DEC, P&G, Sears, Motorola


Leadership

Fire The Status Quo Police

Adam Hartung, 09.08.10, 06:00 PM EDT

Their power to prevent innovation can devastate your business.

“That’s not how we do things around here.” How often have you heard that? And what does it really mean? It is said to stop someone from doing something new. It is no way to promote innovation, is it?”

That’s the lead paragraph to my latest column on Forbes.com, published yesterday evening.  Forbes launched a new editorial page covering Change Management, and gave my column’s link the premier placement!  

All companies want to grow.  But early in the lifecycle they Lock-in on what works, and then implement Status Quo Police that intentionally do not allow anything to change.  Their belief is that if nothing changes, the business will always grow.  So conformance to historical norms is more important than results to them.  To Status Quo Police results will return when conformance to old norms is returned!

Of course, this completely ignores the marketplace.  Market shifts, created by competitors launching new technologies, new pricing models, new delivery models or other new solutions cause the value of old solutions to decline.  No matter how well you do what you always did, you can’t achieve historical results.  The market has shifted! 

To keep any company growing you must know who the Status Quo Police are in your organization.  They can be in HR, controlling hiring, promotions and pay.  In Finance controlling what projects receive resources.  In Marketing, tightly controlling branding, product development or distribution.  The Status Quo Police are committed to keeping things tightly controlled, and saving the organization from change that could send the company in the wrong direction!  No matter what the marketplace may require.

But it’s not enough to know who the Status Quo Police are, its up to leaders to eliminate them!  If you want to have a vibrant, profitably growing organization you have to constantly adjust to market shifts.  You have to sense what the market wants, and move to deliver it.  You have to be very wary of the Status Quo, and instead be open to making changes in order to grow.  To do that, you have to hold those who would be the Status Quo Police in check.  Otherwise, you’ll find the obstacles to innovation and growth overwhelming!

Please read the article at Forbes, review it and comment!  Let me know what you think!