Mighty Oaks from Tiny Acorns Grow – Beyond Meat

Mighty Oaks from Tiny Acorns Grow – Beyond Meat

The newsletters of Adam Hartung.
Keynote Speaker, Managing Partner, Author on Trends
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TREND: Beyond Meat (BYND, NASDAQ)

A big, new trend is emerging. Sales of plant based protein products may be small, but growth is remarkable. Could Beyond Meat be the next Netflix?

BEYOND MEAT plant based patties

In Q3 2019, Beyond Meat’s revenue is up 2.5x (250%) vs Q3 2018 — which was up 2.5x (250%) over Q3 2017. Yes, you can say this growth is on a small base, given that last quarter was $100M revenue.

Imagine what it’s like growing that fast. Imagine the exhilaration of solving problems – like funding your accounts receivable that’s growing with accelerating orders. Or amping up production faster than ever imagined. Or meeting needs of your customers, retailers and restaurants. Or paying out big bonuses due to beating all your planned metrics.

It’s not that much fun to work at Cargill. Or Tyson Foods. Or Smithfield. Or any other traditional company producing beef, or pork, or chicken. Those are huge companies, with lots of people. But they aren’t maxing out sales and profits – and bonuses – like Beyond Meat.

It’s easy to ignore a start up. But one has to look at the relative growth of a company to judge its future. There were cracks in the growth rate at Blockbuster 6 years before it failed. And during that time, Blockbuster kept saying Netflix was a nit that didn’t matter. But Netflix was growing like the proverbial weed. Netflix wasn’t even half the size of Blockbuster when Blockbuster filed for bankruptcy.

A Threat Enters

With growth like Beyond Meat it didn’t take long to upset an entire industry biz model. Amazon still doesn’t sell as much as WalMart, but it wiped out a significant number of retailers by changing volumes enough to erase their profits. Think about the changes wrought on the advertising industry by Google, which has pretty much killed print ads. Look at what’s happened to other media ad models, like TV and radio, by Facebook’s growth. And entertainment has been entirely changed – where today the onetime distributor is one of the biggest content producers – Netflix.

In traditional marketing theory, Beyond Meat, like Netflix, is selling new products to existing markets.

Most disruptors enter the markets in the new product/new market quadrant of the Ansoff matrix. They create the new market just by entering. If they even see them as competitors, established businesses dismiss these potential disruptors because of established focus on current markets/current products with sustaining innovations. Selling new products to existing customers is the first step companies take as they start to innovate.

Kraft was on this path when they acquired a new productc with its purchase of Boca Burger in 2000.  Kellogg’s and General Foods jumped into the alternative meat products at about the same time.  Vegetarian burger substitutes threatened the success formula of meat products and were relegated to niche products. In 2018, Kraft’s incubator tried to relaunch Boca, but the smaller, more nimble start-ups had already captured consumers’ attention and reframed the market.

The Acorn Sprouts

Beyond Meat had morphed quickly into a direct competitor to the meat industry by selling this new product to existing meat customers!

Riding the trends of climate change, sustainability and organic foods, Beyond Meat is starting to look like a true game changer. It may be small, but those other companies were too (along with Tesla, don’t forget, considered immaterial by GM, et.al.) Those who are in the traditional protein market (beef especially) had better pay attention – their profit model is already under attack!!

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“The creation of a thousand forests is in one acorn.”

Ralph Waldo Emerson

What’s on your company’s radar today?

Spark Partners is here to help as your coach on trends and innovation. We bring years of experience studying trends, organizations, and how to implement. We bring nimbleness to your strategy, and help you maximize your ability to execute.

Let us do an opportunity assessment for your organization. For less than your annual gym cost, or auto insurance premium, we could likely identify some good opportunities your blinders are hiding. Read my Assessment Page to learn more.

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For more on how to include trends in your planning, I’ve created a “how-to” that you can adapt for your team.  See my Status Quo Risk Management Playbook.
Give us a call today, or send an email, so we can talk about how you can be a leader, rather than follower.  Or check out the rest of the website to read up on what we do so we can create the right level of engagement for you.
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Find Opportunities Out of the Box

Find Opportunities Out of the Box

If your company is like most businesses, your list of new product or service ideas looks like a sales wish list- new features at a lower cost. Marketing or product management may go a step further and group the ideas into product line extensions or possibly entries into new market segments. Unfortunately, while generating revenue in the short run, this process leaves the company vulnerable to competition and missing opportunities in the long run.

Well, you are not alone. Since about 2012, the pace of innovation has slowed even in the popular market of social media. According to KeyMedia, “What was once a world of diversity and originality has slowly started to look like a bad case of déjà vu… (as platforms are) becoming more similar to each other…”

Most companies devote resources to a quadrant on the innovation matrix known as “sustaining innovation.” They improve existing products sold to existing customers. It’s low risk, true, but it’s also low return. Why do companies follow this death spiral? It’s because “innovation” has gotten a bad reputation.

According to Inc. magazine, “…many (business) people have come to equate the idea of innovation with disruptive innovation. But the fact is that for most businesses, placing big bets on high-risk ideas is not only unfeasible, it’s unwise.”

The Ansoff matrix of new and existing markets and products is usually interpreted as 4 quadrants. It is much more than that: it is a continuum between sustaining and disruptive innovation. .

Adam Hartung often tells clients, “Get out of the box, then think!” This applies directly to the Ansoff model. Once a company sees the matrix, not as fixed “boxes” but as a spectrum of opportunities, markets are viewed not as filled with risk, but filled with opportunities!

Consider Ricoh’s new “clickable paper” that combines the print channel, with an app and that integrates to social media or a website. Not disruptive in the classical sense, but an adjacent product and adjacent market segment that makes print relevant to tech savvy consumers. Or Dr. Dre’s Beats headphones that combine pre-equalized sound with noise cancellation and style- a clever and highly successful blend of existing technologies, vigorously marketed.

Uncovering these market opportunities that can deliver improved returns at a manageable risk for the firm. New products will also generate an increasing percentage of revenue leading to continued growth. Companies that master this process have a long range radar to identify potential opportunities in a process called, “continuous innovation”.

What’s on your company’s radar today?

We are here to help as your coach on trends and innovation. We bring years of experience studying trends, organizations, and how to implement. We bring nimbleness to your strategy, and help you maximize your ability to execute.

Go the website and view the Assessment Page. Send me a reply to this email, or call me today, and let’s start talking about what trends will impact your organization and what you’ll need to do to pivot toward greater success.

United Airlines – How Bad Strategy Created a Culture That Kills Puppies

United Airlines – How Bad Strategy Created a Culture That Kills Puppies

Do you remember the songs, and videos, from 2008 “United Breaks Guitars?” After United Airlines destroyed musician Dave Carroll’s guitar he chronicled the months-long journey he took trying to replace it. In the end, United told him “F**k you” as customer service blew him off completely. He went on to make a few million dollars with his songs and parody about the horrible experience. Because so many people felt they were abused like Mr. Carroll.

“United Breaks Guitars” was a hit because so many people related to the terrible customer experience on United. book united breaks guitars “The Unfriendly Skies” was the motto of customers, mocking the airlines “Friendly Skies” ads. It was clear that by 2008 United did not care about customers. Moving headlong to constantly lower operating costs, United built a culture that focused solely on efficiency, leading to terrible customer service, unhappy customers and employees that were a lot more worried about being yelled at by their bosses for not cutting costs than creating any customer satisfaction.

Things certainly haven’t changed. In 2017, United ejected a 69 year old physician from a plane, breaking his nose, knocking out his teeth and giving him a concussion. That created an uproar. Yet within a week United killed the world’s largest bunny rabbit in an airplane holding bin. But, even worse, last week United actually killed a puppy by forcing it be placed in an overhead bin. At least the dog United sent on a 1,000 mile unexpected flight to Japan survived, and the interviewed owner said he felt lucky the airline hadn’t killed his pet. Of course United refunded their money – which as you can imagine was a slap in the face to all these people who were so abused.

Unfortunately, United is just the worst of a bunch of bad airlines. Customer service really isn’t any better on Delta, American, JetBlue or Southwest. Saying these other airlines are better is just picking out a less heinous member of the Khmer Rouge Army.

STRATEGY MATTERS

This all goes back to deregulation. When President Carter allowed the airlines to charge as they like the industry really had no idea what it was going to do. There was chaos for years. But eventually consolidation kicked-in, and cutting cost was the only thing all 3 majors agreed upon. Buy more market share, as opposed to winning it with customer service, then slash the costs. This did the wonderfulness of leading all of them to file bankruptcy! Some twice! What a grand industry strategy!

eaten green olivesThen Chairman of American Airlines received Wall Street Journal front-page coverage for realizing people weren’t eating their olives in first class, so he ordered olives removed from the first class meals. He was cheered for saving $100K. But what folks missed was that he, and his peers leading the airlines, were systematically trying to figure out “how do we offer the least possible service.” By focusing on a strategy of lowering cost, and being doggedly determined in that strategy, soon nothing else mattered.

Today, there are no free meals in coach, and terrible meals in first class. Management angered employees into strikes and multi-year negotiations, beating down compensation and eliminating benefits leading to unhappiness so bad that in 2010 a Jet Blue flight attendant pulled the emergency exit and jumped out of the plane as he quit.

So, all the airlines in America stink. And, many domestic airlines in Europe, such as Ryan Air, have followed suit. The execs keep saying “all customers care about is price.” They use that excuse to create a culture so hostile to employees, and customers, that pretty soon employees are beating up customers and killing family pets (after charging extra to take the pet on the plane) and actually not caring.

Employees have become gestapos for the leadership – which has created a culture in which nobody wins. So flight attendants do as little as possible, because they don’t care about customers any more than leadership does. In 2017, a JetBlue attendant threw a family off flight because their toddler kicked the seat. When a woman complains about a child in seat next to her a Delta attendant throws her off the plane. And just last week when a 2 year old cries during boarding a Southwest attendant throws the child and her father off the plane.

Deregulation led to an oligopoly. Now, customers have no choice. Some of us fly almost every week on business, and it is pure hell. Nobody we deal with, from TSA to airport vendors to airline staff like customers. The culture has become “I’m abused, so you will be abused.” To fly is to succumb to being obsequious to ALL employees in your effort to not anger anyone, for fear they will deny you service. Or, worse, beat you up or kill your pet. But, honestly, there is nothing customers can do about it.

STRATEGY MATTERS

The leadership of the airlines, lacking regulation, implemented a strategy of “be low cost.” The result was creating a culture where employees routinely abuse customers in the process of trying to save a few dimes. If the next Mark Zuckerberg, Elon Musk or Reed Hastings showed up, do you think HR would hire them? Would the Board of Directors, so focused on the wrong strategy, consider any of them as CEO? The wrong strategy has led to the ruination of an entire industry, miserable employees, unhappy customers and marginal returns. It is a terrible culture.

So what is your strategy? Is your strategy creating the culture you want? Are you headed toward happy customers who want more of your product or service, and create growth? Or are you letting your lack of a forward-thinking strategy default you into operational cost cutting, and the movement toward a culture of misery that drives away employees, vendors and eventually customers?

Warren Buffett Is Loading Up On Apple – Why You Should be Wary

Warren Buffett Is Loading Up On Apple – Why You Should be Wary

In February, Berkshire Hathaway revealed it had dumped its IBM position. Good riddance to a stock that has gone down for 5 years while the S&P went up! What did Buffett do with the money? He loaded up on Apple – making that high-flyer Berkshire’s #1 holding. So, isn’t the smart thing now to buy Apple?

First, don’t confuse your investing goals with Berkshire Hathaway’s. It may seem that everyone has the same objective, to buy stocks that go up. But Berkshire is a very special case. As I pointed out in 2014, we mere mortals can’t invest like Buffett, and shouldn’t try. Berkshire Hathaway has the opportunity to make investments in special situations with tremendous return potential that we don’t have. Berkshire’s investment strategy is to invest where it can create cash to prepare for special situations, or to park money where it can make a decent return, and hopefully generate cash while it waits.

Apple is the #1 most cash-rich company on the planet, and with the new tax laws it can repatriate that cash. This is an opportunity for a “special dividend” to investors, and that is the kind of thing that Buffett loves. He isn’t a venture capitalist looking for a 10x price appreciation. He wants a decent 5% rate of return, and hopefully dividends, so he can grow cash for his special situation opportunities. Apple, the most valuable company on any exchange, is exactly the kind of company where he can place a few billion dollars without driving up the price and let it sit making a solid 5-6%, collect dividends and maybe get a few kickers from things like the cash repatriation.

Second, let’s not forget that Buffett’s IBM buying spree lost money. If he was a great tech investor, he never would have bought IBM. He bought it for the same reason he’s buying Apple, only he was wrong about what was going to happen to IBM as it continued to lose relevancy.

I pointed out in May, 2016 that Apple was showing us all a lot of sustaining innovations, with new rev levels of existing products, but almost no new disruptive innovations. The company that once gave us iPods, iTunes, iPhones and iPads was increasingly relying on the next version of everything to drive sales. Lots of incremental improvement. But little discussion about any breakthrough products, like iBeacon, ApplePay or even the Apple Watch. In a real way, Apple was looking a lot more like the old Microsoft with its Windows and Office fascination than the old Apple.

By October, 2016 Apple hit a Growth Stall. While this may have seemed like “no big deal,” recall that only 7% of the time do companies maintain a 2% growth rate after stalling. Is Apple going to be in that 7%? With the launch of the less-than-overwhelming iPhone X, and the actual drop in iPhone sales in Q4, 2017 it looks increasingly like Apple is on the same road as all other stalled companies.

In the short term Apple has said it is milking its installed base. By constantly bringing out new apps it has raised iTunes sales to over $30B/quarter. And it has a dedicated cadre of developers making over $25B/year creating new apps. So Apple is doing its best to get as much revenue out of that installed base of iPhones as it can, even if device sales slow (or decline.) For Buffett, this is no big deal. After all, he’s parking cash and hoping to get dividends. Milking the base is a cash generation strategy he would love – like a railroad, or Coca-Cola.

But if you’re interested in maintaining high returns in your portfolio, be aware of what’s happening. Apple is changing. It’s not going to falter and fail any time soon. But don’t be lulled by Berkshire’s big purchases into thinking Apple in 2018 is anything like it was in 2012 – or through 2014. Instead, keep your eyes on game changers like Netflix, Tesla and Amazon.

Walmart’s Surprising Tumble – Analysts Never Learn, Will You?

Walmart’s Surprising Tumble – Analysts Never Learn, Will You?

On February 20, 2018 Walmart’s stock had its biggest price drop ever. And the second biggest percentage decline ever. Even though same store sales improved, investors sold off the stock in droves. And after a pretty healthy recent valuation run-up.

What happened? Simply put, Walmart said its on-line sales slowed and its cost of operations rose, slowing growth and cramping margins. In other words, even though it bought Jet.com Walmart is still a long, long way from coming close to matching the customer relationship and growth of Amazon.com. And (surprise, surprise) margins in on-line aren’t an easy thing — as Amazon’s thin margins for 15 years have demonstrated.

In other words, this was completely to be expected. Walmart is a behemoth with no adaptability. For decades the company has been focused on how to operate its warehouses and stores, and beat up its suppliers. Management had to be drug, kicking and screaming, into e-commerce. And failing regularly it finally made an acquisition. But to think that Jet.com was going to change WalMart’s business model into a growing, high profit operation any time soon was foolish. Management still wants people in the store, first and foremost, and really doesn’t understand how to do anything else.

All the way back in 2005, I wrote that Walmart was too big to learn, and was unwilling to create white space teams to really explore growing e-commerce (hence the belated Jet-com acquisition.) In 2007, I wrote that calling Walmart a “mature” competitor with huge advantages was the wrong way to view the company already under attack by all the e-commerce players. In July, 2015 Amazon’s market cap exceeded Walmart’s, showing the importance of retail transformation on investor expectations. By February, 2016 there were 10 telltale signs Walmart was in big trouble by a changing retail market. And by October, 2017 it was clear the Waltons were cashing out of Walmart, questioning why any investor should remain holding the stock.

It really is possible to watch trends and predict future markets. And that can lead to good predictions about the fates of companies. The signs were all there that Walmart shouldn’t be going up in value. Hope had too many investors thinking that Walmart was too big to stumble – or fail. But hope is not how you should invest. Not for your portfolio, and not for your business. Walmart should have dedicated huge sums to e-commerce 15 years ago, now it is playing catch up with Amazon.com, and that’s a race it simply won’t win. Are you making the right investment decisions for your business early enough? Or will you stumble like Walmart?

Retail Transformation Continues and Will Impact Your Portfolio

Retail Transformation Continues and Will Impact Your Portfolio

Business Insider is projecting a “tsunami” of retail store closings in 2018 — 12,000 (up from 9,000 in 2017.) Also, the expect several more retailers will file bankruptcy, including Sears.

Duh. Nothing surprising about those projections. In mid-2016, Wharton Radio interviewed me about Sears, and I made sure everyone clearly understood I expect it to fail. Soon. In December, 2016 I overviewed Sears’ demise, predicted its inevitable failure, and warned everyone that all traditional retail was going to get a lot smaller. I again recommended dis-investing your portfolio of retail. By March, 2017 the handwriting was so clear I made sure investors knew that there were NO traditional retailers worthy of owning, including Walmart. By October, 2017 I wrote about the Waltons cashing out their Walmart ownership, indicating nobody should be in the stock – or any other retailer.

The trend is unmistakable, and undeniable. The question is – what are you going to do about it? In July, 2015 Amazon became more valuable than Walmart, even though much smaller. I explained why that made sense – because the former is growing and the latter is shrinking. Companies that leverage trends are always worth more. And that fact impacts YOU! As I wrote in February, 2017 the “Amazon Effect” will change not only your investments, but how you shop, the value of retail real estate (and thus all commercial real estate,) employment opportunities for low-skilled workers, property and sales tax revenues for all cities impacting school and infrastructure funding, and all supply chain logistics. These trends are far-reaching, and no business will be untouched.

Don’t just say “oh my, retailers are crumbling” and go to the next web page. You need to make sure your strategy is leveraging the “Amazon Effect” in ways that will help you grow revenues and profits. Because your competition is making plans to use these trends to hurt your business if you don’t make the first move. Need help?

Get Me an Innovation!

Get Me an Innovation!

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.

The Waltons Are Cashing Out Of Walmart — And You Should Be, Too

The Waltons Are Cashing Out Of Walmart — And You Should Be, Too

Employees restock shelves of school supplies at a Walmart Stores Inc. location in Burbank, CA.  Bloomberg

Last week there was a lot of stock market excitement regarding WalMart. After a “favorable” earnings report analysts turned bullish and the stock jumped 4% in one day, WMT’s biggest rally in over a year, making it a big short-term winner.  But the leadership signals indicate WalMart is probably not the best place to put your money.

WalMart has limited growth plans

WalMart is growing about 3%/year.  But leadership acknowledged it was not growing its traditional business in the USA, and only has plans to open 25 stores in the next year.  It hopes to add about 225 internationally, predominantly in Mexico and China, but unfortunately those markets have been tough places for WalMart to grow share and make profits.  And the company has been plagued with bribery scandals, particularly in Mexico.

And, while WalMart touts its 40%+ growth rate on-line, margins online (including the free delivery offer) are even lower than in the traditional Wal-Mart stores, causing the company’s gross margin percentage to decline.  The $11.5 billion on-line revenue projection for next year is up, but it is 2.5% of Walmart’s total, and a mere 7-8% of Amazon’s retail sales.  Amazon remains the clear leader, with 62% of U.S. households having visited the company in the second quarter.  And it is not a good sign that WalMart’s greatest on-line growth is in groceries, which amount to 26% of on-line salesalready.  WalMart is investing in 1,000 additional at-store curb-side grocery pick-uplocations, but this effort to defend traditional store sales is in the products where margins are clearly the lowest, and possibly nonexistent.

It is not clear that WalMart has a strategy for competing in a shrinking traditional brick-and-mortar market where Costco, Target, Dollar General, et.al. are fighting for every dollar.  And it is not clear WalMart can make much difference in Amazon’s giant on-line market lead.  Meanwhile, Amazon continues to grow in valuation with very low profits, even as it grows its presence in groceries with the Whole Foods acquisition.  In the 17 months from May 10, 2016 through October 10, 2017 WalMart’s market cap grew by $24 billion (10%,) while Amazon’s grew by $174 billion (57%.)

Retail store closing graphic WSJ

Even after recent gains for WalMart, its market capitalization remains only 53% of its much smaller on-line competitor.  This creates a very difficult pricing problem for WalMart if it has to make traditional margins in order to keep analysts, and investors, happy.

Leadership is not investing to compete, but rather cashing out the business

To understand just how bad this growth problem is, investors should take a look at where WalMart has been spending its cash.  It has not been investing in growing stores, growing sales per store, nor really even growing the on-line business.  From 2007-2016 WalMart spent a whopping $67.3 billion in share buybacks.  That is over 20 times what it spent on Jet.com.  And it was 45% of total profits during that timeframe.  Additionally WalMart paid out $51.2 billion in dividends, which amounted to 34% of profits.  Altogether that is $118.5 billion returned to shareholders in the last decade.  And a staggering 79% of profits.  It shows that WalMart is really not investing in its future, but rather cashing out the company by returning money to shareholders.

 “Say on pay” votes are often seen as a measure of how happy investors are with a company.  The average disapproval level on executive pay is 4.3%.  At Target, Macy’s and Kroger the disapproval is 6.1%, 6.3% and 6.9%.  Investors, however, disapprove of the compensation for WalMart’s leaders at a whopping 16.7%; nearly 4x the average and 2.5x its competition.
So very large investors, who control huge voting blocks, recognize that things are not going well at WalMart.  But, because of the enormity of the share buybacks, the Walton family now controls over half of WalMart stock.  That makes it tough for an activist to threaten shaking up the company, and lets the Waltons determine the company’s future.

Buybacks signal Strategy

Walmart annual meeting 2014, walmart.com

With WalMart’s announcement last week that it intends to spend another $20 billion on additional share repurchases, the Walton family’s strategy is clear.  They are cashing out the business.  As money comes in they are going to continue spending little on the traditional business, and in no way do they intend to invest at a level to really chase Amazon on-line.

There will be marginal enhancements.  But the vast majority of the money is being returned to them, via $20 billion in share repurchases and $1.5 billion in cash dividends annually.

Amazon spends nothing on share repurchases.  Nor does it distribute cash to shareholders via dividends.  Amazon’s largest shareholder, Jeff Bezos, invests all the company money in new growth opportunities.  These nearly cover the retail landscape, and increasingly are in other growth markets like cloud services, software-as-a-service and entertainment.  Comparing the owners of these companies, quite clearly Bezos has faith in Amazon’s ability to invest money for profitable future growth.  But the Waltons are far less certain about the future success of WalMart, so they are pulling their money off the table, allowing investors to put their money in ventures outside WalMart.

Investing your money, do you think it is better to invest where the owner believes in the future of his company?

Or where the owners are cashing out?

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The Case For Trian’s Nelson Peltz Joining P&G’s Board

The Case For Trian’s Nelson Peltz Joining P&G’s Board

Months ago Trian’s Nelson Peltz began buying Procter & Gamble (P&G) shares.  He invested about $3.5 billion, making Trian’s ownership 1.5%.  Since then he has been lobbying, unsuccessfully, for a seat on P&G’s board of directors.  He has said that although P&G already has 10 outside directors on its 11 member board, adding him would make a tremendous difference increasing P&G’s market valuation.  P&G is now the largest company ever to engage in a proxy battle between the existing board and an outside investor.

Today, Peltz offered his plan to change P&G, continuing his attack on management, saying that P&G has not sufficiently cut costs, nor has it created growth via innovation – citing no new innovation platform since Swiffer was introduced almost 20 years ago.  He attacked the company for selling off brands without returning sufficient funds to shareholders.  He believes management’s targets are too low, and it is too easy for managers to make their bonus.  He also believes there is a need to hire more managers from outside the company.

He informed the company if he were a director he would reorganize the company to make it more streamlined, change the compensation plan, and do a better job of cutting costs.

P&G is dead set against adding Peltz, saying he would disrupt the board, and the company, in negative ways. CNBC.com reported Peltz’ claims the company is spending $100 million on the proxy fight to keep him off the board. P&G’s proxy statement puts that sum at $35 million.  Either number indicates P&G is spending a lot of money to stop the appointment of Peltz.

Nelson Peltz, Trian Partners

Nelson Peltz, Founder Trian Partners, LLC

The company defended itself, saying leadership has been growing EPS (earnings per share,) making productivity improvements, growing sales organically at 2%/year and returning huge value to shareholders.  They accuse Peltz of simply planning a split of the company into 3 parts so each can go public on its own – adding little value to shareholders while damaging the company’s ability to operate.

Unfortunately, P&G’s leadership has pretty much set itself up for this battle.  And shareholders may have good reason to add Peltz to the board in hopes of additional change.

P&G’s financial performance has been poor

Firstly, in the last 10 years the value of P&G has risen about 44%. But the S&P 500 has grown by 154.5%.  Shareholders would have done better owning the average than owning P&G.  Claims about how well P&G have done since the CEO arrived 2 years ago overlook the fact that just prior to his arrival, in November, 2014 P&G shares traded at $90-$93.85/share, which is just about where they are now.  So all that’s happened is a recovery to where things were previously, not a great success.  Shareholders have a right to be frustrated.

EPS has risen, but that has everything to do with share buybacks rather than earnings growth.  EPS has risen about 11%.  But since 2nd quarter of 2007 P&G has spent ~$61billion on share repurchases, reducing the number of shares from 3.32 billion to 2.74 billion, or 17.5%.  Rather than growing earnings, leadership has been making the capital structure smaller – and thus EPS has risen while earnings have not.  This is actually a program that goes all the way back to 1995, which indicates a long-term approach of focusing on EPS, which are manipulated, rather than earnings.

P&G has favored divestitures and share repurchases over innovation and acquisitions for growth

Meanwhile, P&G’s buyback program has been financed by a dramatic divestiture program, selling off very large businesses to raise cash.  Over the last decade major sales included:

2009 – selling the P&G pharma business
2012 – selling the water filtration business including Pur
2012 – selling Pringles (along with several other iconic brands)
2014 – selling the dog food business
2016 – selling the Duracell battery business
2016 – selling the beauty brand business

Management tried in its response to say that innovation was just fine at P&G.  But what it cited were line extensions like Tide PODs, GAIN Flings, Pampers Pants, and Oral B power toothbrush.  None of these are great new innovations launching significant sales.  None are new product platforms for high growth.  Rather they are typical sustaining innovations applied to brands that are long in the tooth.

This is typical of the long-term lack of valuable innovation at P&G. Do you recall in 2009 when the company lauded its development of the “P&G Public Toilet Database App?” Not exactly on the top 20 iTunes list.  Or do you remember in 2014 when P&G launched its “Basic” line of products, where it literally sold a less-good quality product hoping to attract a brand-conscious but quality uncaring targeted niche?  Peltz is making a good point, that leadership at P&G really has forgotten what good, long-term profit producing innovation is, while succumbing to the strategy of selling major business units (reducing revenue) then using the money to buy back shares rather than investing in future growth.

P&G has not shown it understands how trends are quickly changing its business

Meanwhile, the consumer goods industry is changing dramatically, and it is not clear that P&G’s leadership is really preparing for future changes.  P&G still relies heavily on television advertising to sell its products. But that approach had stopped generating profitable growth as far back as 2010. Back then Colgate was holding its market share, and growing revenues, on all its brands that compete with P&G while spending 25% less, and often much less, on advertising.

 

P&G is still stuck using marketing strategies that have been outdated for almost a decade. Comcast lost 90,000 subscribers in Q2, and the stock lost 7% today when Comcast management alerted investors it expects to lose 150,000 more in Q3.  And while viewership is declining, ad pricing is going up, making TV advertising a less effective and more expensive marketing tactic for consumer goods. As P&G brands have fallen further behind competitors in Instagram followers, and lack good social media programs like Wendy’s, Peltz has proposed a substantial increase in digitally savvy marketers.

P&G and Walmart logo

Simultaneously, distribution is changing dramatically.  Once P&G could rely on its product dominance to dictate space usage in grocery stores and discounters.  But the rise of e-commerce has dramatically affected these historical distribution channels.  Today the fastest growing grocer is Aldi, which eschews brands like P&G’s in favor of its own private label.  And after stunting the growth of discounters like WalMart, the leading e-commerce company, Amazon.com, has now purchased Whole Foods.  This is leading everyone to expect greater growth in on-line grocery shopping and additional at-home delivery, which undercuts the former strength P&G had in traditional brick-and-mortar stores with warehouse delivery models.

Management bragged of its $3 billion in e-commerce sales, but that is a drop in the bucket.  Is P&G ready to compete for sales in future markets where social media is more important than advertising?  Where mobile ads have more power than print, TV, radio and traditional internet banners?  Where social media groups drive more consumption behavior than company-sponsored social media pages with coupons and use recommendations?  Will P&G dominate product volume when it has to rely on Amazon.com and other sites to sell and deliver its products?  If people move to daily home deliveries, and less stock-up purchasing what will happen to P&G’s former brand advantage via high numbers of SKUs (stock keeping units) and large packaging options?

This will be an interesting proxy battle.  There is no doubt Peltz wants to shake up the board’s behavior, compensation plans, hiring programs, targets and many of the ways management runs the company.  Simultaneously, the P&G board believes it is moving in the right direction.  Large shareholders are conservative, and don’t like to create problems (P&G’s largest shareholders are Vanguard, Blackrock, State Street, BofA, Capital World, Trian, Northern Trust – which combined control 24% of P&G stock.)

But this isn’t about a complete change in the board.  It’s just a vote to add one additional member who is not happy with things the way they are.  Will these large shareholders see a need for someone to shake things up, or will they accept current leadership’s claims that things are on the right track?

It will be interesting to watch, because Peltz isn’t without some objective concerns about P&G’s future, given its performance the last decade and the amount of change facing the industry.

A Bitcoin Is Worth $4,000–Why You Probably Should Not Own One

A Bitcoin Is Worth $4,000–Why You Probably Should Not Own One

Even though most people don’t even know what they are, Bitcoins increased in value from about $570 to more than $4,300 — an astounding 750% — in just the last year.  Because of this huge return, more people, hoping to make a fast fortune, are becoming interested in possibly owning some Bitcoins.  That would be very risky.

Bitcoins are a crypto-currency.  That means they can be used like a currency, but don’t physically exist likeBitcoin dollar bills.  They are an online currency which can be used to buy things.  They are digital cash that exist as bits on people’s computers.  You can’t put them in a drawer, like dollar bills or gold Krugerrands.  Bitcoins are used to complete transactions – just like any currency.  Even though they are virtual, rather than physical, they are used like cash when transferred between people through the web.

Being virtual is not inherently a bad thing.  The dollars on our financial institution statement, viewed online, are considered real money, even though those are just digital dollars.  The fact that Bitcoins aren’t available in physical form is not really a downside, any more than the numbers on your financial statement are not available as physical currency either. Just like we use credit cards or debit cards to transfer value, Bitcoins can be spent in many locations, just like dollars.

What makes Bitcoins unique, versus other currencies, is that there is no financial system, like the U.S. Federal Reserve, managing their existence and value.  Instead Bitcoins are managed by a bunch of users who track them via blockchain technology.  And blockchain technology itself is not inherently a problem; there are folks figuring out all kinds of uses, like accounting, using blockchain.  It is the fact that no central bank controls Bitcoin production that makes them a unique currency.  Independent people watch who buys and sells, and owns, Bitcoins, and in some general fashion make a market in Bitcoins.  This makes Bitcoins very different from dollars, euros or rupees.  There is no “good faith and credit” of the government standing behind the currency.

Why are currencies different from everything else?

Currencies are sort of magical things.  If we didn’t have them we would have to do all transactions by barter.  Want some gasoline?  Without currency you would have to give the seller a chicken or something else the seller wants.  That is less than convenient.  So currencies were created to represent the value of things.  Instead of saying a gallon of gas is worth one chicken, we can say it is worth $2.50.  And the chicken can be worth $2.50.  So currency represents the value of everything.  The dollar, itself, is a small piece of paper that is worth nothing.  But it represents buying power.  Thus, it is stored value.  We hold dollars so we can use the value they represent to obtain the things we want.

Currencies are not the only form of stored value.  People buy gold and lock it in a safe because they believe the demand for gold will rise, increasing its value, and thus the gold is stored value.  People buy collectible art or rare coins because they believe that as time passes the demand for such artifacts will increase, and thus their value will increase.  The art becomes a stored value.  Some people buy real estate not just to live on, but because they think the demand for that real estate will grow, and thus the real estate is stored value.

But these forms of stored value are risky, because the stored value can disappear.  If new mines suddenly produce vast new quantities of gold, its value will decline.  If the art is a fake, its value will be lost.  If demand for an artist or for ancient coins cools, its value can fall.  The stored value is dependent on someone else, beyond the current owner, determining what that person will pay for the item.

Assets held as stored value can crash

Tulip photo with value lineIn the 1630s, people in Holland thought of tulip bulbs as stored value.  Tulips were desired, giving tulip bulbs value.  But over time, people acquired tulip bulbs not to plant but rather for the stored value they represented.  As more people bought bulbs, and put them in a drawer, the price was driven higher, until one tulip bulb was worth 10 times the typical annual salary of a Dutch worker — and worth more than entire houses.  People thought the value of tulip bulbs would  go up forever.

But there were no controls on tulip bulb production.  Eventually it became clear that more tulip bulbs were being created, and the value was much, much greater than one could ever get for the tulips once planted and flowered.  Even though it took many months for the value of tulip bulbs to become so high, their value crashed in a matter of two months.  When tulip bulb holders realized there was nobody guaranteeing the value of their tulip bulbs, everyone wanted to sell them as fast as possible, causing a complete loss of all value.  What people thought was stored value evaporated, leaving the tulip bulb holders with worthless bulbs.

While a complete collapse is unlikely, people should approach owning Bitcoins with great caution. There are other risks. Someone could hack the exchange you are using to trade or store Bitcoins. Also, cryptocurrencies are subject to wild swings of volatility, so large purchases or sales of Bitcoin can move prices 30% or more in a single day.

Be an investor, not a speculator, and avoid Bitcoins

There are speculators and traders who make markets in things like Bitcoins.  They don’t care about the underlying value of anything.  All they care about is the value right now, and the momentum of the pricing.  If something looks like it is going up they buy it, simply on the hope they can sell it for more than they paid and take a profit on the trade.  They don’t see the things they trade as having stored value because they intend to spin the transaction very quickly in order to make a fast buck.  Even if value falls they sell, taking a loss.  That’s why they are speculators.

Most of us work hard to put a few dollars, euros, pounds, rupees or other currencies into our bank accounts. Most of those dollars we spend on consumption, buying food, utilities, entertainment and everything else we enjoy.   If we have extra money and want the value to grow we invest that money in assets that have an underlying value, like real estate or machinery or companies that put assets to work making things people want.  We expect our investment to grow because the assets yield a return.  We invest our money for the long-term, hoping to create a nest egg for future consumption.

Unless you are a professional trader, or you simply want to gamble, stay away from Bitcoins.  They have no inherent value, because they are a currency which represents value rather than having value themselves.  The Bitcoin currency is not managed by any government agency, nor is it backed by any government.  Bitcoin values are purely dependent upon holders having faith they will continue to have value.  Right now the market looks a lot more like tulip mania than careful investing.