Chart courtesy of Felix Richter, Statista.com https://www.statista.com/chart/9454/retail-space-per-1000-people/
Fast Company just published 3 common behaviors that kill innovation. Congratulations! The editors reinforce that most management behavior and best practices are lethal to innovation.
All the way back in November, 2009, my Forbes column explained that organizations approach innovation entirely wrong- trying far too hard to build on historical company strengths, which leads to weak extensions that fail to generate sustainable growth. In November, 2011, my Forbes column identified the “killer comments” that leaders used to stop innovation. Fast Company’s list is remarkably similar to that 2011 column, though it is a shorter list. In June, 2015, my Forbes column described how HR best practices are designed to limit diversity in thinking- and always lead to killing innovation projects. Factually, as I wrote in February, 2011, almost nobody would hire the next Steve Jobs if he applied for a job!
Quite simply, we have built organizations that rigidly adhere to continuing past processes, and are hard wired to resist innovation. This phenomenon has been around for a long time, even though Fast Company just discovered it, and I’ve been writing about it for 9 years. Give my past columns a read and you’ll be forewarned of the risks to brainstorming, or throwing together innovation teams, without a system of new thinking.
Fortunately, smart leaders today see that by focusing on external data and cleverly using outside thinkers, innovation can create a high-growth future. The approach I’ve been teaching organizations for years. Only by overcoming outdated, historical management practices can a modern organization thrive. You can do it- if you smartly use trends and new approaches.
Here in late 2017, the biggest trends are: the 24 hour news cycle, animosity in broadcast and online media, fatigue from constant connection and interaction, international threats and our political climate. The holiday season is in the background struggling for attention.
How are people tuning out of this cacophony to get in the mood for the holidays?
The answer: Christmas movies! And which channel has 75% share of the new movies in 2017? If you have watched any TV since October, you’d know that it’s The Hallmark Channel. THC has produced over 20 original movies for the 2017 Christmas season and has seen viewership grow by 6.7% per year since 2013. THC is on track to surpass the 2016 season in viewership and its brand image is solidly wholesome.
Starting in October, THC runs seasonal programming with its successful “The Good Witch” series (no vampires!) and continues with “Countdown to Christmas” featuring original Hallmark-produced content.
Hallmark spent decades preparing to capture the benefits of these trends. It had become a source of family oriented, holiday-themed programming especially popular in recent years. Once only an ink and paper company, Hallmark expanded strategically in the 1970s with ornaments and cultural greeting cards and again in 1984 with its acquisition of Crayola drawing products. The company moved into direct retail in 1986 and ecommerce in the mid-1990s. Hallmark eCards was launched in 2005.
Hallmark capitalized on branded media content originally to support the core business and it now generates profits as a standalone business. In 2001, the Hallmark Channel was launched. The Hallmark Movie Channel was developed in 2004 which became Hallmark Movies and Mysteries in 2014. This year, the Hallmark Drama channel was launched further leveraging the brand.
Many companies sponsored radio shows in the 1920s through the war years. Serials featuring one company’s products appeared in 1928 on radio. In 1952, Proctor and Gamble sponsored the first TV soap opera featuring one company (“The Guiding Light”). But The Hallmark Hall of Fame was there first on Christmas Eve in 1951 sponsoring a made-for-TV opera, “Amahl and the Night Visitors.”
Written by Gian Carlo Menotti in less than two months and timed for a one hour TV slot, “Amahl” has become, probably, the most performed opera in history.
Hallmark wasn’t the first mover in sponsored media content, but it had learned to experiment with new media. The company was positioned to take advantage of the trend toward family friendly broadcast content and this year was ready to give the nation a place to rest and escape from the chaos. A bit like the story of Amahl and Christmas itself.
Once just a card company, Hallmark followed market trends to expand its business and become a leader in content marketing which is now one of the hottest areas in all marketing. And both the new video content and large library were ready for the current trend- streaming video!
Everybody knows that Google’s Android has about 80-85% smartphone market share, and Apple’s iOS has only 14-19% share (depending upon quarter.) But this week tech services giant Accenture announced it was partnering with Apple to build enterprise apps for its customers, focusing initially on financial services and retail. Despite lower unit sales Apple maintains marketplace technology leadership by capturing the enterprise app developer community – including IBM, Cisco, Deloitte and SAP.
For most consumers an Android-based phone from one of the various manufacturers, most likely bought through a wireless provider if in the USA, does pretty much everything the consumer wants. Developers of most consumer apps, such as games, navigation, shopping, etc. make sure their products work on all phones. For that reason, the bulk of consumers are happy to buy their phone for $200 or less, and most don’t even care what version of Android it runs. As a stand-alone tool an Android phone does pretty much everything they want, and they can afford to replace it every year or two.
And because iOS has superior features, Apple continues to dominate the enterprise environment:
Most of these issues are no big deal for the typical smartphone consumer who just uses their phone independently of their work. But when someone wants to create an enterprise app, these become really important issues. To make sure the app works well, meeting corporate and end user needs, it is much easier, and better, to build it on iOS.
Today Apple charges around $800 for an iPhone 7, and expectations are for the iPhone 8 to be priced around $1,000. Because Apple’s pricing is some 4-5x higher, it allows Apple’s iOS revenue to actually exceed the revenue of all the Android phones sold! And because Android phone manufacturers compete on price, rather than features and capabilities, Apple makes almost ALL the profit in the smartphone hardware business. Even as iPhone unit volume has struggled of late, and some analysts have challenged Apple’s leadership given its under 20% market share, profits keep rolling in, and up, for the iPhone.
By taking the lead with enterprise app developers Apple assures itself of an ongoing market. Three years ago I pointed out the importance of winning the developer war when IBM made its huge commitment to build enterprise apps on iOS. This decision spelled doom for Windows phone and Blackberry — which today have inconsequential market shares of .1% and .0% (yes, Blackberry’s share is truly a rounding error in the marketplace.) Blackberry has become irrelevant. And having missed the mobile market Microsoft is now trying to slow the decline of PC sales by promoting hybrid devices like the Surface tablet as a PC replacement. But, lacking developers for enterprise mobile apps on Microsoft O/S it will be very tough for Microsoft to keep the mobile trend from eventually devastating Windows-based device sales.
As the world goes mobile, devices become smaller and more capable. The need for two devices, such as a phone and a PC, is becoming smaller with each day. Those who predicted “nobody can do real work on a smartphone” are finding out that an incredible amount of work can be done on a wirelessly connected smartphone. As the number of enterprise apps grows, and Apple remains the preferred developer platform, it bodes well for future sales of devices and software for Apple — and creates a dark cloud over those with minimal share like Blackberry and Microsoft.
Amid all the political news last week it was easy to miss announcements in the business world. Especially one that was relatively small, like Starbucks announcement on Thursday July 27, 2017 that it was closing all 379 of its Teavana stores. While these will be missed by some product fanatics, the decision is almost immaterial given that these units represent only about 3% of Starbucks US stores, and about 1.5% of the 25,000 Starbucks globally.
Starbucks founding CEO Howard Schultz returned to the top job in January, 2008, promising to get out of distractions such as music production, movie production, internet sales, grocery products, liquor products and even in-store food sales in order to return the company to its “core” coffee business. Since then Starbucks valuation has risen some 5.5-6 fold, from $9.45/share to the recent range of $54 to $60 per share. A much better return than the roughly doubling of the Dow Jones Industrial Average over the same timeframe.
Yet, one should take time to evaluate what this closing means for the long-term future of Starbucks. This is the second time Starbucks made an acquisition only to shut it down. In 2015 Starbucks closed all 23 La Boulange bakery cafes, with little fanfare. Now, after paying $620M to buy Teavana in 2012, they are closing all those stores. While leadership blamed its decision on declining mall visits (undoubtedly a fact) for the closures, Teavana is not missing goals due to the Amazon Effect. There are multiple options for how to market Teavana’s fresh and packaged products far beyond mall store locations. Choosing to close all stores indicates leadership has minimal interest in the brand.
It increasingly appears that today’s Starbucks literally isn’t interested, or able, to do anything other than build, and operate, more Starbucks stores. And Starbucks is clearly doubling down on its plans to be Starbucks store-centric. The company opened 575 new units in the last year, and announced plans to open more stores creating 68,000 additional US jobs in the next 5 years. Further, Starbucks is paying $1.3B to buy the half of its China business previously owned by a partner. Clearly, leadership continues to tighten company focus on the “core” coffee store business for the future.
This sounds great short-term, given how well things have gone the last 8 years. But there are concerns. Sales are up 4% last quarter, but that is wholly based upon higher prices. Customer counts are flat, indicating that stores are not attracting new customers from competitors. Sales gains are due to average ticket prices increasing 5%, which is marginal and likely refers to higher priced products. Starbucks is now relying completely on new stores to create incremental growth, since bringing in new customers to existing stores is not happening.
Frequently this stagnant store sales metric indicates store saturation. A bad sign. Does the US, or international markets, really need more, new Starbucks stores? It was 2010 when comedian Lewis Black had a successful viral rant (PG version) claiming that when he observed a Starbucks across the street from another Starbucks he knew it was the end of civilization.
One does have to wonder when the maximum number of Starbucks will be reached. Especially given the ever growing number of competitors in all markets. Direct competitors such as Caribou Coffee, The Coffee Bean, Seattle’s Best, Gloria Jean’s, Costa, Lavazza, Tully’s, Peet’s and literally dozens of chain and independent coffee shops are competing for Starbucks’ customers. Simultaneously competition from low priced alternatives is emerging from brands like Dunkin Donuts and McDonald’s, now catering more to coffee lovers. And non-coffee fast casual shops are seeking to attract more people for congregating, such as Panera, Fuddruckers, Pei Wei, TGI Friday’s and others. All of these are competitors, either directly or indirectly, for the customer dollars sought by Starbucks. Are more Starbucks stores going to succeed?
As McDonald’s, Pizza Hut and other fast food chains learned the hard way, there comes a time when a brand has built all the market needs. Then leadership has to figure out how to do something else. McDonald’s invested heavily in Boston Market and Chipotle’s, but let those high growth operations go when it decided to refocus on its “core” hamburger business – leading to heavy valuation declines. Starbucks is closing Teavana, but should it? When will Starbucks saturate? And what will Starbucks do to grow when that happens?
Starbucks has had a great run. And that run appears not fully over. But long-term investors have reason to worry.
Is it smart to make such a huge bet on China?
Will store growth successfully continue, with all the stores that already exist?
Will direct and indirect competitors eat away at market share?
What will Starbucks do when it has reached it market maximum, and it doesn’t seem to have any emerging new store concepts to build upon?
Amazon just had another record Prime Day, with sales up 60%. And the #1 product sold was Amazon’s Echo Dot speaker. At $34.99 it surpassed last year’s unit sales by seven-fold. And the traditional Echo speaker, marked down 50% to $90, broke all previous sales records.
These Echo sales most likely sealed Amazon’s long-term leadership in the war to be the #1 voice assistant. Amazon already has 70% market share in voice activated speakers, nearly 3 times #2 provider Google. And all other vendors in total barely have 5% share.
While it may seem like digital speakers are no big deal, speaker sales are analogous to iPhone sales when evaluating the emergence of smartphones and apps. The iPhone seemed like a small segment until it became clear smartphones were the new personal technology platform. Apple’s early lead allowed iOS to dominate the growth cycle, making the company intensely profitable.
Echo and Echo Dot aren’t just speakers, but interfaces to voice activated virtual assistants. For Echo the platform is Amazon’s Alexa. Alexa is to voice activated devices and applications what iOS was to Smartphones. By talking to Alexa customers are able to do many things, such as shopping, altering their thermostats, opening and closing doors, raising and lowering blinds, recording people in their homes — the list is endless. And as that list grows customers are buying more Alexa devices to gain greater productivity and enhanced lifestyle. Echos are entering more homes, and multiplying across rooms in these homes.
Do you remember when early iPhone ads touted “there’s an app for that?” That tagline told customers if they changed from a standard mobile phone to a smartphone there were a lot of advantages, measured by the number of available apps. Just like iOS apps gave an advantage to owning an iPhone, Alexa skills give an advantage to owning Echo products. In the last year the number of skills available for Alexa has exploded, growing from 135 to 15,000. Quite obviously developers are building on Alexa much faster than any other voice assistant.
By radically cutting the price of both Echo Dot and Echo, and promoting sales, Amazon is creating an installed base of units which encourages developers to write even more skills/apps.
The more Alexa devices are installed, the more likely developers will write additional skills for Alexa. As more devices lead to more skills, skills leads to more Alexa/Echo capability, which encourages more people to buy Alexa activated devices, which further encourages even more skills development. It’s a virtuous circle of goodness, all leading to more Amazon growth.
For marketers it is important to realize that success really doesn’t correlate with how “good” Alexa works. Google’s Assistant and Microsoft’s Cortana perform better at voice recognition and providing appropriate responses than Alexa and Siri. But there are relatively few (almost no) devices in the marketplace built with Assistant or Cortana as the interface. Developers need their skills/apps to be on platforms customers use. If customers are buying speakers, thermostats and televisions that are embedded with Alexa, then developers will write for Alexa. Even if it has shortcomings. It’s not the product quality that determines the winner, but rather the ability to create a base of users.
It is genius for Amazon to promote Echo and Echo Dot, selling both cheaper than any other voice activated speaker. Even if Amazon is making almost no profit on device sales. By using their retail clout to build an Alexa base they make the decision to create skills for Alexa easy for developers.
It is genius for Amazon to promote Echo and Echo Dot, selling both cheaper than any other voice activated speaker. Even if Amazon is making almost no profit on device sales. By using their retail clout to build an Alexa base they make the decision to create skills for Alexa easy for developers.
This is a horrible problem for Google, #2 in this market, because Google does not have the retail clout to place millions of their speakers (and other devices) in the market. Google is not a device company, nor a powerful retailer of Android devices. The Android device makers need to profit from their devices, so they cannot afford to sell devices unprofitably in order to build an installed base for Google. And because Android’s platform is not applied consistently across device manufacturers, Google Assistant skills cannot be assured of operating on every Android phone. All of which makes the decision to build Google Assistant skills problematic for developers.
The game is not over. Apple would like customers to use Siri on their iPhones to accomplish what Amazon and Alexa do with Echo. Apple has an enormous iPhone base, and all have Siri embedded. Perhaps Apple can encourage developers to create Siri-integrated apps which will beat back the Amazon onslaught?
Today, Apple customers still cannot use Siri to control their Apple TV (Though as of August, 2017, it’s been improved.), or make payments with ApplePay, for example. Nor can iPhone users tell Siri to execute commands for remote systems which are controlled by apps, like unlocking doors, turning on appliances, shooting remote security video or placing an on-line order. Apple has a lot of devices, and apps, but so far Siri is not integrated in a way that allows voice activation like can be done with Alexa.
Additionally, as big as the iPhone installed base has become, when comparing markets the actual raw number of speakers could catch up with iPhones. Echo Dot is $35. The cheapest iPhone is the SE, at $399 (on the Apple site although available from Best Buy at $160.) And an iPhone 7 starts at $650. The huge untapped Apple markets, such as China and India, will find it a lot easier to purchase low cost speakers than iPhones, especially if their focus is to use some of those 15,000 skills. And because of the low pricing ($35 to $90) it is easy to buy multiple devices for multiple locations in one’s home or office.
Recall the wisdom of Clayton Christensen‘s “Innovator’s Dilemma.” The incumbent keeps improving their product, hoping to maintain a capability lead over the competition. But eventually the incumbent far overshoots customer needs, developing a product that is overly enhanced. The disruptive innovator enters the market with a considerably “less good” product, but it meets customer needs at a much lower price. People buy the cheaper product to meet their limited goal, and bypass the more capable but more expensive early market leader.
Doesn’t this sound remarkably similar to the development of iPhones (now on version 8 and expected to sell at over $1,000) compared with a $35 speaker that is far less capable, but still does 15,000 interesting things?
This week Microsoft announced another 1,500 layoffs in what has become an annual bloodletting ritual for the PC software giant. But even worse was the announcement that Microsoft would no longer support any version of Windows Phone OS version 8.1 or older – which is 80% of the Windows Phone market. Given that Microsoft has less than 2% market share, and that less than .4% of the installed smartphone base operates on Windows Phone, killing support for these phones will lead to sales declines. This action, along with gutting the internal developer team last year, clearly indicates Microsoft has given up on the phone business for good. This means that now Microsoft has no device platform for Cortana, Microsoft’s voice assistant, to use.
Microsoft ignored smartphones, allowing Apple’s iOS to become the early standard. Apple rapidly grew its installed base. Microsoft could not convince developers to write for Windows Phone because there weren’t enough devices in the market. Without a phone base, with tablet and hybrid sales flat to declining, and with PC sales in the gutter Cortana enters the market DOA (Dead On Arrival.) Even if it were the best voice assistant on the planet developers will not create skills for Cortana because there are no devices out there using Cortana as the interface.
So Microsoft completely missed yet another market. This time the market for voice activated devices in the smart phone, smart car or any other smart device in the IoT marketplace. It missed mobile, and now it has missed voice assist. As PC sales decline, Microsoft’s only hope is to somehow emerge a big winner in cloud storage and services (IaaS or Infrastructure as a Service) with Azure. But, Azure was a late-comer to the cloud market and is far behind Amazon’s AWS (Amazon Web Services.) Amazon has +40% market share, which is 40% more than the share of Microsoft, Google and IBM combined.
Build the base and developers will come…
Tuesday American celebrates Independence Day, and the decision to break away as a colony from England. Since then America has been on quite a growth journey, and today most Americans cannot imagine a world where the USA is not the dominant power. They were born post World War II and simply believe that America was once the great world power, and always will be. Like it is some God-given immutable right.
But it’s not.
From the early 1800s well into the middle 1900s America had one of the fastest population growth rates in the world. “Bring us your tired, your poor, your huddled masses yearning to breathe free” is on the Statue of Liberty for no small reason – America accepted floods of immigrants from around the world as westward expansion and the industrial age created huge opportunity for everyone. People flooded America, and many people had very large families. Well into the 1900s it was not uncommon for people to have 6, 8 or 10 siblings.
When the boomers were born America was rich in natural resources, had a growing economy, and had avoided the devastation that was left behind in Japan, Europe parts of southeast Asia and north Africa. India was an emerging country, finding its way after refuting colonialism. And China was off the world stage due to the inwardly focused leadership. So Americans have lived a very long time thinking that the world will always be a Christian, capitalist, democratic place where the USA’s domination could not be challenged.
But many things have changed dramatically, and many more changes are coming soon enough. In a few short years population growth will make America a relatively far smaller country. And both technology skill development and understanding how to use capitalism have unleashed dramatic growth in what were formerly derisively referred to as “emerging” countries. “Emerging” implying that America had nothing to concern itself as regards these countries.
Zulu were some of the most feared warriors in Africa. But, they had a practice of being inwardly focused. As they looked inward they did not fear external enemies, but only those who came into their inner circle. Approaching their internal circle could invite attack, and demolition. But, eventually the external enemies became too many, and too far reaching, and the inwardly focused Zulu were attacked on multiple fronts from a growing host of enemies. The Zulu lost their domination as Africa’s military leaders.
Americans must address their inclination for inwardly focusing on “what’s good for America.” It is naively affixing self-blinders to think policy decisions can be made independently of the world community, and without harmful retribution. There are a lot more “of them” than their are “of us.” And the majority of “them” have nuclear weapons just as powerful as “ours.” And “their” economies are just as strong as “ours.” In many cases actually a lot stronger. These countries can stand on their own without U.S. support, and they can implement policies which can be very destructive to U.S. economic interests globally. And they can form their own coalitions to avoid working with America.
As other countries grow, those that choose to ignore immigration and the global movement of people will be big losers. Today Japan is struggling, losing economic power annually, because it refuses to endorse a robust immigration policy. Unfortunately, the same thing cold happen to America as its population growth rate falls, and its economic growth falls with it. Outlawing sanctuary cities that help immigrants merge into American society is a misbegotten policy based on false assumptions about America’s lack of need for immigrants to remain globally competitive.
If America chooses to start all-out trade wars to protect its economy, America could be isolated and likely lose more than it gains. Where once American resources and technology were essential, that is far less true today. European countries have every bit the technology and investment skills of Americans, as do the Chinese and many other countries. Just look at how many of your beloved products, such as mobile phones, computers, TVs, and game consoles, are not made in America at all. There are ample trade opportunities between all countries to supply each other with goods and products, including commodities such as wheat, coal, oil, lumber and gold, that could bypass America entirely.
If America starts a shooting war it is far from clear that it will be as untouched as WWII. And far from clear who will “win,” especially if nuclear war ensues.
And while it is tempting to think that God is on the side of Christians, ignoring the growth of Islam is as foolish as the Romans attempting to ignore the growth of Christianity. Thinking that the growth of Islam is a “Middle Eastern problem” is a dramatic understatement of the situation. Population growth rates of Muslims are far greater globally than other religions. It is ridiculous to think that Islam will not be a major part of the world religious landscape. Thinking that Islam is a problem is hyperbole. Thinking America can isolate itself from Islam is simply an hallucination.
Demographic trends are powerful forecasters. They are very easy to predict, and almost always correct. And they foretell a lot about how we will live and work in the future. The key to good policy making is understanding these trends and working to take advantage of them for growth. Ignoring them is a perilous journey that always ends very badly. Since many of the trends are obvious, isn’t it time to plan for them effectively?
People like to discuss “strategic pivots” in tech companies. The term refers to changing a company’s strategy dramatically in reaction to market shifts. Like when Apple pivoted in 2000 from being the Mac company to its focus on mobile, which lead to the iPod, iPhone, and other mobile products. But everyone needs to know how to pivot, and some of the most important pivots haven’t even been in tech.
Take for example Netflix. Netflix won the war in video distribution, annihilating Blockbuster. But then, when it seemed Netflix owned video distribution, CEO Reed Hastings pivoted from distribution to streaming. He cut investment in distribution assets, and raised prices. Then he spent the money learning how to become a tech company that could lead the world in streaming services. It was a big bet that cannibalized the old business in order to position Netflix for future success.
Analysts hated the idea, and the stock price sank. But CEO Hastings was proven right. By investing heavily in the next wave of technology and market growth Netflix soared toward far greater success than had it kept spending money in lower cost distribution of cassettes and DVDs.
(From L to R) Philippe Dauman, US actress and singer Selena Gomez, MTV President Stephen Friedman and US director Jon Chu attend a Viacom seminar during the 59th International Festival of Creativity – Cannes Lions 2012, on June 21, 2012 in Cannes, southeastern France. The Cannes Lions International Advertising Festival, running from June 17 to 23, is a world’s meeting place for professionals in the communications industry. (VALERY HACHE/AFP/GettyImages)
This week Arthur Sadoun, the CEO of the world’s third largest advertising agency (Publicis) announced he was betting on a strategic pivot. And most in the industry questioned if he made a good decision.
Simply put, CEO Sadoun announced at the largest ad agency awards conference, the Cannes International Festival of Creativity, that Publicis would no longer participate in Cannes. Nor would it participate in several other conferences including the very large South by Southwest (SXSW) and Consumer Electronics Show (CES.) Instead, he would save those costs to invest in AR (artificial or augmented reality.)
In an industry long dominated by highly creative people who love mixing with other agency folks and clients, this was an enormous shock. These conferences were where award winners marketed their creative capability, showing off how much they were admired by peers. And they wined and dined clients seeking to build on awards to gain new business. No one would expect any major agency to drop out, and most especially not an agency as large as Publicis.
In changing markets strategic pivots make sense.
And strategically this pivot makes a lot of sense. The ad industry was once dominated by ads placed in newspaper, magazines and on TV. But today print journalism is almost dead. The demand for print ads is a fraction of 20 years ago. And TV is no longer as prevalent as before. Today, people spend more time looking at their smartphone than they do their TV. The days of thinking high creativity would lead to high sales are in the past. Fewer and fewer big advertisers care about who wins awards, and fewer are going to these conferences to decide who they would like to hire.
Today advertising is going “programmatic.” Increasingly ads are placed by computers, on web and mobile sites. Advertising is about finding the right eyeballs, at the right time, next to the right content in order to find a buyer. Advertisers no longer spend money lavishly on mass media hoping for good results. Instead ads are targeted, measured for response and evaluated for ROI based on media, location, user and a raft of other metrics.
And the industry has changed. There still is an advertising agency business. But it is under attack from tech companies like Google, Facebook, Twitter and Snap that promote to advertisers their ability to target the right clients for high returns on money spent. The content is important, but today almost everyone in the industry will tell you success depends on your budget and how you spend it, not the creative. And that is a lot more about understanding how we’re all interconnected, knowing how to measure device usage, profiling user behavior and programming the computers to put those ads in the right place, at the right time.
To pivot you must stop doing the old to start doing the new
Publicis has something like $10B in revenue. Thus, dropping $20M on filing award applications at events like Cannes, and sending a contingent of employees to receive awards, meet people and have fun doesn’t sound like a lot. But multiple that across the year and the total amount could well come to $100M-$200M. That’s still only 2% of revenues – at most. It would seem like not that much money given what has been a core part of historical marketing.
But, if Publicis is to compete in the future with the tech leaders, and emerging digital-oriented agencies, it has to develop technology that will make it a leader. Publicis can’t invent money out of thin air, so it has to stop doing something to create the funds for investing in what’s coming next. And stopping investing in something as “old school” as Cannes actually sounds really smart. As boomer ad execs retire the newer generation is not going to conventions to find agencies, they are looking under the hood at the technology engines these companies provide.
In new strategic areas a little money can go a long way
And while $100M to $200M may not sound like a lot, it is enough money to make a difference in creating a tech team that can work on future-oriented technology like AI. If spent wisely, that could truly move the needle. If Publicis could demonstrate an ability to use proprietary AI technology to better place ads and manage the budget for higher returns it can survive, and perhaps thrive, in a digitally dominated ad industry future. At the very least it can find its place next to Facebook and Google.
WPP, Omnicom and Interpublic should take serious notice. Will they succeed in 2025 if they keep marketing the way they did in 1985? Will this spending grow revenues if customers really don’t care about creative awards? Will they remain relevant if they lack their own technology to develop ads, campaigns and demonstrate positive rates of return on ad dollars spent?
CEO Sadoun’s approach to make the announcement without a lot of preliminary employee discussion shocked a lot of folks. And it shocked the festival owners who now have to wonder what the future of their business will be. But strategic pivots are shocking. They demonstrate a dramatic shift in how resources are deployed to position a company for the future, rather than simply trying to defend and extend the past.
It’s a lot smarter to try what you don’t know than hope everything will stay the same.
Will this work? There is no way to know if the Publicis leadership team can maneuver through the technology maze toward something great. But, at least they are trying. And that alone gives them a lot better shot at longevity than if they simply decided to do in 2018 what they have always done. Is your company ready to reassess its preparation for the future and address your strategy like you’re a tech company? Are you spending money on market shifts, or simply doing the same thing you’ve always done?
Whole Food flagship store in Austin, Texas.
Amazon announced it was paying $13.7B to buy Whole Foods. While not without risks, there are a lot of reasons this is a great idea:
Building any retail chain takes a long time. Due to the intensity of competition, and low margins, building a grocery chain takes even longer. Amazon would have spent decades trying to create its own chain. Now it won’t lose all that time, and it won’t give competitors more time to figure out their strategies.
Few people realize that no grocer makes money selling groceries. Revenues do not cover the costs of inventory, buildings and labor. On its own, selling groceries loses money. Grocers survive on manufacturer “deal dollars.”
Companies like P&G, Nabisco, etc. pay grocers slotting fees to obtain shelf space, they pay premiums for eye level shelves and end caps, they pay new product fees to have grocers stock new items, they pay inventory fees to have grocers keep inventory on shelf and in back, they pay advertising fees to have signs in the stores and products in circulars, and they pay volume rebates for meeting, and exceeding, volume goals. It is these manufacturer “deal dollars” that cover the losses on the store operations and create a profit for investors.
One reason Whole Foods prices are so high is they stock less of the mass market goods and thus receive fewer deal dollars. Now Amazon can use Whole Foods to increase its volume in all products and dramatically increase its deal dollar inflow. Something that Amazon sorely missed as a “delivery only” grocer.
Grocery distribution is unique. For decades grocers have worked with manufacturers, cooperatives, growers and other suppliers to create the shortest, most efficient distribution of food with the lowest inventory. In many instances replenishment quantities are shipped based on manufacturer access to real grocer sales data. Amazon is the best at what it does, but to compete in groceries it needed a grocery distribution system – and with Whole Foods it obtains one at scale without having to create it.
Additionally Amazon will obtain the corporate infrastructure of a grocer, without having to build one on its own. All those buyers, merchandisers, real estate professionals, local ad buyers, etc. are there and ready to execute – something building would be very hard to do.
Whole Foods has 460 stores, and almost all are in great locations. Whole Foods focused on upscale, growing and often urban or suburban locations – all great for Amazon to grow its distribution footprint. And hard sites to find.
These can be used to sell other products, such as other grocery items, or some selection of Amazon products if that makes sense. Or these can be used to augment Amazon’s distribution system for local delivery – or as neighborhood drop-off locations for people who don’t want at-home delivery to pick up Amazon-purchased products. Or they can be sold/leased at very attractive prices.
“Whole Paycheck” has long been the knock on Whole Foods. As mentioned before, the lack of mass market items meant their products lacked deal dollars and thus had to be priced higher. And their stores are large, and not the best use of space. The result has been a lot of trouble keeping customers, and one of the lowest sales per square foot in the grocery industry.
Amazon can easily use its low-price position to alter the Whole Foods brand concept to include things like Pepsi, Coke, Bounty, Gain – a slew of branded consumer goods previously eschewed by Whole Foods. Adding these products could make the stores more useful to more customers, and greatly lower the average cost of a cart full of goods. On its own, this brand transition has been impossible for Whole Foods. As part of Amazon remaking the brand will be vastly easier.
If you shopped Amazon you know they really figure out your needs, and help you find what you want. Amazon keeps track of your searches and purchases, and makes recommendations that often help the shopping experience and delight us as customers.
But today all that information on grocery shopping is un-mined. Despite using a loyalty card, traditional grocers (and WalMart) have been unable to actually mine that information for better marketing. Now Whole Foods will be able to use Amazon’s incredible technology skills, including big data mining and artificial (or augmented) intelligence to actually help us make the grocery shopping experience better – less time intensive, and most likely less costly while still allowing us to fill our carts with what we need and what makes us happy.
$13.7B is only 65% of the cash Amazon had on hand end of last quarter. And Amazon has only $7.7B in long-term debt. With a $460B market cap Amazon could easily take on more debt without adding significant financial risk.
But even more important, Amazon has the amazingly cheap currency that is Amazon stock. Even at the offering price, Whole Foods trades at 34x earnings. Amazon trades at 185x earnings. Thus by swapping Amazon shares for Whole Foods shares Amazon lowers the price 80%! Amazon isn’t spending real dollars, it is using its stock – which is an incredibly valuable move for its shareholders.
For the last several years WalMart’s general merchandise sales have been declining due to the Amazon Effect and growing on-line competitor sales. For the last 3 years overall revenues have not grown at all. To maintain revenue Walmart has shifted increasingly to groceries – which account for well over half of all WalMart revenues. By purchasing Whole Foods, Amazon takes direct aim at the only part of WalMart’s “core” business that it has not attacked.
Walmart’s net profit before taxes is ~4%. If Amazon can use Whole Foods to combine stores and on-line sales to take just 3% of WalMart’s grocery business away it could remove from Walmart ($485B revenues * 60% grocery * 3% market share loss) a net revenue decline of ~$9B. Given that the cost of grocery goods sold is about 50% – that would mean a net loss in contribution of $4.5B – which would cut almost 25% out of Amazon’s $20B pre-tax income. Raise the share taken to 5% and Amazon could cut WalMart’s pre-tax income by $7.25B, or ~35%.
The negative impact of declining store sales on the fixed costs of WalMart is atrocious. Even small revenue drops mean cutting staff, cutting inventory, cutting store size and eventually closing stores. Look at how fast Sears and Kmart fell apart when sales started declining. Like dominoes falling, declining sales sets off a series of bad events that dooms almost all retailers – as the quickened pace of retail bankruptcy filings has proven.
The above analysis, taking 3-5% out of Walmart’s grocery sales, say over 3 years, would be a huge gain attributed to the creation of a new Whole Foods combined with Amazon’s e-commerce. Growing grocery revenues by $9-$14B would mean practically a doubling of Whole Foods. Which sounds enormous – and most likely impossible for Whole Foods to do on its own, even if it did launch some kind of e-commerce initiative.
But this is not so unlikely given Amazon’s track record. Amazon has been growing at over 25%/year, adding between $20-$25B of new revenues annually. In 3 years between 2013 and 2016 Amazon doubled its revenues. So it is not that unlikely to expect Amazon puts forward an extremely ambitious push to turn around Whole Foods, increase store sales and use the combined entities to grow delivery sales of groceries and other general merchandise.
Is there risk in this acquisition? Of course. Combining any two companies is fraught with peril – combining IT systems, distribution systems, customer systems and cultures leaves enormous opportunities for missteps and disaster. But the upsides are enormous. Overall, this is a bet Amazon investors should be glad leadership is making – and it is a great benefit for Whole Foods investors.
GE Chairman and CEO Jeff Immelt walks off stage after being interviewed during the Washington Ideas Forum at the Harmon Center for the Arts September 28, 2016 in Washington, DC. A proud Republican, Immelt said it would hurt the United States and cripple President Barack Obama — and the next president of the U.S. — not to agree to trade deals like theTrans Pacific Partnership (Photo by Chip Somodevilla/Getty Images)
Readers of this column know I’m not a fan of General Electric’s CEO, Jeffrey Immelt. In May, 2012 I listed CEO Immelt as the 4th worst CEO of a large publicly traded American company. Unfortunately, his continued tenure since then did nothing to help make GE a stronger, or more valuable company. GE’s lead director says this is the culmination of a transition plan first developed in 2011. One can only wonder why it took the board so incredibly long to replace the feckless CEO, and why they allowed GE’s leadership to continue destroying shareholder value.
The longer back you look, the worse Immelt’s performance appears.
Few company analysts can say they’ve followed a company for 3 years. Fewer yet can say 5 years. Nearly none can say a decade. Yet, CEO Immelt was in his job for 16 years – much longer than almost all business analysts or writers have followed GE. Therefore, their lack of long-term memory often leaves them unable to give a proper overview of the company’s fortunes under the long-lived CEO.
I have followed GE closely for almost 35 years. Ever since I graduated from HBS class of 1982 along with Mr. Immelt. Several fellow alumni worked at GE, and a large number of my BCG (Boston Consulting Group) colleagues joined GE in senior positions during the mid-1980s as GE grew exponentially. I have followed several of these alumni as the years passed allowing me to take the “long view” on GE’s performance, during Welch’s leadership and more recently since Mr. Immelt took the top job.
I was very pleased to include a positive case study of GE’s business practices in my book “Create Marketplace Distruption – How to Stay Ahead of the Competition” (Financial Times Press, 2007.) CEO Welch used a number of internal processes to help GE leaders identify disruptive opportunities to change industries – whether markets where GE already competed or new markets. He relentlessly encouraged entering new businesses where GE could bring something new to the game, and he put GE’s money to good use growing revenues, and market cap, enormously. No other CEO in American history made as much value for shareholders as Jack Welch. His leadership pushed GE to the top position in most industries, and his relentless focus on growth helped even rank-and-file employees build million dollar IRAs to go with well funded pension and retiree benefit plans.
GE’s performance could not have changed more dramatically than it has under Mr. Immelt. But there are now a number of apologists who would say GE’s smaller size, and lower valuation, are due to market conditions which were out of Mr. Immelt’s control. They contend CEO Immelt was a good steward of the company during difficult market conditions, and the results of his tenure – notably lower revenues, lower valuation, fewer markets, fewer employees and lower community involvement – are not his fault. They argue he did a good job, all things considered.
Balderdash. Immelt was a terrible CEO
There is an overall reluctance to say bad things about any huge American icon, and its CEO. After all, columnists and analysts who are non-congratulatory don’t usually get called by the company to be consultants, or advisors. Or to be on the board. And publishers of columnists who say negative things about big companies and their execs risk having ad dollars moved to more favorable journals, and often unfriendly relationships with their ad departments and agencies. So it is far easier, and more acceptable, to sugar coat bad strategy, bad leadership and bad results.
But we should move beyond that bias. Mr. Immelt was the CEO of the ONLY company on the Dow Jones Industrial Average (DJIA) to have been on that list since it was created. He inherited the most successful company at creating shareholder value during the 1980s and 1990s. He surely should be held to the highest of comparative bars.
Those who say CEO Immelt was “set up to fail” are somehow making the case that Immelt would have been more successful if he had inherited a company with a bad brand image, weak history, and inadequate performance. They are rewriting history to say Jack Welch was not a good CEO, and his outsized gains destined GE to do poorly under his successor. That simply defies the facts – and logic.
Looking at the last 16 years of “difficult times,” when GE has struggled under Immelt’s leadership, one should ask “why did so many other companies do so well?” After all, the DJIA has more than doubled. The S&P 500 has almost doubled. The Russell 2000 has almost tripled. Overall, far more companies have gone up in value than down. Why were Immelt’s circumstances so difficult that all of those CEOs did so much better? They dealt with the same financial meltdown, same Great Recession, same increase in regulations, same federal reserve, same government administration – yet they were able to adapt their companies, grow and increase value.
Yes, GE was huge in financial services when Immelt took the reigns, and financial services saw a major crash. But look at the performance of JPMorganChase under CEO Jamie Dimon (also a classmate of Mr. Immelt.) JPM is stronger today than ever, growing and gaining market share and increasing its value to shareholders. Prior to the crash, in spring 2007, GE was trading at $41/share, and now it is $29 – a decline of ~30%. Back then JPM was trading at $53, and now it is $93 – a gain of ~75%. There obviously was a strategy to adapt to market conditions and do well. Just not at GE.
Immelt reacted to market events, poorly, rather than having a prepared, proactive strategy
Let’s not rewrite history. Prior to the banking crash CEO Immelt was more than happy for GE to be in the “easy money” world of finance. Welch had created GE Capital, and Immelt had furthered its growth when lending was easy and profitable. And he supported the enormous growth in GE’s real estate division. When this industry faced the crash, GE faced a near-bankruptcy not because of Welch, but because of Immelt’s leadership during the over 6 years he had been CEO. If there were risks in the system CEO Immelt had ample time to re-arrange the portfolio, reduce lending, offload financial assets and reduce exposure to real estate and mortgages. But Immelt did not do those things. He did not prepare for a reversal in the markets, and he did not prepare the balance sheet for a significant change of events. It was his leadership that left GE exposed.
As GE shares fell to $7 Immelt made a famous deal with Berkshire Hathaway’s CEO Warren Buffet to increase GE’s capital base in order to stave off demise. And this deal saved GE. But this was an extremely sweet deal for Buffett, giving Berkshire very good interest (10%) on the preferred shares and warrants allowing Buffett to buy future shares of GE at a fixed price. Berkshire made a profit, over and above the interest, of $260M on the deal, and overall at least $1.2B. By being prepared Buffett saved GE and made a lot of money. GE’s investors paid the price for a CEO that was unprepared.
But the changes brought about by the crash, and Dodd-Frank, were more than CEO Immelt could manage. Thus GE exited the business selling many assets at fire sale prices. This “turn tale and run” strategy was sold to the public as a way for GE to “focus” on its “core manufacturing business.” Rather, it was a failure of leadership to understand how to manage this business to future success in changed markets. Where Welch’s GE had grasped for disruption as opportunity, Immelt’s GE gasped at disruption and fled, destroying billions in GE value.
Immelt could not grow GE’s businesses, so he divested GE of many.
GE was to be the “industrial internet giant.” GE was to be a leader in the internet-of-things (IoT) where sensors, the cloud and remote devices created greater productivity. And, to be sure, companies like Apple, Google and Samsung have made huge gains in this market. Even small companies, like Nest, were able to jump on this technology shift with new products for the residential market. But name one market where GE is the dominant IoT player. During 16 years the internet and remote services markets have exploded, yet GE is not the market leader. Rather it is barely recognized.
Rather than growing GE with disruptive innovations and visionary products in emerging technology markets, Immelt’s GE was primarily shrinking via divestitures. In dismantling GE Capital he eliminated the lending and real estate operations. After decades as a leader in appliances, that division was sold. Welch built the extremely successful entertainment division around NBC/Universal, which Immelt sold.
The water business that was to be a world leader under Immelt’s vision, likewise sold – and largely to make sure GE could close the deal on selling its oil & gas unit. Even the famed electrical distribution business, going back to the start of GE, is now close to being sold.
And what happened to all this money? Well, about $50B went into share buybacks – which ostensibly would help shareholders. Only it didn’t, because GE is still worth less than when buybacks started. So the money just disappeared. At least Immelt could have paid it to shareholders as a dividend – but then that would not have boosted his bonuses.
GE’s website says Mr. Immelt wanted to create a “simpler, more valuable industrial company.” Mr. Immelt is definitely leaving behind a simpler, much smaller and weaker company. The brand is gone from consumer products, and severely tarnished in commercial products. GE lacks a great product pipeline, and even a strong development pipeline due to the rampant divestitures. When Mr. Flannery takes over as CEO he will not inherit a powerhouse company. He will inherit a company that is shrinking and rudderless, and disconnected from most growth markets with almost no product, technology or brand advantages. And he will report to the Chairman that created this mess, Mr. Immelt.
The most likely outcome is that Mr. Peltz and his firm, Trian Partners, will buy more GE shares and seek directorships on the board. Then, in a move not unlike the deaths of DuPont and Dow, there will be a massive cost cutting effort to bring expenses in-line with the shrunken GE business. R&D will be discontinued, as will product development. Support groups will be shredded. Customer service will be downsized. Then the remaining pieces will be sold off to buyers, or taken public, leaving GE a dismantled piece of history.
While that may work for the capital markets, and some short-term investors will share in the higher valuation, what about the people? People who dedicated their careers to GE, and are pensioners or current employees? What about cities and counties where GE has been a major employer, and civic contributor? What about customers that bought GE industrial products, only to see those products dropped due to low profitability, or little growth opportunity? What about suppliers that invested in developing new technologies or products for GE to take to market? What will happen to the people who once relied on GE as America’s largest diversified industrial company?
These people all have an ax to grind with the very wealthy, and now departing, CEO Immelt. He inherited what may well have been the most successful company on earth. He leaves behind a far weaker company that may not survive.
Originally posted: May 31, 2017
On the day after Memorial Day Amazon stock hit $1,000/share — a new record high. Amazon is up about 40% the last year. It’s market capitalization doubles Wal-mart. And the vast majority of investment analysts expect Amazon to rise further.
Amazon competes in dozens of international markets, as do many on-line retailers, yet the ‘Amazon Effect’ is far greater in the USA than anywhere else. And there’s a good reason — America is vastly over-served when it comes to traditional retail.
America is enormously over-built with retail space
Looking at square feet of retail space per 1,000 people, this infographic shows that, adjusted for population size, the USA has 8x the retail of Spain, 9x the retail of Italy, 11x the retail of Germany, 22x the retail of Mexico, 51x the retail of China and 400x the retail of India! Overall, this is remarkable. I’ve been to all of these countries, and in none did I feel that I was unable to buy things I needed. Clearly, the USA has had such a robust retail sector that it has dramatically over-expanded – with individual stores, suburban strip malls, elaborate horizontal malls, vertical urban malls and multi-floor urban retail complexes far outpacing the needs of American shoppers.
All these stores created a very competitive retail environment. This competition, and the lack of any sort of national value added tax (VAT,) kept prices for most things in America among the lowest in the world. Simultaneously according to the Department of Labor, Retail is the third largest employer in America. Couple that with the enormous wholesale distribution networks of warehouses and truck fleets — and selling things becomes the country’s largest employer — even bigger than the sum total of all federal, state and local government employees .
Additionally, retail has produced the largest local taxes of any industry, combining local sales taxes with property taxes, which has funded schools and public works projects for decades. And this retail space has helped drive demand for all kinds of support services from utilities to maintenance.
U.S. retail consumers are tremendously over-served, and the market is set to collapse
But now retail is wildly overbuilt. Organic demand for all retail grows about equal to population growth, so about 3%/year. But retail real estate grew far faster since World War II as developers kept building more malls, and large retailers like Sears, KMart, Walmart, Target, Lowe’s and Home Depot built more stores. Now demand for products through traditional retail is declining. People are simply ordering on-line.
Net/net, America’s consumers are now over-served by retailers. There is too much space, and inventory. And now that store-to-home distribution has faded as a problem, with multiple carriers offering overnight service, people are increasingly happy to avoid stores altogether, greatly exacerbating the overcapacity problem. Thus, the ‘Amazon Effect’ has emerged, where stores are closing at a rapid rate and many retailers are failing altogether leaving vast amounts of empty retail space.
Foreign markets are under-served, and benefit from Amazon’s entry
Contrarily, in other countries consumers were to some extent under-served. They actually dealt with local stock-outs on desirable items. And frequently lived in a world with a lot less product choice. And, generally, international consumers expected to travel farther to shop at the few larger stores, malls and urban shopping centers with greater selections.
In those countries local economies became far less dependent on retail real estate for jobs — and for taxes. Most have little or no property taxes as deployed in the USA. Additionally, rather than adding a local sales tax to the price of goods, most countries use some sort of national VAT to collect the tax during distribution. When Amazon starts distributing in these markets it is seen as a good thing! Consumers have more choice, less hassle and often better service. Also, Amazon collects the VAT so no taxes are lost.
Contrarily, American communities could never stop adding retail space. Whenever Walmart or Best Buy wanted a new store, no community leaders turned down the potential local economic gains. But it led to too much space being built for a healthy sector, and certainly far too much given the market shift to on-line retail. Now retail is a classic over-served market, sort of like the need for stagecoaches and livery barns after the railroads were built.
Expect 50-67% of retail space to go vacant within a decade
How much retail space could go vacant in the USA? Just invert the multiples from above. For the USA to have the same retail space as Spain implies an 87.5% reduction, Italy -89%, Germany -91%, Mexico -95.5%. Thus it is not hard to imagine a full 50-67% of America’s retail space to be empty in just 5 or 10 years. Americans would still have 2-3 times the retail space of other developed markets.
There is no doubt Amazon is a good employer, and on-line sales growth will employ hundreds of thousands at Amazon, and millions across the marketplace. Further, most of those jobs will pay a lot better than traditional retail jobs. But there is no sugar-coating the huge impact the ‘Amazon Effect’ will have on local economies and jobs. America is vastly overbuilt and over-supplied by retailers. There will be a huge shake-out, with dozens of retail failures. And there will be enormous amounts of vacant property sitting around, looking for some kind of alternative use. And local communities will find it difficult to meet constituent needs as sales tax and property tax receipts fall dramatically.
As I wrote in my column on February 28, this is going to be an enormous shift. Far bigger than the offshoring of manufacturing. The ‘Amazon Effect’ is automating retailing in ways never imagined by those who built all that retail space. As people keep buying on-line there will be a collapse of retail space pricing, and a collapse of industry participants. Industry players always greatly under-estimate these shifts, so they aren’t projecting retail armaggedon. But in short order the need for retail will be like the need for dedicated, raised-floor computer centers to house mainframes, and later network hubs. It’s just going to go away.